When Congress passed the Federal Arbitration Act on February 12, 1925, it was solving a narrow, practical problem. Merchants who had shaken hands on a deal, and written an arbitration clause into their contract, wanted a fast and private way to resolve the disputes that inevitably arose — a bad shipment of cotton, a disagreement over grade or quantity — without the delay and expense of a courtroom. American courts at the time were openly hostile to arbitration agreements, often refusing to enforce them. The FAA was designed to end that hostility and put an arbitration clause on the same footing as any other contract term.
That is not how the law works today. Over the past four decades, the Supreme Court has rebuilt the FAA into something its drafters would not recognize: a mechanism that forces consumers and employees out of court and into individual arbitration, one person at a time, often for claims too small to be worth pursuing alone. The result is not faster justice. For a great many valid claims, it is no justice at all.
A 1925 law for merchants, not consumers
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 terms: arbitration clauses are enforced like other contract terms, and can be challenged on the same grounds that would void any contract, such as fraud or unconscionability.
The people who drafted and championed the Act understood it to be a tool for merchants of 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 raised the concern that arbitration might be imposed by a party with far greater bargaining power, they resisted the idea that the Act would reach contracts that were not 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.
Nowhere in that origin story is the modern reality: a cell-phone contract or an employment onboarding packet, drafted entirely by one side, presented on a take-it-or-leave-it basis, containing a clause the customer never reads and cannot negotiate.
The doctrinal turn: four decades of expansion
How did a merchants’ statute become a consumer-and-employee statute? Through a series of Supreme Court decisions, each building on the last.
The pivotal move came in Southland Corp. v. Keating, 465 U.S. 1 (1984), where 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 — striking down a California statute that had protected franchisees’ right to sue. Congress, the Court reasoned, had withdrawn from the states the power to require a judicial forum for claims the parties had agreed to arbitrate. That holding took a 1925 procedural statute and made it 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. The door was now 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 exemption for workers narrowly, holding that it exempts only transportation workers — not employees generally. With that, the vast majority of American workers could be required to arbitrate workplace disputes as a condition of employment.
Then came the two decisions that most directly hit consumers and small claimants. 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), closed the escape hatch. The plaintiffs argued that a class-action waiver was unenforceable because the cost of individually arbitrating their federal antitrust claim would dwarf any possible recovery, making the claim economically impossible to bring. The Court disagreed, holding 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. As the majority put it, “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” — a distinction that is cold comfort to anyone with a $200 claim and a $5,000 arbitration bill.
Finally, Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018), extended the logic to the workplace, holding that arbitration agreements requiring individualized proceedings must be enforced and are not overridden by the National Labor Relations Act’s protection of “concerted activities.” Employers could lawfully require workers to waive collective and class proceedings as a condition of the job.
Each case is defensible on its own narrow terms. Stacked together, they add up to a regime the 1925 Congress never enacted and would not have recognized.
The empirical reality: a claims graveyard
Defenders of forced arbitration call it a cheaper, faster alternative to litigation. The data tell a different story: for most consumers, it is not an alternative forum at all, because they never use it.
The most comprehensive federal study remains the Consumer Financial Protection Bureau’s 2015 Arbitration Study, mandated by the Dodd-Frank Act. Reviewing 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-dollar claims were vanishingly rare: on average, about 25 cases per year involved an affirmative claim of $1,000 or less. Meanwhile, arbitration clauses blanketed the market — credit-card issuers representing 53 percent of that market used them, and over 90 percent of the studied arbitration agreements expressly prohibited class arbitration.
The contrast with class litigation is stark. 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 consumers largely did not know any of this was happening to them: three out of four surveyed did not know whether their credit-card agreement even contained an arbitration clause, and fewer than 7 percent of those who were subject to one understood that it barred them from suing in court.
Put simply, arbitration clauses in these markets did not redirect disputes to a different forum. They eliminated the class action — the one procedure that made small-dollar claims economically viable — and put almost nothing in its place.
The counter-currents
The picture is not entirely one-directional. Two developments are worth watching.
First, Congress has begun 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 is a narrow carve-out — limited to those specific claims — but it is the first significant legislative rollback of forced arbitration in a generation, and a signal that the political consensus behind the doctrine is not permanent.
Second, plaintiffs’ lawyers have begun turning the companies’ own clauses against them through so-called “mass arbitration.” Because arbitration providers charge the business substantial per-case filing fees, a firm that files thousands of individual demands at once can confront a company with millions of dollars in fees before the merits are ever reached — the mirror image of the leverage companies sought 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 revised their fee schedules in response. The tactic is contested and evolving, but it shows that “individual arbitration only” can cut both ways.
What this means for Minnesota consumers and small businesses
A few practical takeaways, offered as general information rather than advice about any particular situation.
An arbitration clause in your contract does not automatically mean you have no recourse. 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 exempts sexual-assault and sexual-harassment claims from pre-dispute arbitration agreements. And the scope of any given clause is a matter of reading it carefully: what it covers, what it excludes, and whether it contains a class-action waiver at all.
For small-business owners, the lesson runs in both directions. The same clauses that large counterparties impose on you may appear in your own vendor and financing agreements — worth reading before you sign. And if you use arbitration clauses in your own customer contracts, understand what current law does and does not let them accomplish.
Above all, do not assume that “we agreed to arbitrate” ends the analysis. It frequently does not. The details — the exact language of the clause, the nature of the claim, the forum, and the developing state of the law — determine what options remain.
This article is general information and commentary from Madgett Law, LLC, a Minnesota law firm, and reflects the views of the author. It is not legal advice, does not address any specific person’s circumstances, and does not create an attorney-client relationship. Arbitration and consumer-protection law are complex and change over time; outcomes depend on the specific facts and governing law, and no result is guaranteed.
If you have questions about an arbitration clause, a consumer dispute, or a contract, use the Message Us feature on this site to contact the firm.