Private Law Theory

ABSTRACT
The Supreme Court’s muscular interpretation of the Federal Arbitration Act (FAA) has encouraged businesses to insert arbitration clauses in untold millions of contracts. However, this Article explores a subtler way in which arbitration’s kingdom is growing. Increasingly, defendants are trying to enforce ultra-broad arbitration agreements that nobody at the time of contracting could have foreseen would be relevant to the lawsuit. Some companies demand arbitration of claims that have nothing to do with the contract that includes the arbitration provision. Others attempt to exploit arbitration agreements in transactions between the plaintiff and a far-flung third party. And still others invoke arbitration provisions in contracts that both do not relate to the plaintiff’s allegations and that they did not sign. In these scenarios, the potential for private dispute resolution is less a product of the litigants’ shared expectations and more a result of happenstance. The Article calls this phenomenon ‘accidental arbitration’.

The Article demonstrates that the law governing accidental arbitration is chaotic. Judges disagree about whether to allow companies to freeride on expansive arbitration clauses in contracts that are, at most, only tenuously connected to the underlying merits. Some feel obligated by the FAA to take these provisions at face value, but others refuse. Similarly, although outsiders generally must prove that they fall within some exception to the privity requirement to mandate arbitration, businesses are trying to eliminate this step by deeming enormous classes of entities to be ‘parties’ to the arbitration clause. Finally, drafters often use delegation clauses to empower arbitrators to decide if a case must be arbitrated, and there is vast confusion about whether arbitrators should be able to determine whether an arbitration agreement is overbroad or binds non-signatories. These splits in authority are so deep that courts – including federal appellate panels – have been reaching different conclusions when presented with the same contract.

The Article then offers three arguments that would help untie these doctrinal knots. First, it expands on a thesis that I have sketched elsewhere and that some courts have tentatively endorsed: that the plain language of the FAA only validates agreements to arbitrate claims that ‘aris[e] out of’ the contract that features the arbitration clause. The Article shows that the current Supreme Court, which prizes textualism, would adopt this ‘contractual nexus’ theory, removing the FAA from the equation and giving states greater freedom to regulate accidental arbitration. Second, the Article urges courts not to allow drafters to name huge classes of allies as ‘parties’ to the arbitration clause. This tactic, which I call ‘artificial privity’, is a brazen effort to erase the longstanding distinction between contractual parties (who have agreed to terms and thus can enforce them directly) and non-signatories (who have not assented and have no such rights). Third, the Article explains why courts, not arbitrators, should enjoy the power to decide whether to compel accidental arbitration. Courts possess jurisdiction over whether the FAA applies and if someone has consented to arbitrate. Accordingly, recognizing the contractual nexus theory and the fallacy of artificial privity would prevent corporations from assigning these important gateway issues to arbitrators.

Horton, David, Accidental Arbitration (July 17, 2024).