Companion bills have now been introduced in both the U.S. House and Senate that would exempt most individuals and small businesses from the Federal Arbitration Act (FAA), a piece of 1925 legislation that currently allows contracting parties to avoid the courts and have their disputes informally resolved. The legislation, known as “Restoring Statutory Rights Act,” was introduced in the Senate by Senator Patrick Leahy (VT) and in the House by Representatives John Conyers, Jr. (D-Mich.) and Henry C. “Hank” Johnson, Jr. (D-GA).


FAA Currently Has a Broad Application, Even to Consumer Agreements

Under the FAA, commercial enterprises, such as auto manufacturers and dealerships, may include clauses in their consumer sales agreements that require arbitration of any disputes. The sales agreements may also contain provisions in which the consumer waives his or her right to participate in a class action lawsuit against the businesses. Consumer organizations have argued that the FAA was never intended to cover most consumer agreements, but the federal courts, in virtual unanimity, have said that such limitations are valid.

One recent decision by the United States Supreme Court, DIRECTTV, Inc. v. Imburgia, 136 S.Ct. 463, 193 L.Ed.2d 365 (2015), arose in California, where state courts have not been friendly to those who draft consumer rights waivers. The U.S. Supreme Court, however, again reiterated that the FAA is the law of the land; it preempts inconsistent California law.


Leahy’s Bill Responds to New York Times Series of Articles

According to a press release from Senator Leahy’s office, the bill was in reaction to several articles critical of the federal arbitration process in The New York Times. According to those pieces, the FAA has been used by many large corporations to bar consumers from initiating or participating in class actions. Consumer activists claim that class actions are an important consumer tool, since one consumer with a defective fuel pump is hardly in a position to go to war with General Motors.

In particular, the bill would amend the FAA, so as to make it inapplicable to forced arbitration of claims brought by individuals or small businesses, “arising from the alleged violation of a Federal or State statute, the Constitution of the United States, or a constitution of a State.” The bill would also require court determination as to whether the FAA applied in a given setting.


With Passage Uncertain, Consumer and Commercial Disputes Continue

While the passage of the bill is uncertain, Leahy and others argue that there needs to be a restoration of consumer and small business rights in the country. According to some consumer advocates, the threat of litigation and the power of public opinion are both important mechanisms to safeguard consumers’ health and property interests. The advocates add that the same can be said about small businesses. Business interests counter that the freedom to contract is at stake, and that the arbitration and class action waiver clauses should not be viewed in a vacuum. They argue that consumers enjoy broad protections within American society.


Warranty Act Has Other Important Provisions – Legal Counsel is Key

Arbitration clauses and class action waivers are among many types of clauses that should be considered by any business that sells consumer goods, particularly those that sell new or used automobiles. California law is generally “consumer friendly.” Your operation needs a team of attorneys who are “business friendly.” CKB VENNA LLP has a long history of representing clients in all phases of business operation and litigation. We offer vigorous representation of dealers and other automotive businesses in all aspects of their operation. Our team understands the complexity of the issues, and stands ready to assist your business. We have offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone at 909-980-1040, or complete our online form to speak with us today.