Mandatory Arbitration and Fairness

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Mandatory Arbitration and Fairness SCHWARTZ_FINAL.DOC 2/21/09 12:59 AM MANDATORY ARBITRATION AND FAIRNESS David S. Schwartz* INTRODUCTION Is mandatory arbitration unfair?1 The question has risen to the forefront of a fifteen-year academic debate that for the first time may have imminent policy implications. Under a series of controversial judicial interpretations of the Federal Arbitration Act (FAA),2 the courts have consistently enforced pre-dispute arbitration agreements imposed on employees, consumers and franchisees in adhesion contracts.3 Courts have been mostly deaf to the arguments of critics that mandatory arbitration is “do-it-yourself tort reform,” systematically favoring corporate defendants.4 And Republican congressional majorities from 1994 to 2006 kept arbitration reform off the political agenda, since the business constituency views * Professor of Law, University of Wisconsin Law School. I’d like to thank my colleagues Alexander Colvin, Anuj Desai, Shubha Ghosh, Neil Komesar, William Whitford, and Jason Yackee for their insightful comments on drafts of this article. Thanks to Will Dalsen, Class of 2010, for his valued research assistance. 1 “Mandatory arbitration” refers to arbitration pursuant to an adhesive, pre- dispute arbitration agreement. For further elaboration of these concepts and the surrounding arguments, see, for example, Jean R. Sternlight, Creeping Mandatory Arbitration: Is It Just?, 57 STAN. L. REV. 1631, 1631–33 & n.1 (2005). I have abandoned my effort to relabel the term “compelled arbitration.” Compare David S. Schwartz, If You Love Arbitration, Set It Free: How “Mandatory” Undermines “Arbitration,” 8 NEV. L.J. 400, 400 n.1 (2007) [hereinafter Schwartz, If You Love Arbitration] (using the term “mandatory arbitration” to describe these agreements), with David S. Schwartz, Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 WIS. L. REV. 33, 37 & n.10 [hereinafter Schwartz, Enforcing] (using the term “compelled arbitration”). 2 9 U.S.C. §§ 1–14 (2006). 3 See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (upholding arbitration agreement against employee); Southland Corp. v. Keating, 465 U.S. 1 (1984) (upholding arbitration agreement against franchisee); Allied- Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995) (upholding arbitration clause imposed on consumer purchasing termite extermination services). 4 See, e.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 123 (2001) (extolling virtues of mandatory arbitration). 101 SCHWARTZ_FINAL.DOC 2/21/09 12:59 AM 102 NOTRE DAME LAW REVIE W [VOL. 84:3 mandatory arbitration as deregulatory in its impact.5 In that policy environment, the academic debate over the fairness of mandatory arbitration was condemned to being “academic” in the less flattering sense. But now the fairness of arbitration is squarely under consideration by Congress, and there is a significant possibility that the FAA could be amended to make pre-dispute arbitration clauses unenforceable in most adhesion contracts.6 At this important juncture, as academic commentators are increasingly addressing themselves to legislators rather than courts,7 the debate over mandatory arbitration has turned political—in the less flattering sense. Critics of mandatory arbitration (myself included) have always assumed we took the side of “fairness” in a classical argument against tort-reform “efficiency.” But the salient argument now advanced by supporters of mandatory arbitration puts “fairness” itself at issue. Their two-pronged argument has an “empirical” and an “egalitarian” component: (1) There is no empirical evidence that plaintiffs do worse in arbitration than in court. Indeed, existing studies seem to show they 5 Compare Mandatory Binding Arbitration Agreements: Are They Fair for Consumers?: Hearing Before the Subcomm. on Commercial & Administrative Law of the H. Comm. on the Judiciary, 110th Cong. 1 (2007) [hereinafter Mandatory Binding Arbitration Agreements] (statement of Rep. Linda Sanchez, Chairwoman, Subcomm. on Commercial & Administrative Law) (“[M]andatory arbitration agreements may not always be in the best interests of consumers.”), with id. at 3 (statement of Rep. Chris Cannon, Member, Subcomm. on Commercial & Administrative Law) (“The use of mandatory binding arbitration clauses has risen not because companies want to disadvantage consumers, but because companies increasingly believe they need to protect themselves from abusive class action suits.”), available at http://judiciary.house.gov/hearings/printers/110th/36018.pdf. Legislative reform at the state level has been almost entirely precluded by a series of U.S. Supreme Court decisions holding that the FAA preempts state law. See generally David S. Schwartz, The Federal Arbitration Act and the Power of Congress over State Courts, 83 OR. L. REV. 541, 546–62 (2004) (discussing these cases and criticizing their “incoherence”). 6 The Arbitration Fairness Act of 2009, introduced in the House on February 19, 2009, would amend the FAA to provide that: “No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of—(1) an employment, consumer, or franchise dispute; or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.” H.R. 1020, 111th Cong. § 4 (2009) (quotation marks omitted). Identical bills were introduced in the House and Senate in 2007. See S. 1782, 110th Cong. § 4 (2007); H.R. 3010, 110th Cong. § 4 (2007) (providing identical language). The passage of this legislation in the foreseeable future appears promising as the Democrats have won the White House and expanded their majorities in both the House and Senate in the 2008 elections. 7 See, e.g., Jean R. Sternlight, Introduction: Dreaming About Arbitration Reform, 8 NEV. L. J. 1, 3–4 (2007) (keynoting symposium exploring legislative revision to FAA). SCHWARTZ_FINAL.DOC 2/21/09 12:59 AM 2008] MANDATORY ARBITRATIO N 103 do about as well. Therefore, critics of mandatory arbitration have failed to make their case for reform.8 (2) Moreover, mandatory arbitration offers a more egalitarian system of dispute resolution. Because arbitration is faster, cheaper and less formal than litigation, it is more hospitable to more claims, particularly from low income employees. But since employers will not agree to voluntary post-dispute arbitration, employees can only get this good deal through the use of mandatory (that is, adhesive, pre- dispute) arbitration clauses, which “hold employers’ feet to the fire.”9 Like a political candidate whose strength has been turned into a weakness by opposition spin, mandatory arbitration critics find themselves on the defensive, fighting for ground seemingly won a long time ago. The “empirical” argument preempts the tort-reform question by implying that mandatory arbitration is not in fact tort reform: critics must provide empirical proof that plaintiffs do worse in arbitration before they can debate the merits of imposing such tort reform. Interposing this empirical question as a hurdle to legislative reform would be a strategic victory for mandatory arbitration supporters, because there is a good likelihood that a definitive answer is years away and perhaps unattainable. It therefore is troubling that some legislators (and even mandatory arbitration critics) seem 8 See, e.g., Omri Ben-Shahar, How Bad Are Mandatory Arbitration Terms?, 41 U. MICH. J.L. REFORM 777, 779 (2008) (“We simply do not know enough facts to pass a judgment on arbitration as a mandatory procedure.”); Theodore Eisenberg & Elizabeth Hill, Arbitration and Litigation of Employment Claims: An Empirical Comparison, DISP. RESOL. J., Nov. 2003–Jan. 2004, at 44, 49 (“[M]any people expect employee claimants to fare worse in arbitration than in litigation. Yet we find the opposite . .”); Samuel Estreicher, Saturns for Rickshaws: The Stakes in the Debate over Predispute Employment Arbitration Agreements, 16 OHIO ST. J. ON DISP. RESOL. 559, 565 (2001) (concluding that “[w]ithout better empirical studies” it cannot be settled that employees fare worse in arbitration); Peter B. Rutledge, Whither Arbitration, 6 GEO. J.L. & PUB POL’Y 549, 551–52 (2008) (“[T]he proper question is whether elimating predispute arbitration agreements for wide swaths of the economy yields a net benefit. That is the burden confronting the advocates of arbitration reform and one that, based on my review of the available empirical evidence, they have not met.”); David Sherwyn et al., Assessing the Case for Employment Arbitration: A New Path for Empirical Research, 57 STAN. L. REV. 1557, 1578 (2005) (“[T]here is no evidence that plaintiffs fare significantly better in litigation.”). 9 See Eisenberg & Hill, supra note 8 passim; Estreicher, supra note 8, at 567–68; Sherwyn et al., supra note 8, at 1581 n.124; David Sherwyn, Because It Takes Two: Why Post-Dispute Voluntary Arbitration Programs Will Fail to Fix the Problems Associated with Employment Discrimination Law Adjudication, 24 BERKELEY J. EMP. & LAB. L. 1, 31–38 (2003). I use the term “employer” and “employee” deliberately: this is how supporters frame the argument. They discuss far less often the consumer and franchise settings. See infra Part I.B. SCHWARTZ_FINAL.DOC 2/21/09 12:59 AM 104 NOTRE DAME LAW REVIE W [VOL. 84:3 caught up in the quest for empirical studies.10 The egalitarian argument, that arbitration is more accessible and therefore more fair than litigation, distracts
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