On The Case

How can states block mandatory arbitration clauses? Vermont may have found a way

(Reuters) - There are two very significant words you will not find in a consumer protection bill passed last week by Vermont lawmakers: mandatory arbitration.

That is no accident. To be clear: Proponents of the law, which is now on the desk of Vermont’s Republican governor, Phil Scott, very much want to deter corporations from forcing Vermonters to sign contracts that require them to arbitrate disputes. When the bill was originally introduced in the Vermont Senate, drafters expressly said their intention was “to prohibit forced arbitration of consumer disputes.”

But that language would probably have doomed the law, as business lobbyists rushed to tell Vermont legislators. The U.S. Supreme Court, as you know, was manifestly clear in 2011’s AT&T Mobility v. Concepcion that the Federal Arbitration Act preempts state attempts to invalidate mandatory arbitration provisions as unconscionable. Had Vermont lawmakers approved the original bill - which required businesses to obtain specific authorization of arbitration clauses from consumers and categorically exempted constitutional and civil rights claims from arbitration – the state would have been “flooded with costly, collateral litigation about its legality,” said telecom lawyer Seamus Duffy of Drinker Biddle & Reath in April 6 testimony to Vermont lawmakers. And ultimately, Duffy predicted, Vermont would have lost.

The final bill stripped out those troublesome clauses to anticipate the inevitable preemption challenge the law will face if Governor Scott signs it. Instead of highlighting mandatory arbitration provisions, the bill homed in on particular contract terms that frequently are part of arbitration clauses – but, critically, said those conditions are presumptively unconscionable in any standard-form contract between an individual consumer (or employee) and the counterparty (presumably a business) that drafted the contract. By generalizing the law, said lobbyist David Mickenberg of Mickenberg Dunn Lachs & Smith, Vermont can argue that it’s not preempted by the Federal Arbitration Act because it doesn’t apply only to arbitration clauses.

It’s a shrewd tactic. The law deems unconscionable contract language that requires individuals to bring claims in an inconvenient venue; to waive redress rights under state or federal law; to give up the ability to seek punitive damages; to agree to time limits more restrictive than the relevant statute of limitations; or to pay fees and costs beyond what Vermont state and federal courts would require. Mandatory arbitration clauses typically contain an assortment of those contract conditions, explained Mickenburg, but the bill is couched as an effort to restore the rights of individuals in every standard-form contract.

“Hopefully, this will act as a deterrent,” said Mickenberg, who represents the Vermont Association for Justice. “Our goal is not to play a game of gotcha. It’s to not have these terms in standard-form contracts.”

Mickenberg said the law is not intended to transform Vermont into a hub of consumer and employment class actions. If it’s signed by Governor Scott, the legislation will allow Vermonters to go to court to challenge the prohibited contract conditions. Businesses that impose prohibited conditions have a chance to rebut the presumption that they’re unconscionable, but once the conditions are deemed unenforceable, the business faces a $1,000-per-violation penalty. Mickenberg said it’s possible that Vermont residents bound by the same unconscionable contract condition could line up to seek the same $1,000 penalty, but he said the business could fend off claims by agreeing not to enforce prohibited contract terms.

“Our goal isn’t to create some massive class action boutique,” he said.

Drinker Biddle partner Duffy, who did not respond to my email, said in his testimony to Vermont lawmakers that the bill will do exactly that. “It would open the floodgates to the sort of lawyer-driven, no-injury class action litigation that does very little for actual consumers and is a drain on the judicial system and a threat to local businesses,” Duffy said.

The biggest obstacle to Governor Scott’s approval of the law seems to be opposition from ski and other recreational businesses, which are obviously a big source of revenue in Vermont. The final version of the bill acknowledges the importance of these businesses and says the law is not meant to mitigate their standard negligence waivers. “It is not the intent of the General Assembly to change the way courts allocate responsibility for the inherent risks of any outdoor recreational activity or sport,” the bill said.

Scott ran on a pro-business platform and was the owner of a family construction business before entering politics. But Mickenberg told me the bill had sponsors from both Democrats and Republicans (and lefties from the state’s Progressive Party), so the governor will have to think hard about rejecting it.

If the Vermont law is enacted, it will be the first win for arbitration opponents in a very long time – and perhaps the start of something big.