Lisa W. Timmons, PLLC, Arbitrator and Mediator
The Federal Arbitration Act (FAA), enacted on February 12, 1925, has been a cornerstone of American dispute resolution for a century. It transformed arbitration from a seldom-used alternative into a central feature of the U.S. legal system. Over the past 100 years, the FAA has evolved through legislative amendments, judicial interpretations, and policy shifts, establishing arbitration as a preferred method for resolving disputes in commercial, labor, and consumer contexts, as evidenced by the widespread inclusion of arbitration clauses in contracts across these sectors. This article explores the origins of the FAA, its legislative history, and recent U.S. Supreme Court cases that may shape its future.
A. Pre-FAA: Hostility Toward Arbitration in Early America
Before the FAA's enactment, arbitration faced significant resistance in the United States. Influenced by English common law, the U.S. legal system was often hostile toward arbitration agreements, viewing them as attempts to bypass judicial authority. Courts frequently refused to enforce arbitration clauses, compelling parties to litigate despite prior agreements to arbitrate disputes.
This reluctance was rooted in concerns that arbitration lacked procedural safeguards and the belief that private dispute resolution should not supplant formal judicial processes. Many state laws rendered arbitration agreements unenforceable, making arbitration an impractical alternative to litigation.
B. The Need for Reform: Rise of Commercial Arbitration
In the early 20th century, the rapid expansion of commerce and industry in the U.S. led to increased litigation, congesting court dockets and creating inefficiencies in contract enforcement. Business leaders and trade organizations advocated for arbitration reform, viewing it as a more efficient and cost-effective method for resolving commercial disputes.
The American Bar Association (ABA) and the New York Chamber of Commerce spearheaded efforts for federal legislation to ensure the enforceability of arbitration agreements. These efforts culminated in the drafting of the United States Arbitration Act, later known as the Federal Arbitration Act.
Passage of the Federal Arbitration Act
A. Congressional Sponsors and Presidential Signing
The Federal Arbitration Act was enacted on February 12, 1925, and became effective on January 1, 1926. It was introduced by Senator Charles L. Bernheimer, who was also a dry goods merchant in Manhattan, and supported by members of Congress who viewed arbitration as essential for American commerce. President Calvin Coolidge signed the Act into law, marking a significant shift in the legal landscape regarding arbitration agreements. The FAA aimed to:
1. Make arbitration agreements legally enforceable, preventing courts from arbitrarily invalidating them.
2. Reduce judicial hostility toward arbitration.
3. Promote efficiency and finality in dispute resolution by diverting disputes from congested courts.
Initially, the FAA applied primarily to maritime and commercial contracts, leaving employment and consumer arbitration largely unregulated at the time. This changed gradually over the decades, largely due to judicial interpretation rather than legislative amendments. The expansion of the FAA’s reach, particularly into employment contracts, occurred through a series of Supreme Court decisions that broadened its scope beyond its original intent. Examples include:
1. Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S. 20 (1991) – Employment Arbitration Expansion. In Gilmer the Supreme Court ruled that employment arbitration agreements were enforceable under the FAA unless Congress had explicitly stated otherwise. This decision marked a significant shift in how the FAA applied to workers, effectively allowing employers to compel arbitration of employment disputes.
The ruling encouraged employers across industries to adopt mandatory arbitration clauses in employment contracts.
2. Circuit City Stores v. Adams, 532 U.S. 105 (2001) – Narrowing the FAA's Employment Exemption. Held that the FAA contains a transportation worker exemption in 9 U.S.C. § 1, excluding “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”
3. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)– Consumer Arbitration Expansion. In AT&T Mobility the Supreme Court held that the FAA preempted state laws that prohibited mandatory arbitration clauses in consumer contracts. This ruling overturned state laws that had attempted to restrict forced arbitration, leading to widespread enforcement of arbitration agreements in consumer contracts. After this case, businesses increasingly included class action waivers in arbitration agreements, limiting consumers' ability to bring collective lawsuits.
4. Epic Sys. Corp. v. Lewis, 584 U.S. 497 (2018)– Class Action Waivers Upheld. The Supreme Court ruled that employers could enforce arbitration clauses that require employees to waive their right to collective or class action lawsuits. This decision further strengthened employer-controlled arbitration, limiting workers' ability to pursue legal claims collectively.
Legislative inaction also played a key role in the expansion of arbitration, as Congress has not amended the FAA to limit its scope, effectively allowing the courts to determine its application. Additionally, pro-business policy shifts contributed to this expansion, as arbitration became increasingly favored by businesses due to its cost-effectiveness and efficiency compared to litigation. Finally, preemption of state laws further solidified arbitration’s dominance, with the Supreme Court consistently striking down state attempts to restrict arbitration agreements in employment and consumer contracts.
B. Worker Exemptions Under the FAA
Certain classifications of workers are exempt from the FAA, despite its broad applicability to most private-sector employees. Among these exemptions, transportation workers, seamen, federal government employees, and independent contractors in the transportation industry are notably excluded from FAA provisions due to industry-specific regulations and legal precedents. These exemptions highlight a congressional intent to exclude certain workers reach of the FAA due to the presence of other statutory frameworks that govern their labor rights, such as the Railway Labor Act (RLA) (railroad and airline employees), Civil Service Reform Act (CSRA)(federal employees), and 9 U.S.C. § 1(seamen and maritime workers).
C. Restoring Choice: The End of Forced Arbitration in Sexual Misconduct Cases
On March 3, 2022, President Joseph Biden signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFASHA). This landmark legislation amended the FAA rendering pre-dispute arbitration agreements unenforceable for claims involving sexual assault or sexual harassment. The Act empowers survivors to choose between pursuing their claims in court or through arbitration, rather than being compelled into private arbitration proceedings. Notably, the law applies to any dispute or claim that arises on or after its enactment date, regardless of when the underlying conduct occurred. This ensures that individuals who experience such misconduct have the autonomy to decide the forum in which to seek justice.
Recent U.S. Supreme Court Cases Impacting the FAA
• Morgan v. Sundance, Inc., 596 U.S. 411(2022): Clarified that a party does not have to prove prejudice when arguing that another party has waived their right to arbitration.
• Viking River Cruises, Inc. v. Moriana, 596 U.S. 639 (2022): The Supreme Court ruled that California’s Private Attorneys General Act (PAGA) claims can be subject to arbitration, limiting employees’ ability to
bring representative labor law claims.
• Coinbase, Inc. v. Bielski, 599 U.S. 736 (2023): Held that when a federal district court denies a motion to compel arbitration, the losing party has a statutory right to an interlocutory appeal. 9 U.S.C.S. § 16(a).
The district court must stay its pre-trial and trial proceedings while an interlocutory appeal is ongoing.
Then in 2024 alone, the Supreme Court issued several significant decisions regarding arbitration:
• Smith v. Spizzirri, 601 U.S. 472 (2024): The Court unanimously held that under Section 3 of the FAA, federal courts are required to stay proceedings when a dispute is referred to arbitration, rather than dismissing the case. This decision emphasizes the mandatory nature of staying proceedings pending arbitration, ensuring that parties can return to court, if necessary, after arbitration concludes.
• Coinbase, Inc. v. Suski, 602 U.S. 143 (2024): The Court stressed the contractual foundation of arbitration agreements, ruling that disputes over the applicability of arbitration clauses should be resolved based on traditional contract principles. The decision underscores that parties are bound by the terms to which they have mutually agreed, reinforcing the importance of clear and explicit arbitration provisions in contracts. The Court also ruled that when parties have agreed to two contracts, one that sends arbitrability disputes to arbitration, and the other either explicitly or implicitly sends arbitrability disputes to the courts, a court must decide which contract governs.
• Bissonnette v. LePage Bakeries Park St., LLC, 601 U.S. 246 (2024): In a unanimous decision, the Court clarified that transportation workers do not need to be employed within the transportation industry to qualify for the FAA's exemption. This ruling broadens the scope of workers who can seek exemption from mandatory arbitration under the FAA, focusing on the nature of the work performed rather than the employer's industry classification.
For the last century, the Federal Arbitration Act has shaped the way Americans resolve disputes. Initially enacted to promote efficiency and fairness in commercial transactions, the FAA has since expanded to nearly all areas of law, including employment, consumer rights, and international commerce. As arbitration continues to evolve, debates over its fairness and accessibility remain at the forefront. The next century will determine whether arbitration remains dominant or faces greater regulation. As we mark its 100th anniversary, the FAA’s legacy remains unparalleled in American law.
—————
Lisa W. Timmons, Esq., has over 27 years of experience in alternative dispute resolution (ADR). She is the chair of the ADR Section of the Michigan State Bar, and the Executive Director of the Mediation Tribunal Association. Timmons serves as an arbitrator, mediator, and case evaluator of labor, employment, and commercial cases with the American Arbitration Association (AAA), FMCS, USPS, MERC, FINRA, and several other public and private arbitration and mediation panels.
