1.24 The Dangers of Arbitration

Arbitration is a method of private dispute resolution that usually doesn’t involve courts.  Many of the States, including Alabama, had a stated policy specifically excluding the possibility of contracting away the right to go to court before federal legislation preempted state law and declared policy favoring arbitration.  In 1925, Congress enacted the Federal Arbitration Act to require dispute resolution through arbitration if the parties to a contract agree to binding arbitration for dispute resolution.  In the 1980s, the Supreme Court upheld that legislation and after that, arbitration quickly expanded.  Arbitration has now displaced the role of courts in most matters involving a contract, regardless of the nature of the dispute.  The provisions of that Act are binding on both state and federal courts.  Those who enter into an arbitration agreement must submit to arbitration rather than going to court.  The Federal Arbitration Act applies to all transactions involving interstate commerce and overrides any state law to the contrary. 

While the law seemingly went somewhat unnoticed in Alabama, and perhaps other states, until 20 or 30 years ago, since that time, arbitration has largely superseded the availability of court remedies in connection with any matter involving interstate commerce where anyone has entered into a contract with a corporation.  Purchases of automobiles, disputes about employment, and other instances that pit corporate America against individuals are well within the coverage of the law.

Arbitration has become large business.  Arbitrators are paid well for their services.  With corporate America often pitted against consumers and private individuals, the economics of arbitration make the playing field very uneven.  While the results of arbitration are often private and confidential, the corporations of America that engage in the process are likely to know the results. After all, they engage in arbitration far more frequently than the isolated individuals.  Arbitrators who favor corporate America are much more likely to be successful than those who favor the individuals who use arbitration services only one time.   With regard to justice, the same fault exists that caused Judge Frank Johnson to find the work of Alabama justices of the peace who had a financial interest in the outcome of the cases they heard to be unconstitutional. 

The United States Constitution has two clauses of interest in analyzing the soundness of arbitration as public policy.  Article III, Section 1 provides that, “The judicial power of the United States shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish.”  The article goes on to provide for the financial security of judges so as to make certain that their impartiality is not threatened by the outcome of cases.  In other clauses, the executive power is vested in the President, and legislative power is vested in Congress.  State constitutions generally provide for a similar separation of powers.  Separation of powers is generally considered a fundamental protection of the liberty guaranteed by the United States Constitution.  Access to courts is also a part of that freedom.

The second constitutional provision of interest is found in Article I, Section 10 of the Constitution which provides, “No State shall…pass any…law impairing the obligation of contract….”  At the time the Constitution was written and adopted in 1789, the study of modern economics was a relatively new science.  Adam Smith had published The Wealth of Nations in 1776, the same year that colonies declared their independence in the Declaration of Independence.  Contract rights, the enforcement of contract rights, and property rights are a basic assumption of the economic theories posited by Smith.  The importance of these elements for economic development did not escape the writers of the Constitution.  Economic theory requires adequate provision for enforcement of contracts and property rights.  An arbitration agreement is, in a sense, a contract; but it presents a conundrum.  It is a contract to privatize the very right to enforce the contract in court.  

The Federal Arbitration Act has been upheld as being supported by the Constitutional provision related to freedom of contract and under the commerce clause.  That finding ignores the fact that in passing the Federal Arbitration Act, Congress passed a law that vested arbitrators with the judicial power of federal and state governments and divested the courts of that power.  There is generally no appeal from a finding and award made by an arbitrator.  One is reminded of the Islamic idea of justice in which there is no appeal from the local tribunal.  If an arbitrator makes a mistake of law or fact *** well, ***too bad!  So much for the old adage that everyone is entitled to his or her day in court.

 

 

 

 

 

 

 

 

1.25 Arbitration: The Public’s Right to Know

This essay, like the preceding essay in this series, focuses on the privatization of dispute resolution in arbitration.  Congress enacted The Federal Arbitration Act that required arbitration in all matters involving interstate commerce where there was an arbitration agreement many years ago. In the 1980’s the United States Supreme Court upheld that legislation. Since that time there has been extensive privatization of a very large amount dispute resolution. With rare exception Court proceedings are public proceedings, but arbitration is not public. Juvenile Court proceedings are a recognized exception, but, in most other cases a judge must carefully examine and articulate policies for privatizing dispute resolution. The public has a very legitimate interest in dispute resolution for many policy reasons. For instance, in criminal cases, the defendants are constitutionally entitled to a speedy and public trial.  There is little to be said for resolving disputes in which the public has a very legitimate interest behind closed doors.

            Most legislative bodies have adopted “sunshine laws” so that the business of almost all governmental bodies are open to the public. This recognizes that it is not a good idea for matters of public interest to be debated and decided behind closed doors. It is very important for the public to have access to information regarding the resolution of significant disputes. The resolution of a dispute, when decided by a court, results in a precedent. The reasons for deciding a case a certain way in one instance will provide good reasons for deciding it the same way if similar circumstances arise again. Precedent has been an extremely important element in the preservation of a consistent body of law in the Anglo-American system. Stare decisis assures consistency.Public trials and the reporting of the results enable the general public to formulate a decision making process in order to comply with the law. Christopher Columbus Langdale instituted the case method of Law Study at Harvard University in 1871. That method quickly spread to law schools all across the nation.

Harvard Professor Oliver Wendell Holmes, Jr. who would later become Chief Justice of the United States Supreme Court, stated that “law is what a court does.” If most important commercial disputes continue to be resolved behind closed doors; what will commercial law be fifty years from now? What will employment law be fifty years from now? In arbitration, the results of the dispute resolution are not usually available for public scrutiny. The case method—study of cases—has been the central tool of law school education since 1871.  But law schools cannot examine the process and reasoning by which arbitration decisions are reached. The similarity of the words arbitration and arbitrary is frightening. The decisions of arbitrators are not reported and cannot be systematically collected.  Law Schools cannot instruct students on the  meaning of arbitration results. Lawyers do not have access to the results of arbitration, to analyze for future use in advising clients.

The First Amendment to the United States Constitution has been construed to require public access to this type of critical information. We seldom hear, however, of news media filing First Amendment lawsuits in order to gain access to arbitration proceedings.  The State of Delaware undertook to have its court proceedings involving commercial disputes resolved by Chancery Judges who would conduct proceedings similar to arbitration. They would deny access to the public. The Supreme Court of the United States, that had decided that it was permissible for Corporate America to write contracts requiring the persons with whom they do business to arbitrate their disputes, decided that Delaware could not use such  proceedings. This appears to be totally inconsistent and appears to overlook the policy problems concerning the privatization of commercial disputes in arbitration.

Corporate America—the large corporations—have now constructed elaborate “dispute resolution” procedures to deal with their employees and their customers. Their “dispute resolution procedure” is often more cumbersome than court proceedings. Disputes are resolved behind closed doors. Even if a large corporation grossly mistreats one or more of its employees, that dispute is not likely to gain the public eye and public attention that it deserves. There is no appeal from the results of arbitration. Therefore, in most cases, there are no appellate decisions that are available to the public.

            Arbitration deprives the public of critical information. It conceals from the public important aspects of dispute resolution in matters of extreme importance to the on-going affairs of this nation. It is not just a matter of depriving individuals of their day in court—it is a matter of depriving the public of critical information concerning how disputes are resolved. It represents abdication of responsibility by the Judicial Branch of government.

1.28 Arbitration and Class Actions

Earlier in this series, there are essays describing the dangers that are inherent in corporate America’s ability to impose arbitration on the consuming public.  I pointed out that the power of dispute resolution is vested in the courts and that when dispute resolution is privatized, the public is deprived of its right to know.  The present essays deals with a new and additional problem with arbitration law as declared by the United States Supreme Court.

On December 14, 2015, the United States Supreme Court decided the case of DIRECTV v. Imburgia, which deals with arbitration.  DIRECTV had entered into a contract with all its customers that contained an arbitration clause.  The arbitration agreement also contained a provision that if the law of the customer’s state outlawed a waiver of the right to bring arbitration on behalf of a class, then the contract of arbitration would be unenforceable.  The Imburgia case arose in California.  A statute in California provided that a waiver of the right to a class action contained in an arbitration agreement was unenforceable.  Based on this statute, California courts held that the arbitration agreement was void.  Seemingly, the California court followed the precise wording of the contract.  However, the United States Supreme Court decided that the California statute which purported to make waiver of the right to a class action unenforceable was itself pre-empted by federal law and was, therefore, unenforceable.  Therefore, the Court reasoned, the arbitration agreement was enforceable.  The result would appear to be that, regardless of how many small claims presenting identical issues against DIRECTV there might be, the California consumers would each have to maintain his or her own separate arbitration proceeding in order to gain relief.  That result, of course, undermines any possibility of meaningful relief, despite the fact that DIRECTV may have been charging thousands of customers small amounts of money inappropriately.

This case is the very type of case that class actions, which are authorized by both federal and state law, were intended to remedy.  The undesirable result does not appear to have been necessary.  The clause in the contract that provided that the arbitration agreement was invalid if waiver of class arbitration were illegal appears to be a meaningful clause.  It too was part of the contract.  The Supreme Court itself admitted that at the time the form contract was created, the parties would have believed the California law barred waivers of class arbitration:  “…when DIRECTV drafted the contract, the parties likely believed that the words “law of your state” included California law that then made class-arbitration waivers unenforceable.”  However, because the United States Supreme Court had decided that arbitration is a matter of national policy, under no circumstances could there be any state in which such a clause would be valid.  Thus, the provision in the contract was rendered completely null.  It is not clear why the United States Supreme Court did not cite the Constitutional provision protecting contracts and say that even though California law has been pre-empted by federal law, the parties contracted to follow it.  For the Supreme Court not to honor that contractual provision violates the provision of the United States Constitution that protects contracts.

The legal issues involved in this matter could be argued either way.  However, when it comes to the underlying policies, it does not appear to this retired country judge that any wise policy supports the result reached by the Court.  Sound law is always based on sound policy.  To say that a large corporation can do whatever it wishes to numerous customers, and the remedy of a class action not be available, either in court or in arbitration, because there is an arbitration agreement, and because consumers have waived that right to a class action, is a very bad decision that simply tramples the rights of ordinary people into oblivion.

To their everlasting credit, three of the Justices—Thomas, Ginsburg, and Sotomayor—recognized the problems with the decision in a scathing dissent:  “It has become routine, in a large part due to this Court’s decisions, for powerful economic enterprises to write into their form contracts with consumers and employees no-class-action arbitration clauses.  ***  These decisions have predictably resulted in the deprivation of consumers’ rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws.”

It is time for Congress to severely restrict the Federal Arbitration Act and to require the courts to resolve disputes and protect the rights of all the citizens of the United States of America.  If that is not the law, then the Supreme Court needs to remove the words Equal Justice for All from its building.