When Congress passed the Federal Arbitration Act on February 12, 1925, it was fixing a small, practical problem. Merchants who’d shaken hands on a deal and written an arbitration clause into the contract wanted a fast, private way to settle the fights that always come up — a bad shipment of cotton, an argument over grade or quantity — without the delay and expense of a courtroom. American courts back then were openly hostile to arbitration agreements and often wouldn’t enforce them. The FAA was meant to end that hostility and put an arbitration clause on the same footing as any other contract term.
That isn’t the law I practice under today. Over the past four decades, the Supreme Court has rebuilt the FAA into something its drafters wouldn’t recognize: a machine that pushes consumers and employees out of court and into individual arbitration, one person at a time, often for claims too small to be worth bringing alone. That isn’t faster justice. For a lot of valid claims, it’s no justice at all.
What did the 1925 Congress actually write?
The FAA’s operative provision, codified at 9 U.S.C. § 2, makes a written arbitration agreement in a contract “involving commerce” — the statute’s words — “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In plain English: arbitration clauses get enforced like any other contract term, and you can attack them on the same grounds that would void any contract, like fraud or unconscionability.
The people who wrote and pushed the Act saw it as a tool for merchants on roughly equal footing. The bill grew out of work by the American Bar Association and business groups. Its principal architect was Julius Henry Cohen, counsel to the New York Chamber of Commerce, working alongside cotton merchant Charles Bernheimer. As historians of the statute have documented, its supporters described arbitration as a voluntary method best suited to ordinary factual disputes between businesses. And when senators worried that a party with far more bargaining power might force arbitration on the other side, the supporters pushed back on the idea that the Act would reach contracts that weren’t truly voluntary. Congress also wrote an express carve-out into Section 1, exempting “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” from the Act’s reach.
You won’t find the contracts that cross my desk now anywhere in that story. A cell-phone agreement. An employment onboarding packet. Written entirely by one side, handed over take-it-or-leave-it, with a clause the customer never reads and can’t negotiate.
Six cases did the work
So how does a merchants’ statute turn into a consumer-and-employee statute? One Supreme Court decision at a time, each stacked on the last. Here they are in order.
The big move came in Southland Corp. v. Keating, 465 U.S. 1 (1984). The Court held that the FAA created a body of federal substantive law that applies in state courts as well as federal courts and preempts conflicting state law, and it struck down a California statute that had protected franchisees’ right to sue. Congress, the Court reasoned, had taken away the states’ power to require a judicial forum for claims the parties had agreed to arbitrate. That took a 1925 procedural statute and turned it into a nationwide rule binding every state legislature.
Seven years later, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), held that a federal statutory claim — there, age discrimination under the ADEA — could be forced into arbitration under a clause the plaintiff had signed, absent proof that Congress meant to bar arbitration of such claims. Now the door was open to arbitrating not just contract squabbles but civil-rights and consumer-protection claims created by statute.
In Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the Court read Section 1’s worker exemption narrowly, holding that it exempts only transportation workers, not employees generally. After that, most American workers could be required to arbitrate workplace disputes as a condition of employment.
Then came the two decisions that hit consumers and small claimants most directly. In AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the Court held that the FAA preempts state-law rules — there, a California doctrine treating most class-action waivers in consumer contracts as unconscionable — that stand in the way of enforcing arbitration agreements according to their terms. Companies could now pair an arbitration clause with a class-action ban, and courts would enforce both.
Two years later, American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), shut the escape hatch. The plaintiffs argued the class-action waiver was unenforceable because arbitrating their federal antitrust claim one at a time would cost far more than they could ever recover, so the claim couldn’t realistically be brought. The Court disagreed. It held that the FAA does not permit courts to invalidate a class-arbitration waiver merely because the cost of proving a statutory claim individually exceeds the potential recovery. In the majority’s words, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy” — which is cold comfort if you’ve got a $200 claim and a $5,000 arbitration bill.
Last, Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018), carried the same logic into the workplace. It held that arbitration agreements requiring individualized proceedings must be enforced and aren’t overridden by the National Labor Relations Act’s protection of “concerted activities.” Employers could lawfully make workers waive collective and class proceedings as a condition of the job.
You can defend each case on its own narrow terms. Stack them up and you get a regime the 1925 Congress never enacted and wouldn’t have recognized. The Court built a statute Congress never passed.
The numbers describe a claims graveyard
People who defend forced arbitration call it a cheaper, faster alternative to a lawsuit. The data say otherwise, and the data are what convinced me. For most consumers it isn’t an alternative forum at all, because they never use it.
The most thorough federal study is still the Consumer Financial Protection Bureau’s 2015 Arbitration Study, which the Dodd-Frank Act required. Looking at six consumer-finance markets — credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless — the CFPB found that consumers filed only roughly 600 arbitration cases per year on average across all of those markets combined. Small claims almost never showed up: on average, about 25 cases per year involved an affirmative claim of $1,000 or less. Meanwhile, arbitration clauses were everywhere. Credit-card issuers representing 53 percent of that market used them, and over 90 percent of the studied arbitration agreements expressly prohibited class arbitration.
Now compare class litigation. The CFPB found that, on average, roughly 32 million consumers per year were eligible for relief through class-action settlements in federal court, with at least $1.1 billion actually paid or scheduled to be paid to at least 34 million consumers over the period studied. And most consumers had no idea any of this applied to them. Three out of four surveyed didn’t know whether their credit-card agreement even had an arbitration clause, and fewer than 7 percent of those who were bound by one understood that it barred them from suing in court.
So in these markets, arbitration clauses didn’t move disputes to a different forum. They killed the class action — the one procedure that made small-dollar claims worth bringing — and put almost nothing in its place.
Is anything pushing back?
Some. It isn’t all one direction.
Congress has started carving exceptions back out of the FAA. In the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (Public Law 117-90), signed into law on March 3, 2022, Congress amended the FAA to let a person asserting a sexual-assault or sexual-harassment claim choose to bring it in court, and to proceed on a class or collective basis, notwithstanding a pre-dispute arbitration or class-waiver agreement. It applies to disputes arising after enactment. It’s a narrow carve-out, limited to those specific claims. But it’s the first significant legislative rollback of forced arbitration in a generation, and a sign that the political consensus behind the doctrine won’t last forever.
Plaintiffs’ lawyers, meanwhile, have started turning the companies’ own clauses against them with what’s called “mass arbitration.” Arbitration providers charge the business substantial per-case filing fees. So a firm that files thousands of individual demands at once can hit a company with millions of dollars in fees before anyone gets to the merits — the mirror image of the leverage companies wanted when they wrote the clauses. In one widely reported episode, Postmates faced roughly $10 million in arbitration fees after more than 5,000 of its couriers filed individual demands at once. Arbitration providers have since changed their fee schedules in response. The tactic is contested and still developing, but it shows that “individual arbitration only” can cut both ways.
What I tell Minnesota consumers and small businesses
An arbitration clause in your contract doesn’t automatically mean you’re out of options. These clauses are enforced like other contract terms, which means they can sometimes be challenged — on unconscionability or other generally applicable contract grounds — and some claims and carve-outs survive them. Federal law now lets the person bringing a sexual-assault or sexual-harassment claim choose court over a pre-dispute arbitration agreement. And what any given clause actually covers comes down to reading it carefully: what it reaches, what it leaves out, and whether it has a class-action waiver at all.
If you own a small business, the lesson runs both ways. The same clauses big counterparties put on you may be sitting in your own vendor and financing agreements, so read them before you sign. And if you use arbitration clauses in your own customer contracts, know what current law does and doesn’t let them do.
Most of all, don’t assume “we agreed to arbitrate” ends the conversation. In my experience it often doesn’t. The exact language of the clause, the kind of claim, the forum, and the developing state of the law decide what options are left. Those details pay off for whoever reads them closely.
Attorney advertising. This article is general information and commentary about arbitration and consumer-protection law, not legal advice, and reading it does not create an attorney-client relationship. This area of law is complex and changes over time; outcomes depend on the specific facts and governing law, and no result is guaranteed. For advice about your own situation, consult a licensed attorney.
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