November 09, 2016 Articles

The Coming Storm: Federal Regulations that Attempt to Limit Arbitration

By Mark Kantor

One of the main and developing issues affecting arbitration in the United States is whether federal agencies can prohibit pre-dispute arbitration agreements based on their general regulatory authority even when there is no new Congressional act that gives them that authority. By comparison, the statutory provisions in the Dodd-Frank Financial Reform Act arguably empower the Consumer Finance Protection Bureau and the Securities and Exchange Commission to regulate the use of arbitration agreements. The disputes about the general regulatory authority of the federal agencies are now crystallizing in a number of industries.

National Labor Relations Board Is Prominent But Not Alone
The most prominent of those regulatory actions are probably the measures taken by the National Labor Relations Board to block arbitration agreements that bar collective actions by employees. Those measures have triggered a “Circuit split” and are now the object of certiorari petitions to the U.S. Supreme Court in, inter alia, NLRB v. Murphy Oil.

Several other federal agencies have undertaken similar steps in reliance on the general regulatory authority in their enabling acts but without Congressional legislation that specifically gives them authority to regulate the use of arbitration agreements. Examples include the U.S. Department of Education regulations that limit the use of arbitration agreements in student applications to for-profit educational institutions, the U.S. Centers for Medicare & Medicaid Services regulations limiting the use of arbitration agreements in nursing home agreements and several bank regulatory agencies and off-exchange forex transactions with retail counterparties that also purport to limit the use of arbitration. Presidential executive orders are also involved. For example, Presidential Executive Order EO 13673 concerns Federal Acquisition Regulations governing contractors involved in government procurement contracts and their subcontractors.

Industry Challenges
Industry groups have filed lawsuits challenging these regulatory measures as contrary to the Federal Arbitration Act (FAA) which requires the enforcement of arbitration agreements on the same basis as any other contract or agreement. Very recently, a District Court for the Eastern District of Texas preliminarily enjoined Executive Order 13673 on October 24 in Associated Builders and Contractors of Southeast Texas v. Rung, holding that the provisions of the EO barring certain pre-dispute arbitration agreements is contrary to the FAA. Section 6 of EO 13673 provides that pre-dispute arbitration agreements are unenforceable and that, once a dispute has arisen, a government contract or subcontract employee must voluntarily agree to arbitrate any claims that arise under Title VII of the Civil Rights Act of 1964 or that relate to sexual harassment or assault where the awarded government contract has a value exceeding $1,000,000, unless the contract is for certain defined “commercial items.”

The Texas District Court granting the injunction ruled that:

Contrary to Defendants’ attempt to distinguish a rule prohibiting new arbitration agreements from a rule prohibiting enforcement of existing agreements, neither type of rule is authorized by the FAA in the absence of any congressional command that would override the requirement that arbitration agreements be enforced in accordance with their terms. Defendants’ reliance on the Franken Amendment to the Defense Authorization Act is misplaced. That Amendment simply demonstrates that Congress may choose to modify one statute with another and that it knows how to limit arbitration policies when it so desires. The Executive Branch does not possess similar authority to modify Congressional enactments such as the FAA. Such overstepping of authority in the guise of enhancing federal procurement practices is unwarranted.

Because the plaintiffs “demonstrated a substantial likelihood of success on the merits” and showed they would suffer “irreparable harm in the absence of immediate relief,” the District Court for the Eastern District of Texas enjoined enforcement of the arbitration restriction enumerated in EO 13673 pending a final decision in the case.

Centers for Medicare and Medicaid Services
Additionally, on November 7, 2016, a United States District Court Judge in Mississippi blocked enforcement of a regulation issued by the Centers for Medicare & Medicaid Services (CMS) that would bar nursing homes from requiring applicants to agree to arbitrate disputes in their nursing home admission applications. The regulation was slated to come into effect on November 28, 2016. The judge in American Health Care Association, et al., v. Burwell, et al.expressed sympathy with the motivations behind the challenged regulation but serious doubt whether CMS had the authority to issue it:

This case places this court in the undesirable position of preliminarily enjoining a Rule which it believes to be based upon sound public policy. . . . this court believes that nursing home arbitration litigation suffers from fundamental defects originating in the mental competency issue, rendering it an inefficient and wasteful form of litigation. This court believes that Congress might reasonably consider this inefficiency, as well as the extreme stress many nursing home residents and their families are under during the admissions process, as sufficient reason to decide that arbitration and the nursing home admissions process do not belong together. Nevertheless, Congress did not enact the Rule in this case; a federal agency did, and therein lies the rub. As sympathetic as this court may be to the public policy considerations which motivated the Rule, it is unwilling to play a role in countenancing the incremental “creep” of federal agency authority beyond that envisioned by the U.S. Constitution. While this court does not exclude the possibility that CMS could, in the future, make a sufficiently strong showing that it had the authority to enact the Rule it did, it seems unlikely, based on the administrative record in this case, that it will be held to have done so here. Moreover, given that the enactment of the Rule raises serious legal questions extending well beyond the arbitration issue, this court concludes that the balance of harms and the public interest support holding it in abeyance until the doubts regarding its legality can be definitively resolved by the courts.

And petitions for certiorari have now been filed with the Supreme Court and will shortly be assigned to a conference in at least five of the many labor cases involving the NLRB measures making arbitration clauses barring collective actions by employees unenforceable because they limit the employees’ right under the National Labor Relations Act to engage in “concerted activities” in pursuit of their “mutual aid or protection”; see Murphy Oil , SW General, Patterson v. Raymours Furniture and Epic Systems v. Lewis and Ernst & Young v. Morris.

The Core Question
Although the enabling statutes of these different federal agencies vary to some degree, the core question in each of these cases is the same – can a federal agency decide, based on the general regulatory authority in its enabling statute but “in the absence of any congressional command that would override the [FAA] requirement that arbitration agreements be enforced in accordance with their terms,” that pre-dispute arbitration agreements requiring individual arbitration of claims rather than court litigation or class/collective proceeding can be limited or prohibited by agency regulatory action? Alternatively, must Congress grant express authority overriding the FAA, as it has done for some agencies in the Dodd-Frank Act?

Regardless of how the lower federal courts rule, one or more of these cases will shortly arrive in the U.S. Supreme Court. The result in that dispute will likely have significant implications for regulatory authority across a number of federal agencies and, of course, for all of the citizens those regulations impact.

Keywords: alternative dispute resolution, adr, litigation, federal regulations, pre-dispute arbitration agreements, regulatory authority, class actions, limit on arbitration, nursing homes


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