Lawmaking in the shadow of the bargain: contract procedure as a second-best alternative to mandatory arbitration.

• Author: Tyler, Charles W.

NOTE CONTENTS INTRODUCTION I. "MANDATORY" ARBITRATION A. Judicial Constructions of the Federal Arbitration Act B. How Often Companies Choose Arbitration II. SHIFTING CASES TO THE COURTS A. Procedural Optionality in Arbitration and in Courts B. Why Companies Should Prefer Procedural Optionality in Theory C. Selecting Procedural Options in Arbitration and in Court III. COURTS OVER ARBITRATION A. Voluntary Compliance with the Law B. Precedent C. Democratic Participation and Education IV. THE INTEGRITY AND THE AFFORDABILITY OF COURTS A. The Integrity of Courts B. Access and Fiscal Challenges CONCLUSION INTRODUCTION

Courts in the United States provide several important public goods. (1) Courts clarify the law by creating precedent; they encourage citizens to voluntarily comply with the law by impartially considering all sides of disputes and by providing reasoned decisions; and they educate citizens by hearing disputes that would otherwise go uninvestigated and by modeling democratic institutions. Courts can provide these public goods, however, only when disputes are brought before them.

Companies, through their form contracts, now routinely require consumers and employees to bring claims in arbitration rather than courts, partly because these companies have more freedom to choose particular procedures in arbitration than they do in courts. Consequently, a large swath of legal disputes appears less frequently on courts' dockets than it would in the absence of mandatory arbitration, and thus courts are less capable of providing important public goods in the context of these disputes.

Critics of mandatory arbitration have proposed large-scale legislative reforms that would limit when companies could unilaterally select dispute-resolution procedures through arbitration clauses in form contracts. Although a few of these initiatives have successfully insulated certain industries from mandatory arbitration, large-scale reforms have largely failed to make headway in Congress. Although it is impossible to know, recent history suggests that proposals to limit companies' procedural options in arbitration may not be politically feasible. (2)

In the absence of large-scale reforms to mandatory arbitration, this Note considers an unexplored alternative to those reforms. In particular, this Note considers whether enforcing more procedural options in courts may be the second-best option. That is, perhaps courts should be willing to enforce parties' attempts to make procedural law in the shadow of their bargains. (3) A legal regime that permits parties the same procedural options in courts that they already have in arbitration may influence companies to allow their consumer and employment disputes to be brought in courts. If so, this regime would allow courts to generate important public goods in these sorts of cases.

This Note proceeds in four parts. Part I explains that companies regularly require their consumers and employees to bring their claims in arbitration, where those same companies choose from a larger array of procedural options than they do in courts. Part II suggests that, if courts enforced the same procedural options already available in arbitration, companies might be influenced to allow consumer and employment disputes to be brought in courts. Part III contends that resolving consumer and employment disputes in courts would be an improvement over the current regime, because courts generate important public goods that arbitration does not. Part IV responds to objections that allowing companies to choose dispute-resolution procedures in courts would undermine the legitimacy of courts and would overwhelm the judicial fisc.

1. "MANDATORY" ARBITRATION

   As recently interpreted by the Supreme Court, the U.S. Arbitration Act of 1925-commonly known as the Federal Arbitration Act (FAA)--tends to limit the extent to which courts can provide public goods in the context of consumer and employment disputes. (4) The FAA allows companies to use their form contracts to choose whether to take disputes to court or to arbitration. Companies often select arbitration for their disputes with consumers and employees, but not for their disputes with other companies. Companies' forum choices have created a Janus-faced dispute-resolution system: adjudication for corporate peers and arbitration for consumers and employees. Thus, courts are substantially disabled from providing public goods in the context of disputes between large companies and their consumers and employees.

   1. Judicial Constructions of the Federal Arbitration Act

      The FAA provides that arbitration clauses "written ... in any maritime transaction or a contract evidencing a transaction involving commerce" are "valid, irrevocable, and enforceable" subject only to "such grounds as exist at law or in equity for the revocation of any contract." (5) In the first sixty years after Congress enacted the FAA, courts respected parties' choices about how their disputes would be resolved, but only when those choices were the product of genuine consent.

      In Wilko v. Swan, the U.S. Supreme Court considered the enforceability of a predispute arbitration agreement in the context of a customer's allegations that a brokerage firm had violated the federal securities laws by making false representations about a merger. (6) The Court held that the securities laws precluded the application of the FAA, because they were "drafted with an eye to the disadvantages under which buyers labor." (7) In the majority opinion, Justice Reed concluded that arbitration's lack of a "complete record of [the] proceedings" prevented courts and lawmakers from scrutinizing "arbitrators' conception of the legal meaning of... statutory requirements." (8) Accordingly, arbitration was inappropriate for protecting consumers who objected to the forum.

      Following Wilko, the Court refused to enforce arbitration agreements in all of its cases between 1953 and 2983 in which an individual objected.9 In the 1980s, however, the Court overruled Wilko. In Rodriguez de Quijas v. Shearson/American Express, Inc., the Court renounced its concerns that arbitration would permit strategic parties to "weaken[] the protections afforded in the substantive law to would-be complainants" (10) and held that an arbitration clause in a broker's form agreement was enforceable against consumers who invested with the broker. In Rodriguez de Ouijas and several other cases, the Court announced a new interpretive regime, according to which the FAA manifested "a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims." (11)

      Under current law, the Court interprets the "national policy favoring arbitration" to be expansive, mandatory, and self-contained. First, the FAA applies to the full extent of Congress's power under the Commerce Clause.12 Second, the FAA requires courts to enforce arbitration provisions even when the provisions do not mention costs and fees, (13) when parties have claimed federal statutory rights to bring lawsuits in courts, (14) and when the provisions appear in unnegotiated, boilerplate agreements--such as consumer (15) and employment contracts. (16) Third, although normal contract defenses apply to arbitration agreements under section 2 of the FAA, the Court has interpreted the FAA to prohibit states from discriminating against arbitration agreements vis-a-vis other types of agreements. (17) Congress may, of course, provide exceptions to the FAA. The Court's decision in CompuCredit Corp. v. Greenwood, however, emphasizes that Congress must do so explicitly. (18) Finally, the arbitration process is, in important respects, self-contained. The Court has repeatedly endorsed the "separability doctrine," according to which arbitrators, not courts, decide the enforceability of contracts, unless a challenge is brought against the arbitration clause itself. (19) Moreover, the Court recently held that the interpretation of an arbitration provision may be delegated to an arbitrator (20) and that parties may not contract for more searching review of arbitral awards in court. (21)

      Parties seeking to resist arbitration provisions currently have few plausible legal arguments. Consequently, companies may now unilaterally decide whether to require consumers and employees to bring claims in courts or in arbitration.

   2. How Often Companies Choose Arbitration

      The data on the prevalence of arbitration clauses suggest that companies prefer to arbitrate disputes with certain types of parties and to adjudicate disputes with others. In the leading study, Professors Theodore Eisenberg, Geoffrey P. Miller, and Emily Sherwin report that the companies they studied required arbitration in 76.9% of their form consumer agreements and 92.9% of their employment contracts.22 By contrast, those same companies required arbitration in less than lo% of commercial contracts. (23) Accordingly, one pair of scholars has noted that in the context of commercial agreements, "arbitration does not seem to compete strongly with well-functioning public courts." (24)

      The implications of studies in this area may be overstated. In a recent review of Eisenberg, Miller, and Sherwin's study, Professors Christopher Drahozal and Stephen Ware criticize the set of companies studied. Eisenberg, Miller, and Sherwin studied the arbitration choices of telecommunications and financial services companies, which Drahozal and Ware maintain are "well known for using arbitration clauses ... in their consumer contracts." (25) Thus, Eisenberg, Miller, and Sherwin may have overstated the extent to which consumers and employees are affected by "mandatory arbitration." On the other hand, Professor Drahozal has himself noted that the data scholars cite may actually understate the prevalence of arbitration clauses. In a 2009 study, he found that, although 82.9% of credit card issuers did not include arbitration clauses in...