Arbitration is a powerful tool large companies use to avoid costly litigation. But is it powerful to the point of being harmful to consumers — and your real estate clients? The U.S. Supreme Court is poised to issue a decision on this contentious legal shortcut.
Arbitration is a form of alternative dispute resolution in which a third-party arbitrator issues a final and binding award outside of the court. Notably, this decision cannot be reviewed or corrected by a court of law — even if the decision was based on an error or if the law was applied incorrectly. [Hall Superior Court (1993) 18 CA4th 427]
People involved in a real estate transaction often voluntarily (or unknowingly) initial the boilerplate arbitration provision found in the purchase agreement published by the California Association of Realtors (CAR). However, homebuyers and sellers do not need to initial the binding arbitration agreement to submit their purchase agreement — despite the fact that many agents, brokers and their clients assume they need to. [See RPI Form 150]
It is a licensee’s duty to inform their clients that when they initial the arbitration provision, they waive their right to a trial by jury as well as their right to appeal the arbitrator’s decision when it is flawed.
In addition to real estate contracts, arbitration provisions are common in many contracts you’ve likely signed. For instance, credit card, auto, medical and employment agreements often include an arbitration provision obscured in the fine print.
Due to their ubiquity, the Consumer Financial Protection Bureau (CFPB) has entered the fray, calling the arbitration provision a “gotcha” for consumers, the vast majority of whom are unaware what the arbitration is or whether they have agreed to be bound by one.
To that end, in 2016 the CFPB proposed new federal regulation to prohibit mandatory arbitration provisions in contracts which bar class action lawsuits. The proposed rule would still allow arbitration provisions, though they would need to specify the signer is not precluded from participating in a class action lawsuit. After receiving comments on the proposed rule, the CFPB is developing a final rule to be published in spring 2017.
This effort to limit participation in class action lawsuits follows a 2011 U.S. Supreme Court decision which found the Federal Arbitration Act enables companies to prohibit consumers who signed an arbitration agreement from participating in class actions. [AT&T Mobility LLC v. Concepcion et ux. 563 U.S. 333 (2011)]
The Supreme Court weighs in
The U.S. Supreme Court recently agreed to revisit the issue as it applies to arbitration agreements found in employment agreements.
For example, one of the cases to be decided when the Supreme Court reviews the issue was first decided in the Ninth Circuit court — a federal court with jurisdiction over California and other Western U.S. states.
As a condition of employment, two employees signed an arbitration provision which prohibited them from joining class action lawsuits against their employer. The employees later claimed their employer misclassified their employment status to avoid the payment of over-time pay. The employees then attempted to join in a class action lawsuit against their employer, seeking to be paid appropriately. The employer sought to enforce the arbitration agreement which prohibited participation in class action lawsuits.
The Ninth Circuit decided that an employer which requires its employees to sign an arbitration provision precluding them from participating in class actions is a violation of the National Labor Relations Act. Accordingly, the arbitration provision agreed to by the employees is unenforceable. [Morris v. Ernst & Young U.S., LLP (9th Cir. 2016) 834 F.3d 975]
However, the Ninth Circuit’s decision disagreed with a similar case decided by a separate federal court — the Fifth Circuit in New Orleans. In this case, an employee of a large oil company signed an arbitration agreement which prohibited the employee from joining with others to pursue class actions. The employee later joined in a class action lawsuit against the employer for violating fair labor laws. The oil company sought to enforce the arbitration provision. Here, the court sided with the employer. [National Labor Relations Board v. Murphy Oil USA, Inc. (5th Cir. 2016) __ F.3d __]
Since the two federal courts disagreed, the U.S. Supreme Court will set a firm standard on whether employment agreements can include arbitration agreements prohibiting class actions.
The court is likely to hear the case in April 2017, according to the New York Times. Check back with first tuesday for a detailed report of the result and its potential implications for California real estate contracts.
How arbitration impacts your real estate practice
Since the Federal Arbitration Act (FAA) was enacted in 1925 for the benefit of large companies to avoid the high costs of litigation to solve minor disputes, arbitration has continued to receive legal protection. [9 U.S. §1 et. seq.]
Even when arbitration decisions contradict the law, the decision may not be reviewed by a court of law. [Hall v. Superior Court (1993) 18 CA4th 4271]
The U.S. Supreme Court case to be decided in April 2017 may not have a direct impact on real estate transactions. Still, a decision in favor of the National Labor Relations Board which represents the employees may weaken arbitration’s legal impermeability, as well as strengthen the CFPB’s likely rule this spring to prohibit the limitation on class action lawsuits.
But since neither of these rules will change how your real estate clients pursue relief when a disagreement occurs between buyers and sellers or others involved in the transaction, it’s up to you to inform your clients of the rights they choose to sign away when they initial the arbitration provision. Further, they need to know that they don’t need to agree to arbitration in order to submit a purchase agreement.
As a matter of practice, Realty Publications, Inc. forms do not include arbitration provisions. Instead, a mediation provision is included. Unlike arbitration, clients who undergo mediation can later decide to take the disagreement to court if they are unable to reach a meeting of the minds.
first tuesday readers can download all 400+ RPI forms, which are legal to use in California real estate transactions, for free here.