Questions regarding the future of the FAA are no longer of passing concern. With a Democratic President and a Democratic Congress, there is a significant likelihood that some version of the proposed “Arbitration Fairness Act” will become law. As one prominent academic said to me this weekend, “The worst part about Obama getting elected is that he’s going to destroy the FAA.”

So what exactly is at stake? Berkeley law professor David Caron does a nice job in the most recent issue of World Arbitration and Mediation Review discussing the future of international arbitration under the Federal Arbitration Act if the proposed legislation becomes law. In his article, Caron argues that the language in the proposed legislation arguably would overturn the severability doctrine and undermine the doctrine of kompetenz-kompetenz.

Although Caron outlines how these changes might be interpreted to exclude international arbitration, he nonetheless concedes that absent an express carve-out, we face a potential future in which the United States will no longer be viewed as a favorable venue for international arbitration. “[D]espite its aims of reforming domestic arbitration, a 2009 Fairness in Arbitration Act could discourage the growth and use of the United States as a seat of international commercial arbitration and diminish the competetive advantages of American firms transacting abroad.”

While the solution may be an international arbitration carve-out, I have my doubts that such an exception will be easily accepted. The forces of globalization are such that consumer groups fear unequal bargaining power wherever they see it, and from their perspective a generic exclusion for all international commercial arbitration could create a giant loophole that virtually any drafter of an adhesion contract could exploit. For example, Dell currently has an arbitration clause in its Terms and Conditions of Sale providing for arbitration of any dispute regarding the sale of its computers with the arbitration proceedings to be held in Austin, Texas and subject to the laws of Texas. But if the proposed changes to the FAA go into effect with an international carve-out, what is to prevent Dell from simply modifying its terms and conditions and specifying that arbitration shall be held in Vancouver, Canada and governed by the laws of British Columbia? Wouldn’t such an arbitration fall under an international arbitration carve-out, and if so won’t consumer groups fight tooth and nail against any effort to include such an exception?

If the momentum for proposed changes to the FAA continues, the real question may be how we can preserve the status quo for arbitrations created pursuant to negotiated international transactions, while not creating an exception that swallows the rule.


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3 comments

  1. As far as a “carve-out” goes, this may be the time to lobby for the Model Law. It has already been passed in a number of states and is up for consideration in Florida, where it received little opposition from the consumer law section of the Florida Bar and consumer law groups.

    In addition, I find it hard to imagine where a US court would apply it to a domestic dispute (like your Dell example) when courts have already rejected the application of the ICC Rules because they don’t have adequate connection to the underlying dispute.

  2. I agree that now might be the best time to try and push for the Model Law to be incorporated into the FAA. It will be interesting to see whether there is a push for such an addition as part of any changes. But I’m not sure what groups, if any, representing international arbitration concerns are trying to educate Congress about such matters.

    As for the Dell example, I think I differ from you. Most of the constituent parts of a Dell computer are outsourced from abroad such that the product itself has significant international connections. I would think that any consumer product such as that, combined with a clause stipulating that arbitration was to be held abroad, might be susceptible to a claim that it could be included in an international carve out.

    Roger Alford

  3. As far as lobbying for the Model Law, the Miami International Arbitration Society (nascent group here in Miami) is in contact with some members of Congress and trying to work with them to protect international arbitration from the Arbitration Fairness Act. I think there is great potential for broader and more successful lobbying efforts if we incorporate people from those states that have passed the Model Law.

    Turning to the Dell example, I’m thinking of 246 A.D. 2d 246 where the court applied an unconscionability analysis to void a clause mandating arbitration according to the ICC rules. As a defense to the formation of the clause, unconscionability will always be available, and I believe courts would readily enforce it regardless of the applicable statute. Thus, under a dual arbitration regime where we have the Model Law and the FAA, the consumer would still be protected, and the Model Law could still serve its central purposes. Especially in light of the proposed language of the Arbitration Fairness Act, the key is unequal bargaining power, and courts have the unconscionability doctrine to protect consumers regardless of the choice of law.

    Quinn Smith

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