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Article Excerpt
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.
I. THE PHENOMENON OF MANDATORY BINDING ARBITRATION IN THE UNITED STATES
A. 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)
B. 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 such clauses to securities fraud claims, reasoning that the Securities Act of 1933 must be interpreted to prohibit such a mandatory usage of arbitration. Emphasizing that the Act "was drafted with an eye to the disadvantages under which buyers labor," (22) the Court explained that arbitration does not offer the same remedy as litigation, in that arbitrators may make awards "without explanation of their reasons and without a complete record of their proceedings," (23) and because that arbitrator's conception of the legal meaning of statutory requirements cannot effectively be challenged. (24)
However, the Supreme Court's attitude toward commercial arbitration changed dramatically beginning in the 1970s and 1980s. While the earliest cases marking this shift involved arbitration between two business entities, (25) by 1989 the Court had applied these precedents to reverse Wilko and require courts to enforce arbitration clauses imposed by securities brokerage houses on their investors. (26) In Moses H. Cone Memorial Hospital v. Mercury Construction Corp., (27) the Court enunciated, for the first time, the idea that federal policy favors arbitration of commercial disputes. (28) Then, in 1991, in Gilmer v. Interstate/Johnson Lane Corp., (29) the Court held that a securities broker could be compelled to arbitrate his federal age discrimination claim against his employer. (30) This decision shocked many employers and employees, who had previously assumed that public policy concerns would prevent courts from compelling employees to resolve employment discrimination claims through binding arbitration. (31)
Once the Supreme Court began to issue decisions stating that commercial arbitration was "favored" and that arbitration of employment claims could be permitted, businesses jumped on the opportunity to compel arbitration in contexts where they previously thought arbitration agreements would not be enforced. In an era when they feared aspects of litigation including publicity, jury awards, punitive damages, extensive discovery, and class actions, companies saw arbitration as potentially protecting them from all of these "evils." Thus, companies in a wide array of areas soon followed the lead of the securities industry and began to use form agreements to require their customers to agree to resolve all future disputes through arbitration rather than litigation. By reading the decisions in reported cases, one can see that arbitration soon began to be mandated by a broad range of industries, including financial institutions (as to personal accounts, house and car loans, payday loans, and credit cards), (32) service providers (termite exterminators, gymnasiums, telephone companies, and tax preparers), (33) and sellers of goods (mobile homes, computers, and eBay). (34) Arbitration has even been mandated in connection with games sponsored by the McDonald's hamburger chain (35) and with respect to a mail-in on a Cheerios cereal box. (36) In this new millennium, consumer arbitration has quickly expanded as well to health care (hospitals and health maintenance organizations), (37) nursing homes, (38) and educational institutions. (39) Also, some companies are now using arbitration offensively, to obtain speedy default judgments against consumers who allegedly owe them money. (40)
It is difficult to assess how common mandatory arbitration clauses have become, but they certainly seem ubiquitous. Readers can each do their own empirical study on this question by taking note of how often they come across mandatory arbitration clauses in their own life. I have seen arbitration mandated by my bank, my broker, my cell phone provider, various credit cards, and my mortgage lender. One recent study of the "average Joe" in Los Angeles showed that approximately one-third of the consumer transactions in his life were covered by arbitration clauses. (41) With respect to employment, while the percentage of employees required to arbitrate future disputes is probably lower than one-third, (42) it is rising. (43)
The new consumer and employment arbitration has a few features that were not present even in the securities arbitration upon which it was based. First, whereas the arbitration clauses prepared by brokerage houses were typically included in documents required to be signed by investors, companies soon realized that an actual signature was not required in order for an arbitration agreement to be enforced by many U.S. courts. The FAA requires that arbitration agreements be written, but does not mandate they be signed, in order to be enforceable. (44) Thus, companies often impose arbitration on their consumers by including an arbitration agreement in a document that is received by the consumer but not necessarily read and certainly not signed. Specifically, it is now common to include arbitration clauses in small print notices, envelope stuffers, or warranties contained in boxes or sent to consumers in the mail. (45) Some arbitration clauses are contained in Web sites, (46) and some arbitration clauses have even been e-mailed to customers. (47)
Second, whereas the arbitration imposed by securities brokers was typically required at the beginning of the business relationship--that is, at the time that the customer opened the account--companies now commonly impose arbitration after the relationship has already commenced. Credit card companies, for example, often send their customers small print notices stating that all future disputes will be governed by arbitration. Sometimes companies even attempt to use such clauses to replace ongoing litigation with arbitration. For example, a clause issued by Banana Republic in June 2004 states that "[t]he New Arbitration Provision applies to Claims previously asserted in lawsuits filed before the effective date of any previous arbitration provision." (48)
Third, the broad expansion of consumer arbitration has likely meant that a less educated cadre of persons is now covered by arbitration clauses. Though not all securities investors are well educated, it seems reasonable to assume that such investors are better educated than the general public. In contrast, virtually all consumers have phones and credit cards, purchase termite extermination services, and so on. Thus, courts have had to face situations in which consumers to whom arbitration notices were provided denied that they were aware of the clause, understood the clause, were literate, or could see. (49)
A fourth important feature of the new consumer arbitration is that companies are increasingly using their arbitration clause not only to require arbitration but also to further limit consumers' procedural and even substantive rights. For example, some companies have included clauses in their arbitration agreements that shorten statutes of limitations, (50) limit or eliminate discovery, (51) require a claimant to file in a distant forum, (52) prevent consumers from joining together in a class action, (53) or bar consumers from recovering particular forms of relief (injunctive relief, compensatory damages, punitive damages, or attorney fees). (54)
C. U.S. Courts' and Legislatures' Response to Mandatory Arbitration
Following the lead of the Supreme Court, lower federal and state courts have generally enforced mandatory arbitration agreements just as they have enforced arbitration agreements entered into voluntarily by two or more business entities. Courts have repeatedly stated that the mere fact that an agreement is imposed in a form agreement, or contained in fine print, is not a legitimate reason to refuse to enforce the arbitration clause. (55) While plaintiffs have attempted to challenge these clauses using arguments drawn from the U.S. Constitution, federal statutes, state constitutions, state statutes, and common law, most of these challenges have failed, as briefly discussed below.
1. Constitutional arguments
When a party contends it has been required or mandated to resolve its claims through binding arbitration, rather than in court, it sometimes attempts to argue that its rights under the U.S. Constitution have been violated. While these arguments have some intuitive appeal, and have been championed by some scholars, they have not to date been particularly successful in court. In order to establish a violation of the Due Process Clause, arbitration opponents would have to first demonstrate the existence of state action, and this has proved very difficult. When two private parties agree to arbitrate future disputes, most courts have found no state involvement sufficient to rise to the level of state action. (56) Moreover, even once state action is established, the challenger must demonstrate that the arbitration process is sufficiently unfair as to violate the norms of due process. (57) Given the Supreme Court's flexible view of due process, (58) this will not be easy, and to date no court has refused to enforce a private arbitration agreement on due process grounds.
Challengers may also attempt to argue that a binding arbitration provision violates their rights to a jury trial under the Seventh Amendment. This argument can only be made in cases in which a Seventh Amendment right would otherwise have applied: cases brought in federal court, "at common law," and claiming damages of at least twenty dollars. (59) The Seventh Amendment argument seems promising for challengers in this limited number of cases. No state action need be proven, and in the nonarbitration context courts have upheld jury trial waivers only when the waivers are made knowingly, voluntarily, and intelligently. Many mandatory arbitration provisions arguably would not pass this test. Nonetheless, the Seventh Amendment argument has rarely succeeded in the arbitration context. (60)
2. Federal statutory arguments
Challenges made to arbitration agreements under federal statutes have been somewhat more successful. Even in this most pro-arbitration era, the Supreme Court has always made clear that Congress has the power to make claims nonarbitrable. (61) Moreover, while it is true that, post-Wilko, the Supreme Court has not found any federal statute that totally precludes arbitration of claims brought under that statute, the Court has also explained that "[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." (62) Thus, where a challenger can show that the arbitration clause was written in such a way as to effectively prevent the challenger from vindicating her rights under a particular federal statute, the Court has explained that the arbitration clause should not be enforced. For example, although the facial attack made by the plaintiffs in Gilmer failed, the Court left open the possibility that future age discrimination plaintiffs could void a particular arbitration clause if they could show it prevented them from adequately vindicating their rights due to specific failings in the arbitration process (e.g., nonneutral arbitrators, insufficient discovery, or inadequate appeal opportunities). (63) Similarly, in Green Tree Financial Corp.-Alabama v. Randolph, (64) the plaintiffs attempted to show that they could not effectively vindicate their rights under federal law because the costs of arbitration were too high. Although the Court rejected the plaintiffs' claim due to an inadequate factual showing, the Court recognized that this kind of attack on an arbitration clause can be valid. (65)
3. Contractual and common law attacks
The most successful means for challenging arbitration clauses has not been either constitutional or federal statutory arguments, but rather contractual and other common law attacks. As section two of the Federal Arbitration Act makes clear, and as the Supreme Court has frequently stated, arbitration clauses can be invalidated on standard common law grounds. (66) For example, the challenger may argue that the agreement was invalid due to lack of consideration, (67) that the clause did not...
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