Arbitrating novel legal questions: a recommendation for reform.

• Author: Scodro, Michael A.

INTRODUCTION

Arbitration plays a significant role in the contemporary alternative dispute resolution (ADR) movement, a trend in conflict management affecting the practice of law in the United States to an ever-growing extent. In 1995 alone, the U.S. Supreme Court decided three cases requiring interpretation of the Federal Arbitration Act (FAA),(1) the federal statute chiefly responsible for regulating arbitration provided for in private, commercial contracts. While these cases, and others like them brought in the more than seventy years since Congress enacted the FAA, have allowed the federal bench to resolve issues concerning federal arbitration law, the Act itself does not empower judges to reach the merits of the legal claims that underlie privately arbitrated disputes. Under the FAA, federal courts can be called upon to enforce arbitral awards against noncomplying parties, but, with certain narrow exceptions, they may not review the substantive decisions rendered by private arbitrators.

The Act's strict limitations on judicial review of arbitral awards have become more questionable in recent years, however, as arbitrators have begun to resolve an increasingly broad spectrum of claims. Once confined primarily to disputes over the language of private contracts, today arbitration is a judicially recognized and enforced means of resolution for virtually any controversy arising between parties that have contracted to arbitrate their present or future conflicts. Such contractual agreements are now binding under the FAA even for the resolution of claims brought under federal antitrust, RICO, patent, securities, and, increasingly, employment discrimination statutes--a development that represents a significant expansion in arbitral "jurisdiction."

This Note argues that the greatest potential for injustice in the arbitral resolution of such statutory claims, both to the parties and to society more generally, arises when these claims raise novel legal questions. First, when a party raises a legal claim that the courts themselves have never addressed, she is unable even to present a decision from a publicly accountable judge to guide or constrain an arbitrator's decisionmaking. Under these conditions, an arbitrator is particularly likely to render an interpretation that is inconsistent with what a public court would decide. Second, the private resolution of a novel point deprives the courts of the opportunity to flesh out important statutory standards.

This Note recommends a procedural innovation in the form of an amendment to the FAA narrowly tailored to target the potential harms in the arbitral resolution of disputes grounded in novel legal claims. In particular, it recommends the creation of a procedural link between the federal courts and private arbitrators based on a process currently in practice: federal courts' certification of unresolved state-law questions to state supreme courts. Applied to private arbitration, such a certification procedure has the potential to strike a balance between the arbitral independence advocated by arbitration's proponents and the harms identified above.

In making its practical recommendation, this Note is not intended to suggest that more substantial judicial oversight of private arbitration would not be preferable. Rather, recognizing that more ambitious reform is unlikely in the current era of rapid ADR expansion, it aims to rectify a narrow yet especially pernicious aspect of the arbitration of federal statutory claims.

1. The Current State of the Law

   Congress passed the Federal Arbitration Act in 1925. The Act, a history of which is provided in Part II, requires that courts enforce parties' contractual agreements to resolve present or future disputes through private arbitration. In particular, either by declining to hear such disputes3 or by mandating that they go to arbitration,(4) federal courts are to uphold any "written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction."(5) The Act further provides that, following private arbitration conducted pursuant to such a contractual provision, a party to the dispute may call upon the courts to order the enforcement of the resulting award.(6)

   1. The Expanding Sphere of Arbitrability

      Judicial interpretation of the FAA has undergone a significant change in recent years. Earlier in the century, the courts had placed extensive limitations on arbitration. In the past decade, however, the trend has been for the federal courts to expand the sphere of substantive issues that they consider to be legitimate subjects of the binding, minimally reviewable arbitration that the Act governs. This section describes the key decision in the initial limitation of the arbitrability of claims brought under the FAA and the line of cases defining arbitrability's subsequent expansion. It emphasizes in particular the change in the Court's view of arbitral competence to resolve legal issues and, relatedly, of arbitration's ability to recognize and preserve substantive statutory rights.

      The Supreme Court first advanced the notion that courts should refuse to order the arbitration of certain claims in Wilko v. Swan,(7) a customer's private action against his broker under the Securities Act of 1933. The Court found that a provision in the parties' margin agreement requiring the arbitration of future disputes constituted a "'stipulation' waiving compliance with [a] `provision"' of the 1933 Act, a waiver prohibited by [section] 14 of the Act.(8) The Court expressed its concern that an arbitrator might enforce the Securities Act's substantive requirements less effectively than would a court.9 In particular, the Wilko majority explained that arbitral legal determinations may lack the accuracy of judicial conclusions and yet stand up in the face of the narrow powers of judicial review provided for in the FAA:

      As their award may be made without explanation of their reasons and

      without a complete record of their proceedings, the arbitrators'

      conception of the legal meaning of such statutory requirements as

      "burden of proof. . . . reasonable care" or "material fact," . . . cannot be

      examined.... In unrestricted submissions ... the interpretations of

      the law by the arbitrators in contrast to manifest disregard are not

      subject . . . to judicial review for error in interpretation. The [FAA]

      contains no provision for judicial determination of legal issues such

      as is found in the English law.(10)

      If the arbitrator reached inaccurate legal conclusions, the parties might not be subject to the proper substantive principles laid out in the Securities Act.

      Although the Wilko decision specifically involved the Securities Act of 1933, its concerns apply more broadly, and courts subsequently extended its limitations on arbitration to other areas of federal statutory law. A "public policy exception" developed, whereby courts would refuse to order the arbitration of claims involving areas of public law despite the existence of otherwise valid predispute arbitration agreements. As one commentator notes, "Courts have found exceptions to the Arbitration Act based on the public policy underlying patent, copyright, antitrust, civil rights, and other statutes, and although Wilko v. Swan was not based on a generalized public policy exception, it has frequently been cited for that proposition."(11)

      While the Supreme Court actually began to chip away at the public policy exception as early as 1974, the first in this line of cases, Scherk v. Alberto-Culver Co.,(12) did not reflect a rethinking of arbitrators' competence to resolve statutory claims. Rather, in requiring the arbitration of a cause of action under the Securities Exchange Act of 1934, the Scherk Court stressed the fact that the contract at issue was international, with the parties' dealings taking place in several countries.(13) There is a need, the Court explained, for parties to be able to choose a forum for the reconciliation of disputes when they do not share a single national legal system.(14)

      Unlike Scherk, a series of decisions beginning in the 1980s revealed a turnaround in the Court's conception of arbitration. These decisions rapidly expanded the sphere of arbitrability to include securities, antitrust, and RICO claims; other areas covered by federal statutes, such as copyrights, patents,(15) and pensions(16) also became appropriate subjects of arbitration.(17) The Court in these opinions no longer depicted arbitration as an inappropriate means to resolve statutory claims; indeed, the Court has effectively proscribed any such assumption.

      This recent rush of cases expanding arbitrability began in 1985 with the Court's decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.(18) In the face of a contractual dispute with Soler, Mitsubishi had moved under both the FAA and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to enforce an arbitration clause in their contract.(19) Soler, in turn, had levied a number of allegations against Mitsubishi, including Sherman Act antitrust claims, and it wanted to resolve its causes of action in a federal court.(20) Based on the proceedings below, the specific issue before the Court was "whether an American court should enforce an agreement to resolve anti-trust claims by arbitration when that agreement arises from an international transaction."(21) As a first step in resolving this issue, the Court made it clear that the fact that Soler's claim was statutory, in itself, said nothing about its arbitrability.(22) In language subsequently quoted on numerous occasions by both the Supreme Court and lower federal courts, the Mitsubishi majority explained:

      By agreeing to arbitrate a statutory claim, a party does not forgo the

      substantive rights afforded by the statute; it only submits to their

      ...