I. Introduction
Arbitration has been integrated in various ways across legal systems. It has sometimes been criticized as privatizing many disputes without ensuring the free and willing consent of the weaker party (e.g., consumers and employees). This article describes two alternate models of integrating domestic arbitration into legal systems which, though springing from similar roots, are in many ways mirror images or direct opposites of each other. Through a comparison between the centralized arbitration policies adopted in the U.S. and Israel—the latter having a domestic arbitration policy similar to that of European countries, yet generally more restrictive—this article discursively uncovers a middle path for implementing domestic arbitration into legal systems, one that encourages the use of arbitration while limiting opportunities for its abuse or misuse.
Both the U.S. and Israel have common law roots, modeling their legal systems at first mainly on English common law. In both, the rigid view of adjudication as the ultimate response to any dispute was made more flexible around the beginning of the twentieth century (during the British Mandate in the case of Israel). Arbitration laws were passed to encourage the legitimacy of arbitration: Title Nine of the U.S.C., now called the Federal Arbitration Act (FAA), and Israel’s Arbitration Law. With the growth of the alternative dispute resolution (ADR) movement towards the end of the twentieth century and concerns over large court caseloads and frivolous claims, arbitration (along with mediation) began to be looked upon even more favorably by legislators. Laws were passed in the beginning of the 1990s to encourage arbitration.
But the commonalities end here. While the U.S. Supreme Court has developed a centralized policy that mandates an expansive interpretation of the FAA in all states, the Israeli Labor Court and Supreme Court have developed a centralized restrictive interpretation of Israel’s Arbitration Law. Thus, while nearly all types of civil disputes are considered appropriate for arbitration in the U.S., including disputes between large employers and non-unionized employees or corporations and consumers, in Israel, there is no recognition or enforcement of arbitration on a broad range of matters, including numerous employee matters (such as severance pay, sick days, and more) and standard consumer contracts. In addition, while U.S. courts legitimize class action waivers in mandatory arbitration clauses, they are prohibited in Israeli courts. Furthermore, Arbitrators in the U.S. have the power to issue interim injunctions. At the same time, Israeli arbitrators are perhaps the last group of arbitrators in modern countries who generally remain unable to do so.
The restrictive and somewhat marginal stance on arbitration in Israel does not exist in a vacuum. It may be compared to a similar stance taken by European countries, where socialism, as in Israel, has contributed to an emphasis on safeguarding employee and consumer rights. But, even in Europe, many countries have long allowed arbitrators to issue interim injunctions and have created a relatively autonomous process free of court interference. Italy, one of the last countries in Europe to prohibit arbitrators from issuing interim injunctions in domestic arbitration, overturned this policy in November 2021 (the new policy will come into effect in 2023). As of this writing, Europe has no centralized policy on domestic arbitration (in contrast to international arbitration), and each country has its own rules.
Israel is still far off in creating an autonomous arbitration alternative, as this article will further describe. Thus, while in some ways the U.S. is an “outlier” in its permissive stance on arbitration and the proliferation of arbitration clauses in employee and consumer contracts, Israel may be viewed as an “outlier” in its restrictive stance and marginality of arbitration.
The expansive model offered by the U.S. has recently been rolled back for the first time by a law passed to prohibit mandatory arbitration in cases of sexual harassment. This might indicate a willingness to rethink the appropriateness of arbitration in certain matters. In Israel, the currently marginal use of arbitration and its minor role in alleviating caseloads despite the legislator’s intent to reduce them may also provide an incentive for finding ways to expand its use.
This article argues that a middle path to arbitration, uncovering best practices and grounding them in theory, can be developed by comparing the two outlier models. This will enable the recalibration of arbitration and root it in substantial theoretical grounds resulting from an analysis of considerations underlying the two models. In this pursuit, we will begin with a brief description of arbitration in Part II. Part III discusses the arbitration paradigms applicable to labor disputes. Part IV describes the approach of the countries to class action arbitration and the viability of class action waivers. Part V provides an analysis of the use of interim injunctions and their permissibility in each jurisdiction.
II. Arbitration in a Nutshell
Arbitration is a consensual process for dispute resolution before a neutral third party whose decision is binding. While litigation can be initiated by one party without the consent of the other, arbitration is conducted either through a pre-dispute contract that contains an arbitration clause or through an agreement arising after the dispute. There are multiple options for consent on an arbitrator—such as referral to a specific arbitrator by a judge with the consent of the parties, specifying an arbitral agency in a contract between the parties (large arbitral agencies often have rating processes to support the choice of an arbitrator within the agency), or choosing two arbitrators (one by each party) who choose a third to conduct the arbitration.
Parties can choose the rules governing the process: arbitration can be decided according to current law, an alternative method of decision-making, and an expert on the matter can conduct it (e.g., accountant, building contractor). The reasoning presented in an arbitral decision is often less specific than that of a judicial decision. Opportunities for appeal are more limited in arbitration due to the desire to safeguard arbitration as a separate process, with as little as possible intervention from the courts. But appeals have been made possible within arbitration providers. Confidentiality is also a key trait of arbitration; a decision may be published without disclosing the identity of the parties and is categorized as a closed-door proceeding. This can be benefit concerned companies or individuals, but it is also a cause for criticism. It is worth noting that courts, too, are often criticized from this angle since settlement promotion—a significant part of the judicial role in the U.S. and Israel—can take place in judicial chambers (U.S.) or the courtroom, but off the protocol (Israel).
The benefits of arbitration are often cited along two dimensions: reducing court caseloads and allowing individuals immediate, effective resolution of their disputes. As explained in the discussions preceding the adoption of the Federal Arbitration Act: “[A]rbitration saves time, saves trouble, saves money . . . It preserves business friendships . . . It raises business standards. It maintains business honor, prevents unnecessary litigation, and eliminates the law’s delay by relieving our courts.”
But policies implementing arbitration are varied. The basic description offered above has resulted in multiple questions such as the extent to which courts should intervene in arbitration, the conditions under which an arbitration clause can be considered acceptable, and the extent to which arbitration should be conducted in matters that involve constitutional rights. In the following sections, we will analyze two opposite approaches to such questions.
III. Labor Disputes
If one goes back to the end of the nineteenth century in the United States, arbitration had just begun to penetrate the courts’ animus to this private dispute resolution form. During that time, arbitration was rare within the domestic field, where adjudication prevailed as the standard public method of dispute resolution. To enable its implementation as a method for the quick resolution of business disputes, the business and legal community promoted the passing of the Federal Arbitration Act (FAA, currently U.S.C. Title Nine) in 1924. In Israel, resistance to arbitration was softened over the years and the promotion of arbitration by legislators was enacted in the 1968 Arbitration Law. But while judges in the U.S. embraced the FAA, judges in Israel—for reasons touched upon in this article—gave arbitration the cold shoulder.
A. Expansive Model
U.S.C. Title Nine (the Federal Arbitration Act), passed in 1924, was initiated by the American Bar Association to facilitate “maritime transactions and interstate commerce” (overcoming the differences between laws of countries and states). But employees of the industries for which the law was enacted were expressly excluded from the scope of arbitration. Section one of the Federal Arbitration Act (FAA) defines maritime transactions and interstate commerce while emphasizing the exception of labor disputes:
“Maritime transaction”, as herein defined, means charter parties, bills of lading of water carriers, agreements relating to wharfage, supplies furnished vessels or repairs to vessels, 3(10) collisions, or any other matters in foreign commerce which, if the subject of controversy, would be embraced within admiralty jurisdiction; “commerce”, as herein defined, means commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. [emphasis added].
From a simple reading of the section (which has not changed to this day), it seems that the FAA was intended to allow arbitration in interstate commerce or maritime transactions, with the distinct exception of the employees (i.e., it was intended as a dispute resolution mechanism for businesses and other relevant entities). This reading seems supported by the legislative background of the FAA and the discussion before its enactment.
Nevertheless, mainly since the 1980s, in tandem with the growing influence of the ADR movement, the Supreme Court made a sequence of precedential rulings that departed from a straightforward interpretation of the FAA. The scope of the law was broadened to industries that had only a vague connection to interstate commerce. For instance, in a homeowner’s claim against a local pest control company due to an unresolved termite problem, it was enough that the company was active in several states and that the insecticide used to treat the house came from an out-of-state source. In addition, the court determined that “involving interstate commerce” was equivalent to “affecting” interstate commerce.”
Yet the employment exception was not likewise extended and continued to be interpreted verbatim as pertaining mainly to transportation industries; and the question of whether the employees are involved in interstate commerce within these industries is not given a broad interpretation (it is not enough that the company they work for is active in several states or even nationwide).
Thus, the Supreme Court generally validates agreements to arbitrate labor disputes. This includes labor disputes regarding cogent rights, such as freedom from discrimination, as determined in the landmark Gilmer decision, in which age discrimination was alleged. In that case, a person whose employment was terminated at sixty-two alleged that the discharge violated the Age Discrimination in Employment Act of 1967 (ADEA).
Class action waivers in arbitration clauses are also enforced. Arbitration clauses are considered valid even when notified of the already employed, thus adding to an employment contract without the express consent of the employed party.
Another exception to the validity of arbitration clauses in the FAA is interpreted restrictively by the Supreme Court. Section two of the FAA states that arbitration agreements shall be “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract [emphasis mine–G.F. & M.A.].” The purpose of this clause was to upend the tendency of courts (at the end of the nineteenth and the beginning of the twentieth century) to invalidate arbitration agreements while allowing them to do so if the arbitration clauses were contractually invalid.
The Supreme Court has interpreted “equity for the revocation of any contract” as allowing the invalidation of agreements to arbitrate by “generally applicable contract defenses, such as fraud, duress, or unconscionability,” but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. By this same reasoning, state laws to limit arbitration on specific issues have yet to be given legitimacy by the Supreme Court. Its interpretation has made it nearly impossible for state courts to limit arbitration. Attempts to nullify agreement to arbitrate based on unconscionability have famously been upturned by the Supreme Court.
The Supreme Court has likewise interpreted “upon such grounds as exist at law” in the savings clause in a restrictive fashion. In Epic Systems Corp. v. Lewis, employees who wished to file a class action suit despite a class waiver in an arbitration clause cited the National Labor Relations Act (NLRA), which prohibits limitation on the concerted activities of employees. The employees argued that the NLRA “nullifies the FAA with respect to class action waivers in employment contracts, as the savings clause of the FAA declares arbitration agreements ‘valid, irrevocable, and enforceable’ except where rendered otherwise illegal-here by the NLRA.” But, the Court found that class action waivers in employment arbitration agreements are enforceable under the FAA and that the NLRA does not displace the FAA since Congress did not expressly state so in the statute. The law must show the clear intention of Congress not to permit arbitration of claims arising under the statute. In other words, to use the savings clause “under such grounds as exist at law,” the law must expressly carve out an arbitration exception.
Notably, arbitration clauses in the employment setting are very different from arbitration clauses in contracts between two businesses or a company and a union, where asymmetry is often less acute and agreements to arbitrate often align with the interests of the parties. Moreover, class actions are not mentioned in the FAA and it could not have realistically been legislators’ intent in the 1920s since it rarely existed at the time.
Recent survey data indicates that mandatory employment arbitration clauses bind more than sixty million nonunion American workers over half of the U.S. private-sector nonunion workforce. Employment class action waivers bind nearly twenty-five million American workers.
Despite this sea change in the use of agreements to arbitrate, the Supreme Court has often continued to cite the legislator’s original intent to encourage arbitration as it strikes down state and district court decisions seeking to rein it in. In contrast to its expansive interpretation of “maritime agreements and interstate commerce” to include labor disputes, its interpretation of the savings clause in § 2 is exceptionally restrictive.
Another federal law governing arbitration in the employment context is the 1991 Civil Rights Act, amending the 1968 Act to encourage the use of ADR, including arbitration, in cases of employment discrimination “where appropriate”:
SEC. 118. ALTERNATIVE MEANS OF DISPUTE RESOLUTION.
Where appropriate and to the extent authorized by law, the use of alternative means of dispute resolution, including settlement negotiations, conciliation, facilitation, mediation, factfinding, minitrials, and arbitration, is encouraged to resolve disputes arising under the Acts or provisions of Federal law amended by this title.
Congressional intent seems to have been to broaden the means for redress of victims of discrimination. Thus, scholars have noted that this section should be read as a voluntary choice of the victim rather than a promotion or endorsement of mandatory arbitration, severely limiting their options. This interpretation is strengthened by the background of the law, stated in Section 2 below, emphasizing the need for “additional” remedies and the desire to strengthen victims’ rights under the law due to previous Supreme Court interpretations (Gilmer, which was decided half a year earlier, is not specified but hovered in the background):
SEC. 2. FINDINGS.
The Congress finds that—
(1) additional remedies under Federal law are needed to deter unlawful harassment and intentional discrimination in the workplace;
(2) the decision of the Supreme Court in Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989) has weakened the scope and effectiveness of Federal civil rights protections; and
(3) legislation is necessary to provide additional protections against unlawful discrimination in employment.
Nevertheless, the accepted interpretation in Supreme Court rulings is that the change to the Civil Rights Act does not change the landmark Gilmer decision taken half a year earlier and even reinforces it. This expansive interpretation of the Supreme Court has covered a significant breadth of civil rights issues, including sexual harassment in the workplace.
The “#MeToo” movement highlighted the abuses of mandatory arbitration in providing a cover for sexual harassers in the workplace by silencing victims through non-disclosure mandates in arbitration clauses and limited access to the courts. In March 2022, in a first move to limit arbitration clearly by law, a statute prohibiting mandatory arbitration in cases of sexual harassment was passed.
Among the other concerns regarding arbitration are that it may prevent employees or consumers from seeking redress due to a lack of familiarity or skepticism of the fairness of the process. In addition, one of the primary distinctions between litigation and arbitration—consent—is undermined when the parties signing a contract are asymmetrical (such as regular consumers faced with adhesive contracts by suppliers). Another piece of legislation that may pass is the Forced Arbitration Repeal Act (FAIR Act), which would significantly roll back mandatory arbitration clauses.
Another small, perhaps telling, sign of change is a May 2022 Supreme Court decision that seems to modify the oft-quoted liberal federal policy favoring arbitration interpretation of the FAA. Writing that “a court must hold a party to its arbitration contract just as the court would to any other kind,” Justice Kagan, in a unanimous decision, stated that “a court may not devise novel rules to favor arbitration over litigation. . . . [F]ederal policy is about treating arbitration contracts like all others, not about fostering arbitration.” A Taco Bell employee filed a collective action case regarding overtime payment despite a mandatory arbitration clause. Since the defendant (a Taco Bell franchisee) had tried to mediate the case and responded to the litigation without asserting arbitration, the employee claimed it had waived its right to arbitration. When considering whether the defendant had waived its right, the lower courts examined whether the party knew of the right and acted inconsistently with that right and added a condition favoring arbitration – whether the party “prejudiced the other party by its inconsistent actions.” This added condition, which followed a precedent by the Eight Circuit Court, was determined erroneous by the Supreme Court since it favored arbitration over other contracts.
This might be a small step in curbing the vast effect of arbitration on the employment market: Currently, more than half of workers in the U.S. are estimated to be bound by arbitration clauses.
B. Restrictive Model
While the U.S. Supreme Court has interpreted the FAA broadly, to include labor arbitration and class action waivers, and interpreted the exemption to the law narrowly, the Supreme Court in Israel has interpreted the Arbitration Law narrowly and its exemption broadly. Israel is a mixed legal system, containing many common and civil law influences. In alignment with the principle of stare decisis, First-instance courts in Israel are bound by precedent made by the Supreme Court (as are U.S. courts, and in contrast to civil law countries, whose courts generally are not bound by precedent). Thus, the Supreme Court’s restrictive stance causes lower courts to hesitate to permit arbitration in areas of vagueness, and lawyers to hesitate to engage in arbitration in certain areas, such as labor disputes, where many matters have been found by the Court to be non-arbitrable. Unlike the U.S. Supreme Court, the Israeli Supreme Court has no parallel state system to consider. Thus, while the centralized arbitration policy developed by the U.S. has included overriding state law and policy, no such effort is needed in Israel. Another difference, specifically related to labor law and drawing inspiration from European countries, is the existence of a system of labor courts, at the top of which is the National Labor Court, handling individual and collective disputes.
Almost synchronously with the passing of the 1968 Arbitration Law, a law was passed to channel court disputes dealing with labor law into specialized Labor Courts. The timing of these two seemingly unrelated laws, passed for different reasons to respond to different problems, may have sealed the fate of arbitration in Israel. The Labor Courts were established to carry out a socialist policy while dealing with strikes paralyzing the nation. Israel was founded on socialist ideology, with an overarching workers union (the “Histadrut”) that included most of the country’s workers and was closely linked to the founding political party, Mapai. Thus, large service providers were often partially owned by the state, and the workers were organized in a state-supported framework. In the 1960s, when Mapai began to lose power, the influence of the government-promoted Histadrut also weakened, and what was viewed as illegal strikes across sectors became common. Thus, the idea was born that a specialized court system (a National Labor Court and lower instance labor courts) could deal with the numerous labor disputes and control them while upholding the founding ideology of workers’ rights and clarifying them in binding decisions. The founding of a system of specialized labor courts did not occur in a vacuum but instead followed similar developments in European countries, which had introduced labor courts decades earlier.
Naturally, the fledgling National Labor Court did not look favorably upon arbitration, which could muffle the grand vision of safeguarding employee rights and reordering labor law. As cited by legislators, the advantages of establishing labor courts were quite similar to the advantages of arbitration: a specialist forum, which would allow immediate resolution and would not be bound only by labor law but could incorporate other considerations. It is not surprising, perhaps, that the first President of the Labor Courts, Justice Bar-Niv, stated: “Now that there are labor courts there is no need for arbitration.” The Supreme Court, which is the forum for the contestation of decisions by the National Labor Court, has generally upheld its decisions.
The legislator’s intent in enacting the Arbitration Law was the same as in the U.S.: to encourage arbitration. Moreover, the law’s wording in Israel seems much more expansive than that of the FAA, as it does not specify certain types of transactions for which arbitration is suitable (such as maritime transactions and interstate commerce in the FAA). It only states that the law does not pertain to issues that “cannot be agreed upon by the parties.” This seems on par with the stated arbitration policy in the U.S., where exceptions to arbitration include doctrines that would undermine contracts in general.
However, this exception has been interpreted expansively by Israel’s National Labor Court and Supreme Court to include many issues. The National Labor Court interpretation of the exception to the Arbitration Law includes any decision related to a cogent issue or the exercise of authority expressly conferred on the Labor Court by other laws. In the framework of this rule, it was decided, for example, that issues of annual leave, vacation redemption, and severance pay are not arbitrable, nor are claims for compensation for withholding wages or any derivative claim. This is true even when the employee has benefited from an arbitration proceeding. For example, an arbitration award in favor of an employee was canceled due to this restrictive approach. Labor courts generally deal with arbitration clauses in labor contracts when the employees file a case in court. The employer typically asks to stay in court proceedings since an arbitral process is underway. The court looks at the case matter and rejects the employer’s request if it involves cogent matters (implementing an extensive interpretation of the term).
In a series of judgments within the framework of the restrictive paradigm described above, the Supreme Court ruled that since a protective law creates a right that is not subject to arbitration between the parties, then even preconditions for the existence of such rights are not subject to an agreement between the parties. A decision on a precondition may have a positive or negative effect on the statutory right itself. Thus, arbitration is not valid where a question arises whether the employee was fired or resigned.
The Daycare case was a valid example of applying the restrictive paradigm in recent years. The plaintiff was a worker at an ultra-orthodox daycare who agreed to resolve her work dispute before a rabbinical arbitral panel. Since the panel awarded a small sum for her social rights, she turned to the regional labor court, which awarded her a more substantial sum. The National Labor Court subsequently affirmed this ruling. In a petition to the Supreme Court filed by the association that employed the employee, the Court refused to intervene, reiterating the restrictive rule that cogent rights and related preconditions are not subject to arbitration and that the results of an arbitral determination can be revoked after balancing the interests and rights involved in the case. In another case, Early Childhood Enrichment Centers, a district court not only ruled that the parties could not empower the arbitrator to decide on cogent issues but that they also could not authorize the arbitrator to try to bring them to a compromise—a surprising decision because the Labor Court can refer such cases to mediation. Whether an employee is considered a guide or teacher also cannot be determined in arbitration.
The restrictive approach is not absolute. The first exception, determined in the Eraslin and Helsco cases, concerns situations where the non-arbitral issue arises incidentally as a secondary claim. The second exception, which was determined, inter alia, in the case of Platok concerns situations in which most of the claims are arbitrable, and the non-arbitrary claim represents a minimal part of the total claims. The third exception, exemplified in the case of Gladblum, concerns situations where there is a valuation dispute, as opposed to a dispute over the question of an employee’s entitlement.
Alongside the exceptions presented above, the National Labor Court ruled that the principles presented in the restrictive paradigm are not inflexible. It can be softened in exceptional circumstances, such as concrete circumstances of bad faith, if the employee has strong bargaining power, and situations in which the retroactive dismissal of the arbitrator’s ruling, due to questions of the arbitrator’s lack of authority to discuss cogent issues in the first place, would lead to a distorted ruling. Not every use of the arbitration process regarding cogent rights will necessarily result in the cancelation of the arbitration ruling. For example, the National Labor Court was required to deal with a situation in which the legal process between the parties in the regional court was preceded by an arbitration process that awarded the petitioner severance pay due to unlawful dismissal. The National Court ruled that although, as a rule, in primo loco, decisions relating to cogent issues brought before an arbitrator should not be validated, there are exceptions. These exceptions arise partly from the perception that the court should rarely intervene in decisions made in arbitration proceedings. In deciding such a situation, the court will be required to examine, inter alia, whether the petitioner received legal advice before an arbitration process began. Insofar as the answer is yes and there is no distortion of law from the execution of the arbitration ruling (in other words, the court must still investigate the case’s substance), it must be enforced.
The question of what qualifies as arbitrable may not have a clear answer. For example, the rulings of the National Labor Court established that the question of entitlement to wages is contractual and is within the arbitrator’s jurisdiction. On the other hand, in other cases it held that disagreements over the right to compensation due to withholding wages require the interpretation of the protective laws and are an exercise of jurisdiction vested in the court alone. This lack of clarity causes lawyers to believe that all work-related matters cannot be submitted to arbitration.
In the 1990s, the legislature sought to reinforce ADR as an alternative to adjudication in addition to the Courts Law, allowing judges to refer cases to arbitration (Section 79B), among other options. The National Labor Court noted in its ruling on the matter of Norton the fact that the courts were authorized to transfer certain disputes to arbitration per Section 79B of the Courts Law does not affect the scope of the issues discussed in arbitration. Aside from the minor exceptions described above, this scope remains very limited.
The reasoning employed by labor courts in their restrictive stance toward arbitration revolves around recurring themes: the Arbitration Law negates the possibility of discussing cogent issues in arbitration; the fear that an arbitration hearing on employee rights will perpetuate inherent power gaps between the employee and the employer; arbitration suffers from a lack of transparency and publicity and thus may harm protective rights and the status of employees; arbitration is not subject to traditional procedural or evidentiary rules, nor is an arbitrator obligated to provide the reasoning behind a decision that may lead to a distortion in the implementation of the law; there is no right to appeal; for the sake of justice and fairness, as well as for uniformity in the decisions on various issues, it is appropriate to leave some of the issues to the judiciary and not to render decisions through arbitration.
The scant literature on arbitration in Israel has included criticism of court interpretations of the Arbitration Law and the underlying reasons stated in court decisions. One critique holds that the restrictive approach has lost its conceptual and empirical basis. The primary justification for a restrictive approach is that rights derived from protective laws, expansion orders, or collective agreements cannot be subject to contractual conditions that detract from them. However, this justification is weakened due to two significant trends that have developed in case law in recent decades.
First, cogent rights recede in cases of extreme bad faith. This was the case when employees who were not compensated for overtime acted in extremely bad faith. Second, judges discussing cogent issues currently employ various settlement proceedings; judicial settlement efforts or referral to court-annexed mediation. This reasoning might have had merit when the trial was the primary method of case disposition, yet the gradual diminishment of the trial in the past decades (only about ten percent of first-instance court civil non-family cases are decided by trial) and promotion of settlement has put this reasoning in question. Another criticism of the restrictive doctrine is that it creates uncertainty about the cases in which arbitration may be used, as demonstrated in our survey. There is no dichotomous, precise categorization between issues related to labor law that are arbitrable or non-arbitrable.
In sum, from painting labor relations as cogent and non-arbitrable with a broad brush, labor courts have developed a slightly more refined analysis that considers cases in which the employee is not a weak individual confronting the powers that be. Employees with high standing in organizations (such as physicians) may need less protection from the courts as they may have more bargaining power in contracts with their employers and often are more informed and supported as they begin an arbitration proceeding. In addition, in cases in which employees manipulate arbitration proceedings in bad faith, they cannot quickly claim afterward that they need protection. Finally, courts have realized that canceling an arbitration award can sometimes do more harm than good, that adjudication is not always the ultimate panacea, and that too is a development from the first years of the labor court. Developments within the court, including judicial mediation and court-annexed mediation in cases including cogent matters, may have contributed to the slightly softened stance on arbitration. In the future, there may be a place to narrow the scope of matters considered cogent to allow more cases to go to arbitration.
IV. Consumer Agreements and Class Action
The implementation of arbitration clauses in standard consumer contracts is controversial and is an essential lens through which to analyze approaches to arbitration. Consumer contracts often take the form of “take it or leave it” adhesion contracts. These contracts are widespread, often making consumer choices illusory (when most providers issue standard contracts, the choice is to agree or remain without possessions). Concerning arbitration clauses in these agreements, the one-sided nature of these contracts becomes particularly problematic, as it blocks access to courts without freely given consent. However, upholding arbitration clauses in consumer agreements can benefit consumers, especially if the company bears the costs of the process. The commonly stated benefits of arbitration in such cases are saving time and money and reducing the caseload in court systems. When consumer class action is involved, the stakes increase for the companies involved.
Israel and Europe deal with arbitration clauses in consumer contracts by implementing laws governing adhesion contracts. In the U.S., where such laws do not exist, general contract defenses are sometimes raised but are often rejected.
A. Expansive Model
The U.S. Supreme Court has consistently enforced mandatory arbitration clauses in standard consumer agreements despite the decisions of some lower courts that tested the waters on its policy. In theory, states can overcome mandatory arbitration clauses by implementing unconscionability as a guiding principle. The U.S. Supreme Court has interpreted the FAA allowance for revocation of any contract in the name of equity (Section 2) as allowing the invalidation of agreements to arbitrate by generally applicable contract defenses, such as fraud, duress, or unconscionability, but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.
However, a gap exists between policy in the books and action: the Supreme Court has repeatedly struck down state court decisions based on unconscionability, reinforcing mandatory arbitration clauses in standard consumer contracts, even when they include class action waivers. The critical court decision illustrating this point is AT&T Mobility v. Concepcion, wherein the Supreme Court overturned a decision by the California Supreme Court that determined that blocking class action was unconscionable.
The discussion centered upon a mandatory arbitration clause between the Concepcions and AT&T. The Concepcions had procured a phone advertised as free by AT&T and later discovered that taxes were not included in the benefit. They were prevented from filing a class action due to a class action waiver in the arbitration clause (one of the goals of a class action is to prevent companies from illegitimately accruing small sums from many consumers; thus, small sums that would be illogical to claim on an individual basis can be claimed through class action). The majority opinion of the Supreme Court determined that the class action waiver could not be interpreted as providing for class arbitration since it did not include class arbitration. From the company’s viewpoint, such an expansive reading of the clause was not reasonable as it could result in a decision on extensive compensation that could not be appealed. Thus the class waiver was upheld, and class arbitration was prohibited unless expressly stated. In the U.S., class arbitrations take place with the parties’ consent.
The decision is believed to have encouraged companies to include mandatory arbitration clauses in consumer agreements to evade class action. A recent study analyzing the consumer agreements of 100 top companies and their affiliates in the U.S. found that eighty-one included mandatory arbitration clauses and seventy-eight had class action waivers in those agreements. All brokerage firms currently use them; the largest insurance companies (AIG, Aetna, Inc., Blue Cross Blue Shield, Travelers); the largest financial firms (American Express, Bank of America, Chase Bank, Citigroup); and the largest Fintech firms (PayPal, Venmo, Square). Arbitration clauses are also pervasive among online retailers (Amazon, eBay, Walmart.com); music service providers (Apple, Spotify); wireless providers (Verizon, AT&T, T-Mobile, Sprint); and sharing economy firms (Uber, Lyft, Airbnb), covering trillions of dollars of transactions. In sum, a large share of potential disputes between consumers and firms in the United States for purchases ranging from a toothbrush to a house are settled through mandatory arbitration rather than the court system.
B. Restrictive Model
In Israel, standard consumer agreements are governed by the Standardized Contract Law, by which clauses in a standard agreement between a supplier and consumer can be found unfair and thus nullified or altered by the Court. The European Union has a similar approach.
The Standardized Agreement Law applies to contracts whose clauses (all or in part) have been determined in advance by one party so that they can be used in many contracts between those party and unspecific individuals (unspecific in number or identity). No such law exists in the U.S. and the parallel mechanism is considered the unconscionability doctrine, which is very limited in determining arbitrability.
Israeli courts have expansively interpreted the Standardized Agreement Law, which allows courts to cancel unfair clauses. The Court determined that the law is not limited to standard consumer agreements and can apply to other forms of agreement, such as franchise agreements, agreements that have been negotiated, and more. In general, the court examines whether one party has worded the contract and whether, within the contract, a clause is deprivative in an unfair manner, taking into consideration other circumstances, such as power asymmetry between the parties.
Israeli law contains a list of clause types presumed to be unfair in a standardized contract – in which case the burden rests on the supplier to prove that they are fair if a dispute arises. Among these clause types is any restriction to access courts. Until 2014, this clause type had an exception for accepted arbitration agreements. This exception was canceled in 2014, with an emphasis that the clause type includes arbitration agreements i.e., from a literal reading of the law, arbitration agreements are considered unfair in standardized contracts unless proven otherwise by the supplier.
Though the changed wording seems like a complete reversal, first and second-instance courts (the Supreme Court has not dealt with the issue) looked to the discussions in legislative groups before the 2014 amendment and, in general, have concluded that the primary purpose of the change was to prevent mandatory arbitration in instances that could be resolved in Small Claims Courts or instances of class action. The former to avoid obstacles to consumers that can easily find remedy in a small claims court, and the latter to preserve the class action option.
One lower court decision cited parliamentary discussions regarding the decision to change the law:
Aug 8, 2012, Protocol p.31: Another problem – today, in the U.S., suppliers insert an arbitration clause – and what is happening in the U.S. will happen here in a few years, it’s just a matter of time just as any fashion – for one simple reason: to block class action suits.
Feb 25, 2014, Protocol, mainly p. 36: [A]n arbitration clause that prevents the option to go to a small claims court should be considered unfair in the consumer context. The same is true for class action suits, which are today the most important tool in the hands of consumers . . .
Several other court decisions continue this line of reasoning. In Israel, class action or redress through a small claims court is not blocked by mandatory arbitration clauses in standard consumer agreements, as the presumption by law is that these avenues for redress should remain open. Other consumer claims are also examined by the court, which looks at the wording of the arbitration clause to ensure that it is fair and limited in scope. In addition, it looks at the power balance between the parties and can consider any other circumstances that may help determine if the arbitration clause is fair.
In cases that do not involve small claims or class action, the courts have reviewed the wording of the arbitration clause to see if it involved all disputes between the parties or an unfair advantage to the supplier and considered the other circumstances of the case. Two exceptions that prove the rule, where the court upheld an arbitration clause, included (1) a neutral arbitration clause, and the power asymmetry was not akin to that of regular consumer agreements as it was a franchise agreement, and (2) a contract between a lawyer and very knowledgeable client (an experienced businesswoman) on the other, and the arbitration clauses did not cover all disputes between the parties (and this was a consideration for fairness). The court held that in franchise agreements, though considered in many cases to be standard agreements, arbitration might be suitable since the relationship between the parties needs to be explored along with other legal issues that an arbitrator is well positioned to consider. Since these are not Supreme Court decisions, they are not binding, yet they show the general view taken by the first and second-instance courts, which do not hesitate to intervene and probe the appropriateness of agreements.
In employment agreements, arbitration clauses cannot block class action. However, class action, as in Europe, is limited due to the policy of labor courts to approve class action suits sparingly (regardless of arbitration). In addition, questions have risen regarding unionized workers: must they abide by arbitration clauses in collective agreements? The problem arises because collective agreements usually include collective instructions and normative personal instructions that seemingly cannot be subject to arbitration. Court rulings on the matter seem contradictory. Labor courts uphold arbitration in collective labor disputes. On the other hand, other rulings asserted that an employee’s rights arising from the personal provisions in a collective agreement are those of the employee and therefore are not subject to compromise or arbitration. This has blocked a plethora of issues from being resolved through arbitration and caused contradictions in the case law developed by the National Labor Court. For instance, in Six-Star v. Fischler, an arbitration condition that was in a collective agreement concerning workers’ rights was not validated, while in Shkolnik v. El AL, such a clause was considered valid. The lack of uniformity has been criticized as creating obstacles implementing the Arbitration Law.
V. Interim Relief
Interim measures are often needed to preserve the status quo, i.e., to prevent the dissipation of assets or evidence necessary for the arbitral inquiry or award. The FAA does not mention interim relief nor the Israel Arbitration Law. Yet the courts have taken opposite approaches. In the U.S., as in many modern legal systems, arbitrators can issue interim relief before an arbitration (an emergency arbitrator is often made available by the main arbitration agencies) and during the arbitration. The practice of courts is to issue interim relief before arbitration if emergency arbitration is impossible. During arbitration, the court will intervene only to support interim relief issued by an arbitrator (i.e., to enforce the relief if needed). In Israel, arbitrators have no authority to issue interim relief during or before arbitration.
A. Expansive Model
In general, provisional relief may be necessary before arbitration proceedings begin when:
a) A party has evidence that is relevant to the dispute, but the evidence will likely be destroyed, damaged, or lost without an interim order protecting it;
b) A dispute concerns the ownership of perishable goods that may deteriorate before the dispute can be determined. An interim order requiring the sale of the goods (with the sale proceeds to be held pending the final award) or requiring the goods to be sampled, tested, or photographed before the sale is often granted;
c) A party is planning to liquidate assets before the arbitration; or
d) A party is planning to leave the country before the arbitration.
Generally, courts in the U.S. defer to arbitral proceedings, only retaining the power to consider injunction applications before the arbitration has begun unless an emergency arbitrator, now often offered by primary arbitration providers, is available, and if the delay in issuing the injunction will cause irreparable harm.
Preliminary injunctions, if issued by a U.S. state or federal court, are temporary until an arbitrator can decide on the matter. Courts may also enforce injunctions issued by arbitrators when requested at which opportunity they do not review the arbitral decision but rather bestow formal approval to support the arbitration.
In other words, arbitrators can issue injunctions—even before the arbitration has begun—and it is clear to the parties that courts will enforce them if necessary. The discussions in court opinions center around whether courts may issue injunctions when a dispute is arbitrable, such as when third parties are involved.
The U.S. is not exceptional in allowing arbitrators to issue interim relief, yet the fact that arbitration agreements are acceptable even in adhesive agreements and regarding constitutional rights translates into a broader range of issues for which arbitrators can issue interim relief than in many European countries.
B. Restrictive Model
Israel is one of a few countries with modern legal systems that do not usually allow arbitrators to issue interim injunctions. If arbitrators issue injunctions under the agreement of the parties, the interim injunctions are subject to court review according to their merit. Court opinions in such cases center around whether the Arbitration Law permits arbitrators (not judges) to issue injunctions in cases undergoing arbitration.
The Arbitration Law does not expressly allow or prohibit interim injunctions by the arbitrator, and the Supreme Court has not decided on the arbitrators’ authority to issue interim injunctions – though it has noted the need to do so. Lower courts differ in their approaches to the issue of interim injunctions during an arbitration. Courts often comment that parties may need the courts to enforce the relief, and thus, there seems to be no logic in giving arbitrators authority to issue interim injunctions. In addition, courts may offer various interpretations of the Arbitration Law and comment that the draft of the law expressly allowed arbitrators to issue interim relief. Those words were eventually omitted from the law. Yet interpretations allowing for such arbitrational authority are also possible, especially since the law authorizes the arbitrator to “grant a declaratory decision, a mandatory or prohibitive injunction, an order for specific performance and any other relief which the court is competent to grant.” Moreover, one District Judge has noted that even though the Court may grant interim orders according to the Arbitration Law, this does not derogate from an arbitrator’s authority to do so since § 16(d) of the law provides that “the provisions of this section shall not derogate from the powers of the arbitrators under the arbitration agreement or under this Law.”
However, even this judge distinguished between interim injunctions issued by arbitrators early or late in the arbitration. In the latter case, the arbitrator has gained a deeper knowledge of the case than the courts. Faced with such an instance, the judge issued an interim order identical to the arbitrator’s. While arbitration agencies in Israel, like in the U.S., have specified in their rules that they have the authority to issue interim injunctions, this has had little effect due to courts’ tendency to review such arbitral decisions on their merits when presented to them by one of the parties.
VI. The Golden Path in Arbitration?
The two models compared in this article can provide insights into a possible path for arbitration that ensures the use of arbitration and minimizes possible misuses or abuses. The ills of arbitration policy mentioned in this article (on both sides of the spectrum) seem to result from a lurch to extremes, away from which each legal system has recently begun to take small steps.
In the U.S., an expansive arbitration policy enables industries to limit the rights of consumers and employees to access courts individually or through a class action. This is despite the fact that adhesion (take it or leave it) contracts in the consumer setting and similar contracts in the employment setting compromise consent and often include disparate power relations. In Israel, a toothless arbitration policy has rendered the process underused and relatively ineffective due to commonly occurring court intervention, which has set severe limits on the scope of permitted arbitration. The differences in the courts’ approach could stem from historical factors discussed in the article, such as the emphasis on capitalism versus socialism, legislative history, and timing, and more.
Suggestions for reforming arbitration policy in the U.S. have centered on making arbitration more similar to courts: public hearings, greater discovery, adherence to rules of evidence, reasoned decisions, and more. Yet doing so detracts from the advantages of arbitration and erodes its benefit as an alternative that has benefits over adjudication for a wide range of litigants and disputes. For instance, the speed of the process, an important consideration for businesses, would be compromised. Confidentiality is also essential so disputes that otherwise would not be dealt with due to privacy concerns can be addressed.
Rather than distancing arbitration from its original meaning, bringing it closer—i.e., going back to the condition of consent—will offer a remedy to some of the current ills both models present. This would entail distinguishing between cases of inherent asymmetry (e.g., adhesive contracts) and cases of business relationships between “merchants” where business awareness on both sides is greater, or labor contracts where the employee has significant bargaining power. The cogent rights of such an employee can be protected through various means, such as requiring that arbitrators have an appropriate and relevant background.
Further, consent can moderate extreme interpretations of arbitration. Consent is not only a principal feature of arbitration (and contracts in general) but also a moderating one. Of course, consent is not always the indicator of a middle path between the two models. Neither is a middle path always the better path. However, in many cases, consent can help balance the advantages and disadvantages of arbitration and a remedy to “going overboard” in promoting or restricting arbitration.
In the U.S., the official policy can be described at times as “arbitration regardless of non-consent” (by enforcing adhesive contracts enforcing one-sided modifications to contracts); in Israel, the approach is “court intervention regardless of consent.” The cornerstone of this approach is that some things cannot be consented to—such as giving up cogent rights. While this is understandable, the scope of what is considered cogent rights has been given an unreasonably broad interpretation: a job candidate with high bargaining power can perhaps be permitted to knowingly replace court redress with arbitration for issues such as severance pay.
To encourage arbitration, a variety of means can be employed to help promote consent without, in fact, forcing it upon the parties: (1) awareness of arbitration can be raised through the incorporation of studies on arbitration in academia in a variety of fields (e.g., law, business, accounting); (2) judicial training can include the diagnosis of cases that would best be referred to arbitration; (3) the option to appeal to another arbitrator as a default by law might encourage parties to choose arbitration; (4) arbitration can be subsidized through tax benefits or other methods; and (5) the efficiency of the process can be better ensured by creating clear limits to court intervention and fortifying arbitrators to issue interim injunctions so that arbitral proceedings are not easily compromised.
This article is a call to recalibrate arbitration in light of the two contrasting models described— the overly expansive model found in the U.S. and the overly restrictive model found in Israel. As important as this could be for arbitration and legal systems in general, it may also have another beneficial side effect—reinforcing the importance of comparative law. A clear picture of a better path may emerge through a dialectic process of comparison. Comparative law can thus help prevent the normalization of extremes, and create more moderate, functional, and fair means of dispute resolution.
