Creeping mandatory arbitration: is it just?

• Jurisdiction: United States
• Author: Sternlight, Jean R.
• Date: 01 April 2005

INTRODUCTION I. THE PHENOMENON OF MANDATORY BINDING ARBITRATION IN THE UNITED STATES A. The Pedigree of Binding Arbitration B. The Evolution of Mandatory Arbitration C. U.S. Courts' and Legislatures' Response to Mandatory Arbitration D. A Uniquely U.S. Phenomenon II. THE IMPACT OF MANDATORY BINDING ARBITRATION ON INDIVIDUALS A. Attacks on Mandatory Arbitration from the Individual Perspective B. Defenses of Mandatory Arbitration from the Individual Perspective C. Empirical Studies of the Effect of Mandatory Arbitration on Individuals III. THE SOCIETAL IMPACT OF MANDATORY BINDING ARBITRATION A. The Public Justice Critique B. Rethinking the Public Justice Critique CONCLUSION INTRODUCTION

The emergence of mandatory arbitration over the last two decades has dramatically changed our legal system. With the approval and even encouragement of the Supreme Court, U.S. companies are increasingly using form contracts, envelope stuffers, and Web sites to require their consumers, patients, students, and employees to resolve future disputes through binding arbitration, rather than in court. While arbitration has been used as a dispute resolution technique for thousands of years, in the past it has been agreed to knowingly and voluntarily, typically by two or more businesses. The involuntary imposition of arbitration in lieu of open court procedures is a new and most controversial phenomenon. (1)

Critics' attacks on mandatory consumer arbitration have been impassioned. For example, one of the most colorful court opinions states, "The reality that the average consumer frequently loses his/her constitutional rights and right of access to the court when he/she buys a car, household appliance, insurance policy, receives medical attention or gets a job rises as a putrid odor which is overwhelming to the body politic." (2)

Academic and journalistic critics have been harsh as well. One well-known article states:

As architecture, the arbitration law made by the Court is a shantytown. It fails to shelter those who most need shelter. And those it is intended to shelter are ill-housed. Under the law written by the Court, birds of prey will sup on workers, consumers, shippers, passengers, and franchisees; the protective police power of the federal government and especially of the state governments is weakened.... (3) Another academic critic urges that

The Supreme Court has created a monster. With the Court's enthusiastic approval, pre-dispute arbitration clauses--agreements to submit future disputes to binding arbitration--have increasingly found their way into standard form contracts of adhesion.... Given the Supreme Court's blessing in the name of a "national policy favoring arbitration," adhesive pre-dispute arbitration clauses should expand beyond their current strongholds in consumer contracts in health insurance, banking and securities investing to other areas of the economy and society.... The doctrine of rigorous enforcement of adhesive pre-dispute arbitration clauses--what I call "compelled arbitration"--has given large firms the power to displace the judiciary from its role in enforcing common law claims and statutory rights. (4) Journalists from many of the most prestigious U.S. newspapers have described the practice harshly as well, as one can see from articles in the New York Times, Washington Post, Wall Street Journal, and San Francisco Chronicle. (5) At least one British journalist has also focused on the U.S. phenomenon of mandatory arbitration, criticizing Americans for failing to focus on the huge importance of the phenomenon. A Financial Times article characterizes the growth of arbitration as "a silent revolution" through which "[l]arge areas of American life and commerce have silently been insulated from the lawsuit culture." (6)

At the same time, mandatory arbitration has its advocates. While few, if any, would defend the most unfair arbitration clauses in which companies impose nonneutral arbitrators or greatly limit possible recoveries, some contend that fair binding arbitration is better for claimants than the alternative of litigation. They urge that when companies include arbitration in form contracts, they help consumers and employees by providing them with a forum that is cheaper, quicker, and more accessible than litigation. (7) Such defenders also urge that to the extent companies reduce their own dispute resolution costs, market forces will ensure that they pass on such savings to their workers in the form of higher wages, and to their customers in the form of lower prices. (8) Some of these defenders also assert that voiding the contract would deny consumers/employees their freedom of contract. (9)

To fully understand the phenomenon of mandatory arbitration one must move beyond the level of rhetoric. One must also step beyond an insistence that the way our legal system is or has been is ideal or inevitable.

Part I of this Article will examine the phenomenon of mandatory binding arbitration in the United States. It will provide a brief history of the emergence of this process, consider how common it is in this country, look at how courts have responded to the phenomenon of mandatory arbitration, and note that mandatory arbitration has not yet emerged in other countries.

Next, Part II will analyze mandatory binding arbitration's actual impact on individuals. Although the question of whether mandatory arbitration positively or negatively impacts most individuals has been widely debated among academics and practitioners, empirical data is scant and not likely to resolve this question in the near future. We have little choice but to rely on anecdotal information and common sense to determine how mandatory arbitration affects individuals.

Finally, Part III will focus on the broader societal impact of mandatory arbitration. Clearly the use of mandatory arbitration is curtailing the use of jury trials and class actions, is leading to fewer precedential decisions, and is limiting public access to our justice system. While many would say that these impacts, alone, show that mandatory arbitration is unjust, this Article will take a broader perspective and consider whether the undermining of our current civil system of justice is really a bad thing. After all, jury trials and class actions have not always existed, nor have other aspects of our current system. To consider whether the use of mandatory arbitration is just, this Article will go back to first principles and examine the proper goals of a system of justice. It concludes that while informal private processes such as arbitration are not inherently unjust, mandatory arbitration is problematic for two fundamental reasons: lack of consent and lack of public scrutiny. First, it is highly problematic to permit the most powerful actors in a society to craft a dispute resolution system that is best for them but not necessarily their opponents or the public at large. Second, principles of justice require that disputants have access to a dispute resolution process that is transparent and open to public scrutiny. While disputants may, in particular situations, choose private processes, it would be improper for a society to establish entirely private dispute resolution processes.

1. THE PHENOMENON OF MANDATORY BINDING ARBITRATION IN THE UNITED STATES

   1. The Pedigree of Binding Arbitration

      Voluntary binding arbitration has a long and honorable history in the United States, 10 and also predates the formation of this country. (11) Traditionally, businesses have voluntarily agreed to resolve disputes through binding arbitration, rather than through other means, because they sought expertise, speed, efficiency, privacy, and neutral decisionmakers. Arbitration has been particularly popular within certain industries or societies possessing their own unique approach to dispute resolution. (12) Internationally, arbitration has been used because it allows businesses to avoid feared biases from each others' courts, and to obtain a result that is more enforceable in another country than a court decree would often be. (13)

      Courts have always supported the use of voluntary binding arbitration. They have historically enforced both arbitral awards and postdispute agreements to arbitrate. (14) While predispute agreements to arbitrate have a more complex history, with some courts refusing to use their equitable powers to hold parties to such agreements, (15) the passage of the Federal Arbitration Act (FAA) (16) in 1925 has required U.S. courts to grant motions to compel arbitration pursuant to such agreements.

      Until quite recently, however, arbitration agreements were not used by U.S. businesses to require consumers, employees, franchisees, or other weaker parties to resolve disputes through private arbitration rather than in court. (17) Instead, the use of arbitration was limited to business-to-business or management/union contexts. Indeed, to the limited extent that the possibility of such arbitration was considered by Congress in 1925, when it passed the FAA, those few who spoke on the issue made clear that they did not view such a use of arbitration as appropriate. For example, when one Senator voiced a concern that arbitration contracts might be "offered on a take-it-or-leave-it basis to captive customers or employees," the Senator was reassured by the bill's supporters that they did not intend for the bill to cover such situations. (18)

   2. The Evolution of Mandatory Arbitration

      The emergence of "mandatory" arbitration (19) occurred during the last fifteen to twenty years. Its rise is linked to the Supreme Court's issuance of a series of decisions that permitted businesses to use arbitration in situations they had never previously thought permissible. While the securities industry had long required its investors to sign form agreements agreeing to arbitrate rather than litigate future disputes, (20) a 1953 Supreme Court decision, Wilko v. Swan, (21) refused to apply...