Consumer arbitration: is it working now and will it work in the future?

• Author: Matthews, Joseph M.

When this author began practicing law in 1977, consumer arbitration was an oxymoron. As late as 1969, Florida appellate courts were still expressing resistance to enforcing arbitration agreements, even in the context of business disputes. (1) Just four years later the Florida Supreme Court clearly expressed this state's altered policy in favor of enforcing arbitration agreements. (2) This policy is now nearly uniform across the 50 states and the District of Columbia and is the policy of the U.S., as embodied in the Federal Arbitration Act and a long series of U.S. Supreme Court decisions.

During the past 30 years, use of arbitration has expanded both as to the quantity and the nature of the disputes subjected to it. Many in the organized trial bar and academia have fought to curtail this expansion into the consumer arena. The 2003 Forum for State Appellate Court Judges sponsored by the Roscoe Pound Society was entitled "Privatization of Justice? Mandatory Arbitration and the State Courts." (3) Two of the leading opponents of mandatory arbitration, Professors Jean R. Sternlight and David S. Schwartz, presented papers that challenge the continued expansion of mandatory consumer arbitration as an assault on the constitutional guaranty of the right to trial by jury. (4) The Trial Lawyers for Public Justice have for several years pursued a "Mandatory Arbitration Abuse Prevention Project" through which they have filed amicus briefs and assisted in the representation of consumer interests attempting to prevent enforcement of mandatory arbitration provisions in consumer contracts. While TLPJ has enjoyed some limited success, mostly in California, these and other efforts have been largely unsuccessful in stemming the tsunami of arbitration.

One unfortunate byproduct of the opposition by trial lawyer organizations to mandatory consumer arbitration has been a "boycott" by the San Francisco Trial Lawyers Association of the American Arbitration Association (AAA). To the extent that this prevents the AAA and other forums from drawing upon lawyers from the consumer or employment bar to participate in the process, including service as arbitrators, it is truly self-defeating.

The purpose of this article is not to evaluate the merits of enforcing mandatory arbitration provisions in consumer contracts. Rather, it is to offer a glimpse into the developing practice, procedure, and economics of consumer arbitration, particularly class arbitration of consumer claims, and to encourage all segments of the bar, particularly the consumer and trial bar, to participate in this evolving system of dispute resolution.

A Brief History of Arbitration

Arbitration has been with us since at least Biblical times. In its purest form it is a method of dispute resolution involving one or more neutral third parties who are agreed to by the disputing parties and whose decision is binding. (5)

* International Arbitration

Arbitration in the international business setting has enjoyed great success largely due to the effectiveness of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, adopted as the law of the U.S. at 9 U.S.C. [section] 201 et seq., commonly known as The New York Convention. The New York Convention, with more than 150 signatories, has made arbitration awards far more readily enforceable through domestic justice systems than the domestic judgments of any court.

Historically, arbitration in the context of international commercial relations developed around the primary goal of finding an acceptable method for resolving a dispute while overcoming the inherent suspicions and conflicts stemming from different languages, nations, cultures, and legal systems and the desire for simplified commencement of proceedings, service of process, and conduct of the proceedings. (6) More uniform and less expensive enforcement of arbitral awards among the many nation states that are signatories of The New York Convention was the incentive given to encourage more nearly universal acceptance of arbitration as the preferred method for resolving disputes among international business interests.

Because of the significant amounts of money usually involved, the international arbitration rules and systems did not develop primarily to produce a less expensive alternative to domestic civil justice systems. In fact, the costs involved in conducting international arbitration under the auspices of the primary international forums such as the International Chamber of Commerce (7) (ICC) and the London Court of International Arbitration (LCIA) were historically beyond the reach of all but the wealthiest of parties.

The New York Convention includes a commercial reservation that allows signatories to refuse to enforce arbitral awards that are not considered "commercial." This reservation has been adopted by 51 of the contracting states and the consensus has been that business-to-consumer transactions are not "commercial." (8) Thus, in the context of international commerce, the concept of "consumer arbitration" remains an oxymoron. (9)

* Arbitration and Arbitration Forums in the US.

Arbitration in the U.S. developed differently. For many years, arbitration in the U.S. consisted largely of employment disputes resolved by arbitration procedures established through collective bargaining agreements. At the turn of the 20th century, members of specific industries, most notably the construction industry, began to look for a "faster, cheaper, better" alternative to civil justice systems for primarily business-to-business disputes. It initially met with significant resistance from courts whenever a party sought to avoid enforcement of a contractual arbitration clause. The adoption of the federal and state arbitration statutes (and the explosive growth in court backlogs) gradually softened the courts' resistance to compulsory arbitration. Today, under both federal and state law, arbitration agreements are valid, irrevocable, and enforceable, except upon such grounds as exist at law or in equity for the revocation of any contract; in other words, under state law, as under federal law, an arbitration agreement may only be invalidated for the same reasons as other contracts. (10)

The AAA was created in 1926 as a not-for-profit, shortly after Congress passed the Federal Arbitration Act. (11) The AAA Web site describes the AAA's mission as follows: The AAA is dedicated to the development and widespread use of prompt, effective and economical methods of dispute resolution. As a not-for-profit, our mission is one of service and education. We are committed to providing excellent neutrals, proficient case management, dedicated personnel, advanced education and training, and innovative process knowledge to meet the conflict management and dispute resolution needs of the public now and in the future.

The AAA is by far the largest provider of alternative dispute resolution services in the U.S. and probably in the world. (12) However, it has competitors for the provision of arbitration and other alternative dispute resolution services.

One of the most significant judicial changes in the nature of arbitration in the U.S. came with the decision of the U.S. Supreme Court in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987), when the Supreme Court held that arbitration clauses in securities broker/consumer account agreements were enforceable, even as to statutory claims under the federal securities laws. The decision opened the proverbial "floodgate" to consumer arbitration in the securities industry. The decision contributed greatly to the explosive growth of the arbitration forum previously created by the National Association of Securities Dealers arbitration forum (NASDADR), which is also a not-for-profit. The NASDADR describes its mission as follows:

NASD Dispute Resolution pledges to provide impartial professional staff and highly trained arbitrators, mediators, and other neutrals committed to delivering fair, expeditious, and cost-effective dispute resolution services for investors, brokerage firms, and their employees. NASD Dispute Resolution wants our customers to view us as the preeminent provider of dispute resolution services worldwide.

More recently, competitive alternatives to AAA and industry-specific forums such as NASD have developed, though none have yet made significant inroads into the state of Florida. Interestingly, two of the major competitive providers are "for-profit" entities. The National Arbitration Forum (NAF) a privately owned corporation headquartered in Minnesota, describes its mission as follows:

Since 1986, the National Arbitration Forum has been a leading neutral administrator of arbitration, mediation and other forms of alternative dispute resolution (ADR) worldwide. An unbiased administrator of ADR services, the Forum's only...