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Article Excerpt
INTRODUCTION
I. AN ARBITRATION CASE STUDY II. ADR's EMBRACE OF COMPULSION III. THE COSTS OF COMPULSION A. Compelled Arbitration 1. Substantive manipulations 2. Procedural manipulations 3. Attempts to thwart claims 4. Adhesion contracts and ADR providers B. Court-Compelled ADR 1. Variability of proceedings 2. Procedural failings 3. Pressure to settle C. The Reaction of Those Facing Compulsion D. Compulsory Informal Processes and Bias IV. WHAT SHOULD BE DONE ABOUT COMPULSION?
INTRODUCTION
This Article will explore alternative dispute resolution's (ADR's) rush to embrace compulsion both in the private contract setting and with respect to court-compelled ADR programs. It will consider the risks posed when ADR is required rather than freely chosen. In the private contract context, these risks include the likelihood that adhesion contract drafters will use arbitration clauses and related requirements to short-circuit existing legislation with newly drafted provisions protective of their special interests, that contract drafters will, in some cases, go even further and use their drafting power to squelch all claims, and that ADR providers will be sorely tempted to cast their lot with adhesion contract drafters in order to win and retain valuable business. Next, the risks of compulsion in court-annexed programs will be canvassed. These include exposing litigants to wildly varying ADR experiences unrelated to the merits of their claims, as well as a range of procedural problems and heightened pressure to settle without a trial. This Article will then examine compulsion-created risks that are likely to arise in both the private and public contexts. Two of these will be the main focus: first, that compulsory ADR processes may fail to satisfy deep-seated psychological needs associated with a sense of justice; and second, that mandating ADR is likely to increase the prospect that biases favoring the strong over the weak will be introduced into the decisionmaking process.
In light of all these risks, the Article will conclude by arguing that compulsion should be abandoned. The likelihood that this will happen anytime soon is small, so the Article goes on to consider intermediate steps to help improve ADR processes and move them in a direction that will encourage greater trust and greater voluntary participation. Among the steps proposed are enhanced diversity among ADR providers and increased transparency in ADR proceedings. Finally, the Article will suggest that ADR needs to learn greater humility and respect for the rule of law or risk discrediting and politicizing itself.
I. AN ARBITRATION CASE STUDY
America's securities industry has aspired to regulate itself since its earliest days. (1) Congress has, in large measure, ratified the industry's power to oversee its own affairs by classifying national securities exchanges, including the New York Stock Exchange (NYSE), and registered securities associations, including the National Association of Securities Dealers (NASD), as "self-regulatory organization[s]." (2) Among the strategies these bodies have used to achieve the end of self-regulation is the championing of private arbitration of disputes in lieu of public adjudication by courts of law. (3) Securities industry arbitration keeps issues in the hands of industry-trained and -based decisionmakers rather than publicly selected judges. As part of their ongoing effort to maintain control, the NYSE and NASD, by the early 1970s, had mandated that their members arbitrate disputes at the request of an aggrieved customer. (4) Within less than a decade, this initial step toward compulsion was followed by the imposition on virtually all customers, and securities industry employees as well, of an involuntary predispute (i.e., contractual) requirement that all substantial disagreements be arbitrated rather than brought before a court. (5)
The transition to compelled arbitration was not an entirely smooth one. In 1975, Congress demonstrated its concern about arbitration practices and other securities industry conduct by enacting legislation imposing a number of restrictions on the industry and calling upon the Securities and Exchange Commission (SEC) to intensify its oversight of brokers and exchanges. (6) To help carry out the task of monitoring the industry, the SEC formed a "conference," the Securities Industry Conference on Arbitration (SICA), comprised of industry representatives, public representatives, academics, and others. (7) It prepared a Uniform Code of Arbitration, scrutinized the operation of the arbitration process, and sought more effective techniques for the training and selection of arbitrators. (8) This regulatory effort notwithstanding, the securities industry, with characteristic vigor, continued to press its arbitration agenda. By the mid-1980s compulsory arbitration requirements were becoming widespread. (9) The compulsion involved was troubling to some observers (10) but was, at least in official eyes, acceptable because of the oversight regime established by Congress in 1975. (11)
The self-regulatory power of the industry and the hold of compulsory arbitration were substantially strengthened in 1987, when the U.S. Supreme Court decided Shearson/American Express Inc. v. McMahon, in which the Court concluded that disputants with statutory claims based on the Securities Exchange Act of 1934 (12) and on the Racketeer Influenced and Corrupt Organizations (RICO) Act (13) could be compelled to arbitrate those claims on the basis of predispute agreements. (14) This result was mandated, according to the Court, by the Federal Arbitration Act (FAA), (15) which established a "federal policy favoring arbitration" (16) and required the Court to "vigorously enforce agreements to arbitrate," (17) even with respect to claims arising under statutes. The McMahon decision overrode precedent from the 1950s in which the Court had emphatically limited the reach of the FAA and of securities industry arbitration with respect to statutory claims by recognizing a "public policy" of allowing the enforcement of such claims in court, irrespective of the existence of a predispute arbitration clause. (18)
The hegemony of predispute securities industry arbitration clauses under the FAA was made virtually complete in 1991 when the Supreme Court decided Gilmer v. Interstate/Johnson Lane Corp., in which an employee of a stock brokerage firm was required to pursue his statute-based age discrimination claim in an NYSE arbitration proceeding rather than in court because, in 1981, he had signed a standardized securities industry registration form that required arbitration of "any dispute, claim or controversy." (19) Signing the form was "required by [Gilmer's] employment"; (20) he did not have any choice. The form had all the characteristics of a classic adhesion contract--a privately created document drafted by the dominant party to a legal relationship and imposed on the adherent without opportunity for negotiation or change. (21) The Court found arbitration, as a general matter, a satisfactory alternative, comparing it to appearing in a state rather than a federal court. (22) Only if Congress barred arbitration would a predispute arbitration clause be rejected and a court hearing required. (23)
Surprisingly, Gilmer was not the end of the securities industry arbitration story. Compelled arbitration did not sit well with those upon whom it was imposed. (24) Complaints were especially sharp from those who claimed that Wall Street practiced a pervasive form of sexual discrimination against female employees. Compelled arbitration provoked deep suspicion among the members of this group and a feeling that the required dispute resolution mechanism was tainted because of the close association between the industry and the arbitrators employed in the process. With complaints about bias mounting, an influential member of Congress, Edward Markey, called for a General Accounting Office (GAO) investigation of securities industry arbitration. (25) What the GAO found, while not proof of overt prejudice, was troubling. The arbitrators in the NYSE/NASD system were strikingly homogeneous. As the GAO put it: "We estimate that most arbitrators serving in NYSE's New York arbitrator pool are white males, averaging 60 years of age." (26) The statistics were stark: 89% of the arbitrators were male, 97% were white. (27) These findings were particularly troubling in light of the growing number of accusations that many of Wall Street's most important firms were engaging in a pattern of sexually discriminatory and harassing conduct.
As the 1990s reached their midpoint, Wall Street officials, old hands at using public reports and private arbitration to quell criticism, attempted to use the same strategy to address the discrimination crisis. A task force was formed by the NASD "to explore and propose broad reforms to the NASD arbitration process." (28) The NYSE held a two-day forum. (29) The SICA considered a nonbinding "Due Process Protocol." (30) The reports, meetings, and conferences eventually concluded that everything was all right or could be made so with a modest bit of tweaking. (31)
The victims of discriminatory conduct were not mollified. With increasing vigor and accompanying publicity they pressed their claims, charging, among others, industry giants Merrill Lynch, Morgan Stanley, and Smith Barney with a range of transgressions. (32) They filed complaints with the Equal Employment Opportunity Commission (EEOC), complained to the SEC, and resolutely resisted a secret, piecemeal, case-by-case arbitration approach. (33) Their efforts eventually led to the disclosure of shocking misconduct. Lurid tales about strippers, gross pranks, and physical abuse filled the press. (34) Arbitration was swept aside as the discrimination imbroglio deepened. Morgan Stanley paid $54 million to settle EEOC-initiated litigation, (35) and Merrill Lynch paid in excess of $100 million to settle the claims of about ninety-five percent of the more than nine hundred women who filed sexual discrimination claims against it. (36) Arbitration had not cleaned up the mess. It appeared, instead, to be part of the industry's effort at damage control.
In 1997, as the sex discrimination battle peaked, the NASD took a surprising step and proposed a rule change doing away with the requirement that securities industry employees arbitrate their discrimination claims. (37) Owning up, at least to some degree, to the inadequacy of compulsory industry-sponsored arbitration, the NASD declared, "After consideration of all the views presented, and in light of the public perception that civil rights claims may present important legal issues better dealt with in a judicial setting, the NASD determined that the appropriate action was to remove the arbitration requirement for such claims." (38) Although the statement was coyly worded to place the onus on "public perception" rather than on arbitration's shortcomings, the NASD admitted that its private dispute resolution mechanism could not persuade either complainants or the public of its legitimacy or its efficacy in solving the discrimination problem. Compulsory arbitration had instead heightened suspicions and thwarted efforts to find a systemic solution to a pervasive problem. Within a year, the NYSE followed the NASD lead, (39) and on January 1, 1999, the new rules ending the requirement of compulsory arbitration of discrimination claims went into effect. The influence of the earlier Wall Street strategy could, however, still be observed in 2004, as Merrill Lynch doggedly resisted a finding that it had engaged in "a pattern and practice of discrimination," and dragged its feet in a court-supervised (rather than industry-run) arbitration process designed to resolve the remaining discrimination claims. (40)
The securities industry story contains a number of lessons. One is that enhanced adhesion contract drafting power is likely to lead to explosive growth in the number and variety of compelled arbitrations. A second is that where a closed and clubby industry creates arbitration machinery, there is a substantial likelihood that the arbitrators will be a homogeneous lot strikingly different from the claimants whose cases they are to hear. A third is that claimants confronted with such arrangements are extremely likely to distrust whatever the industry offers. A fourth is that piecemeal private adjudications compelled by predispute arbitration agreements are unlikely to be able effectively to address a problem as deeply rooted as corporate sexism. A fifth is that compulsion must, sometimes, be abandoned if trust is to be reestablished and genuine social progress is to be made. Finally, the presence of even relatively passive regulators, like the SEC and SICA, may push reluctant compulsory systems toward meaningful improvement.
II. ADR'S EMBRACE OF COMPULSION
Significant numbers of Americans have, throughout the country's history, desired to use alternatives to public trials and judicial proceedings. (41) For many the goal was to avoid the intrusion of lawyers--a profession feared and reviled even before the beginning of the Republic. (42) Alternatives to court have also been sought by merchant and guild organizations desirous of regulating their own affairs. (43) It is notable that the arbitration processes used by these groups were voluntary, either with respect to the election of the process itself or with respect to enrollment in a group requiring ADR among its members. (44) The courts for their part were loath to compel arbitration. (45) So strong was the resistance to compulsion that it took several decades of agitation to convince Congress to pass the FAA in 1925 and to require the honoring of agreements, entered into by initially willing contracting parties, to arbitrate rather than litigate. (46) Mediation too has been closely associated with voluntary choice. The literature on mediation is replete with encomiums to party independence. As the Model Standards of Conduct for Mediators puts it, "Self-determination is the fundamental principle of mediation. It requires that the mediation process rely upon the ability of the parties to reach a voluntary, uncoerced agreement. Any party may withdraw from mediation at any time." (47)
Despite this long history and the rhetoric of choice, ADR, over the past quarter-century, has grown to prominence by compelling the vast majority of those who use it, in such contexts as consumer, banking, securities, and employment disputes, to participate in processes that they have not voluntarily chosen (48) and, in many cases, actively oppose. It is perhaps the central irony of the recent success of ADR that it is built on the sort of mandatory approach that ADR rejected throughout most of its history.
Leading modern ADR advocates have been ambivalent in their embrace of compulsion. The putative father of modern American ADR, Frank Sander, has been described as arguing that "there is a difference between being coerced into mediation and being coerced in mediation." (49) The former is said to be appropriate because of the ignorance, fear, or selfishness of the parties or their lawyers. (50) The latter is anathema because it trenches on the core notion of self-determination. Whether such a neat demarcation between the two may be maintained either in the minds of the compelled or of the compellers is an empirical question that ADR's advocates have not spent much time exploring but about which this Article raises a number of questions. One of the most articulate spokesmen on behalf of ADR, especially in the court-annexed context, is federal magistrate judge Wayne Brazil. Judge Brazil too has displayed ambivalence about compulsion. He has defended its use today as fostering the "growth curve" of initial ADR adoption, but has urged its abandonment when "the angle of [the] learning curve ... decline[s]." (51)
Whatever one thinks of compulsion, the evidence suggests that there would be far less ADR use without it. Empirical data indicate a huge gap between expressions of support for ADR and willingness to voluntarily use it. This gap has been noted by mandatory ADR's friends (52) and foes (53) alike. Critics have argued that the low degree of voluntary use of ADR indicates that there is little demand for its services, and that the ADR push is "almost entirely a supply side phenomenon" promoted by a number of interested judges and ADR providers. (54) In 1998, after more than a decade of promotion by ADR advocates, the ninety-four federal districts responded to a poll about ADR usage. (55) The majority of federal courts appeared unenthusiastic about ADR: thirty-one districts failed to provide any ADR information at all, another twenty-one stated that they had no qualified ADR program, and only eight districts had what could be classified as "robust" programs. (56) These data imply judicial skepticism about ADR (57) and do not point to any high level of litigant demand for such services. The attitude among the bar (58) and the public (59) has been similar. Where ADR programs exist, they have not been overwhelmed by disputant demand. When the...
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