Mandatory and fair? A better system of mandatory arbitration.

AuthorFarmer, Miles B.

NOTE CONTENTS INTRODUCTION I. THE EMERGENCE OF MANDATORY ARBITRATION II. THE BENEFITS AND DRAWBACKS OF MANDATORY ARBITRATION A. Benefits B. Drawbacks III. EXISTING PROPOSALS FOR REFORM A. Eliminate Mandatory Arbitration Entirely in Cases with Unequal Bargaining Power B. Expand Judicial Review C. Government Regulation or Inclusion of an Institutional Middleman D. Disclosure of Data Regarding Arbitration IV. CREATING AN ENFORCEMENT STRUCTURE TO PREVENT SYSTEMATICALLY BIASED MANDATORY ARBITRATION A. Institution-Level Enforcement To Prevent Systematically Biased Behavior 1. Legal Standard 2. Ethics Standards for Arbitration Providers 3. Evidence of Arbitration Provider Bias Would Be Further Informed by Data Disclosure 4. Development of a Well-Defined Legal Standard for Liability 5. Using a Robust Legal Standard To Incentivize Self-Regulation B. Government Prosecutors as Enforcers C. Holding Drafting Parties as Well as Providers Directly Liable for Wrongdoing D. Remedy E. Implementation 1. State Implementation 2. Implementation Through the Consumer Financial Protection Bureau F. Cost and Efficiency of an Effective Enforcement Regime CONCLUSION INTRODUCTION

Mandatory arbitration offers the potential for a faster and less costly means of dispute resolution. It holds out the promise of a process that is more efficient and accessible for plaintiffs, yet still preferable for businesses. In application, however, mandatory arbitration has fallen short of this goal. It presents opportunities for abuse, and companies have used it as a means of skewing proceedings in their favor rather than simply providing a more efficient means of dispute resolution. Although there are numerous problems with mandatory arbitration, fundamentally the current system is broken because businesses can use mandatory arbitration clauses to select biased decisionmakers who will systematically preference the drafting party over the party signing the mandatory arbitration clause (usually a consumer or employee).

While there is a wealth of literature attacking the shortcomings of mandatory arbitration, (1) no satisfactory solution has been proposed. Proposals for arbitration reform often focus on granting individuals the means to appeal unjust decisions. (2) But by adding costly and time-consuming procedures, these reforms neglect the primary advantages of mandatory arbitration and simply transform the process into something more akin to traditional litigation. Other proposals call for prohibiting mandatory arbitration for those classes of cases where parties typically have unequal bargaining power. (3) But the potential advantages of using mandatory arbitration are real. In fact, mandatory arbitration offers the greatest benefits in cases where only a small amount of money is at stake, a situation that often arises when parties have unequal bargaining power.

This Note proposes a solution that ensures that mandatory arbitration will be carried out in a more impartial manner, while at the same time preserving its central advantages of speed, cost, and accessibility. Instead of focusing on providing recourse to plaintiffs at the individual level, we must solve the problems posed by mandatory arbitration through systemic reform. I propose an enforcement scheme in which parties drafting mandatory arbitration clauses, as well as arbitration providers themselves, are held liable when arbitration providers engage in systematically biased adjudications. By consolidating oversight into large cases alleging widespread unfairness rather than pursuing individual appeals, significant costs can be saved. At the same time, because the fundamental injustices of mandatory arbitration are caused by systemic factors rather than discrete instances of bias, this form of oversight would counteract the central problem posed by mandatory arbitration. This Note is the first to propose a system of institution-level policing for mandatory arbitration.

Liability in cases of systematic unfairness should be enforced by government attorneys, including federal prosecutors, state attorneys general, and other public attorneys empowered to bring affirmative civil cases (such as city attorneys in some jurisdictions). Under such a system, because there would be many prosecutorial actors-including fifty state attorneys general who are each responsive to a somewhat different set of political forces--enforcement would be much less vulnerable to regulatory capture than would attempts to reform mandatory arbitration through the creation of a single regulatory agency. At the same time, government actors are the best enforcement mechanism because they are likely to exercise more restraint than would private attorneys if a private cause of action were created. Because government actors act with more discretion, the governing statute can be less rigidly constructed, making liability for systematic bias easier to prove.

For this system of enforcement to be most effective, prosecutors must be provided with the tools necessary to control misconduct. In addition to the threat of prosecution, incentives and mechanisms should be created for arbitration providers and parties who use mandatory arbitration to make their systems of dispute resolution fairer. In order to accomplish these goals simultaneously, prosecutorial enforcement of systematic bias in mandatory arbitration should be combined with a system of limited data disclosure by mandatory arbitration providers. This system of disclosure would allow prosecutors to encourage self-policing by providing safe harbors for companies that hit certain benchmarks for arbitral fairness. In addition, it would provide judges and prosecutors with a valuable tool in determining when companies are engaging in unfair practices. While others have advocated for data disclosure for mandatory arbitration and one state has even implemented such a disclosure system, (4) this Note is the first proposal to explain how it could be integrated effectively into a system of enforcement.

Finally, in order to incentivize parties to actively choose fair arbitration providers, liability should be placed directly on the party choosing the arbitrator and on the arbitration provider itself. This would incentivize the parties themselves to choose fair arbitrators and to monitor their own arbitration providers to ensure that disputes are decided in a fair manner. It would also save litigation costs by eliminating the need to prove a principal-agent relationship between drafting parties and arbitration providers.

Although these reforms would most effectively be instituted through a federal statute, similar but more limited results might also be achieved through a patchwork of statewide laws, or else by regulatory action from the newly created Consumer Financial Protection Bureau. Overall, while such a system would impose some additional costs on mandatory arbitration, it would preserve the central efficiency advantages that mandatory arbitration provides. The broad goal of mandatory arbitration would thus be achieved: consumers and employees could benefit from the less cumbersome system that mandatory arbitration provides without receiving unfair treatment in the resolution of their disputes.

This Note proceeds by first discussing the rising use and importance of mandatory arbitration in Part ! and outlining the advantages and disadvantages of mandatory arbitration in Part II. Part III lays out many of the existing suggestions for reform and explains why none of these ideas satisfactorily addresses the fundamental problems of mandatory arbitration. Part IV describes my proposed enforcement scheme, discusses bow such a system of reforms could be implemented, and considers the effects that this system would have on the cost and efficiency of mandatory arbitration.

  1. THE EMERGENCE OF MANDATORY ARBITRATION

    Mandatory arbitration has recently grown to be an area of fundamental importance to our legal system. Over the past twenty-five years, it has become increasingly widespread and is now commonly used in a wide variety of contexts, including in business transactions, (5) employment contracts, (6) and consumer claims. (7) Mandatory arbitration clauses now appear in nearly every facet of our daily lives, governing contracts related to financial services (such as mortgages, credit cards, and other loans), the sale of goods, and even healthcare, nursing homes, and educational institutions. (8)

    No reliable data measure the exact extent of arbitration, (9) and "[i]t is difficult to assess how common mandatory arbitration clauses have become," (10) especially because of the general lack of disclosure requirements for arbitration proceedings. However, it is clear that arbitration is now used pervasively throughout our society. (11) The American Arbitration Association, just one of many large arbitration providers, conducts over 100,000 cases per year. (12) Indeed, as one commentator has observed, "It is not a hyperbole to state that civil justice or adjudication in the United States ... is achieved primarily through arbitration." (13) The widespread and increasing use of mandatory arbitration underscores the critical importance of finding a solution that preserves it as an effective option for businesses but that prevents systematic abuse.

  2. THE BENEFITS AND DRAWBACKS OF MANDATORY ARBITRATION

    1. Benefits

      Advocates of mandatory arbitration tout its speed, reduced cost, and accessibility. (14) They effectively demonstrate that mandatory arbitration enjoys specific structural advantages over traditional litigation and that greater efficiency is necessary, especially for the resolution of certain types of disputes, such as claims for small sums of money.

      Delay is one of the largest problems in our legal system. In the last several decades, the state and federal courts have seen increasing caseloads and have resolved disputes at slower and slower rates. The incoming civil caseloads...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT