Volume 10, Issue 3 - March 2012

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Claim-Suppressing Arbitration: The New Rules

David S. Schwartz
87 Ind. L.J. 239 (2012)

Binding arbitration should be recognized for what it is: claim-suppressing arbitration. It is not Alternative Dispute Resolution (ADR) because the process is neither voluntary at the beginning nor nonbinding at the end. It is not a justice system because it is only imposed by one side, and it is not mandatory arbitration because the defendant voluntarily drafts it into the agreement. Instead, it is a process designed and intended to suppress claims. Supreme Court interpretations of the Federal Arbitration Act (FAA) have only served to convert the FAA into a claim-suppressing statute. The Arbitration Fairness Act should be passed because consumer and employment disputes should not be governed by the will of wealthy companies.

Claim suppression is the logic behind “mandatory arbitration.” The economical reason to write pre-dispute arbitration agreements into adhesion contracts is to prevent “high-cost/high-stakes” claims from going to court. In “high-cost” claims, the proof is complex and the defendant possesses most of the evidence. The extensive discovery required for the plaintiff to meet the burden of proof means high potential litigation costs. In “high-stakes” claims, there is the possibility of high liability payoffs. Litigation would be preferable in “low-cost” cases, but employers trade away this preference in order to keep high cost/high stake claims out of the court. The assumption is that it must be more cost effective to arbitrate high-cost/high-stakes cases than to deter low-stakes claims.

Arbitration supporters assert that arbitration saves in procedural costs. They claim that plaintiffs do well in both litigation and arbitration, but they back these claims up with methodologically unsound studies. The supporters’ argument implies that the procedures that drive up litigation costs provide no benefit to plaintiffs. This is absurd. Dollars spent in discovery do not lead to additional recovery; discovery instead provides the plaintiff with the evidence they need to get past summary judgment. Defendants are not simply after process costs. They hope that by severely limiting discovery they will also limit ultimate liability costs.

Employers and sellers use arbitration as a way to suppress class actions. Barring class actions has become a primary reason for companies to use pre-dispute arbitration. The Court’s reinterpretations of the FAA have only served to help those who intend to suppress claims. It is being abused by weathy parties. The FAA was meant to help strengthen trade associations’ internal arbitration systems and to control the cost of doing business, but classical arbitration pursuant to pre-dispute agreements lacks the internal cohesiveness that is present in trade associations and other such businesses.

The Court was aware of the limitations of private arbitration when they decided in Wilko v. Swan that arbitration was unsuitable for claims under public regulatory statutes. These statutes are meant to regulate the relationships between parties with unequal bargaining power, including employer-employee and seller-consumer. Overruling Wilko was a mistake that motivates the use of dispute-control provisions to suppress claims.

Even if the FAA did apply to claim-suppressing arbitration clauses, the Supreme Court, and particularly the liberal justices, has failed to differentiate between claim-suppressing arbitration clauses and commercially reasonable ones. Rules that apply to commercial entities with nearly equal balancing power should not be interchangeable with rules for adhesion contracts, yet the Court has treated them as such.

Two basic due process principles are violated by arbitration law.  The principles are that: (1) parties with a financial stake in the outcome are not neutral adjudicators; and (2) the wealth and power of a party should not give them the right to decide key dispute resolution rules. Yet claim-suppression arbitration violates both of these principles. Despite this, there seems to be a collective blasé attitude toward this central feature of FAA jurisprudence.

Disputes over FAA interpretation have focused on the question of “who decides?” The court, through its decisions, has increasingly empowered arbitrators to make this decision. In Rent-A-Center v. Jackson, the court went so far as to allow the addition of a simple contract term to deprive courts the power to review the enforceability of an arbitration agreement. The decision about whether an arbitration agreement is enforceable belongs to the person whose income is dependent upon an arbitration taking place.

The entire system has been affected by claim-suppression arbitration. The standard-form adhesion contract is the prime vehicle for claim-suppression. It is the exclusive right of the drafter to choose arbitration. This means that pre-dispute arbitration is a service that is purchased solely by the drafter. Essentially, arbitration sells itself to the claim suppressors. Arbitrators have an economic incentive to make pre-dispute arbitration attractive to the claim suppressors. Arbitration providers have an incentive to make arbitration as friendly as possible. Organizations like AAA provide a short list to disputants under its arbitrator-selection protocol. It is unlikely that these organizations will be completely indifferent as to who is on that list. This is not meant to offend individual arbitrators. It is meant to show that the system itself creates a financial incentive to decide “who decides” in favor of the arbitrator.  The due process principle is meant to serve as a necessary external control.

Arbitration supporters have argued that claim-suppression is politically and constitutionally sound. For this, they point to two factors: (1) it is outcome neutral; and (2) it provides access to dispute resolution for the masses. However, there is still no sound research to prove that arbitration is outcome neutral. As for providing people access, simple microeconomics suggests that an employer will return to a litigation regime if the cost of arbitrating many small claims exceeds the cost of litigating few large claims. Estimates suggest that employees would be five times more likely to file their claims if they have access to a court rather than mandatory arbitration.

Wealthy parties should not have the exclusive right to decide how disputes will be resolved. When the FAA was enacted in 1925, ordinary individuals did not have a say in the matter because it concerned business-to-business disputes, and they have had little say since the Supreme Court began turning the statute against them.

Supreme Court decisions involving arbitration jurisprudence have been a mess of confused decisions. These decisions tend to involve some hypertechnicality that give readers little understanding of what the decision is meant to do, or the decisions consciously avoid the real issue in the case.

There are two big mistakes of FAA jurisprudence. The first was undoing the “public policy exception.” Unfortunately, public policy cases did not stress that the statutes were meant to prevent the overreaching of a party in a one-sided transaction. This omission was unfortunate for two reasons: first, the court missed the opportunity to establish that the FAA was not designed to enforce arbitration agreements in one-sided, regulated, contractual relationships, and second, the entry of lawyers into the ranks of arbitrators undermined the rationale that arbitrators were not sufficiently judicial to render decisions on socially important statutory claims. The second mistake was the decision to federalize arbitration law by holding that the FAA preempts state law. Among other problems, it flouts the basic federalism principle that Congress cannot make procedural rules for state courts.

The opinions of Justice Breyer have been especially troublesome. In Allied-Bruce Terminix Cos. v. Dobson, Justice Breyer’s opinion created distinctions without differences. Part of the opinion expresses the idea that an arbitration agreement may be unfair even if is basic terms are fair.  This incomprehensible hairsplitting makes no sense. Further decisions have not helped to clarify issues. Green Tree Financial Corp. v. Bazzle provided the Court with the opportunity to express when and whether class arbitrations are permissible. Instead, Bazzle has contributed the confusion. In the 2002 term, the only clear rule emerging from Howsman, Bazzle, and Book was that the arbitrator decides questions that cannot command a majority rationale.

The liberals of the Court should state what is at stake in arbitration cases. They could have identified claim suppression for what it is. They should have pointed out public policies rationales, and they should never have allowed important decisions to be made under a judge-made FAA. Their hedging and mincing of words has led to the near explicit embrace of arbitration’s claim-suppressing potential. Stolt-Nielsen S.A. v. AnimalFeeds International Corp. raised a massive issue for the Court to later address: whether a ban on class arbitration can ban class actions entirely. If a claimant whose sole remedy is arbitration cannot process on a class basis, then he cannot succeed on a class basis period, as he has no access to the courthouse. The only way to prevent this would be to create a public policy exception that allows class actions to proceed in court over the defendant’s objections, or to use state unconscionability doctrine.

The decision in Rent-A-Center is just as bad. Courts basically have no choice but to compel arbitration in every case, despite glaring defects in the arbitration agreements. It may be possible to argue that a delegation clause is unconscionable because it requires submitting a question to an arbitrator who has a financial stake in the decision, but the decision lies in the hands of a Court that ensures pre-dispute arbitration is claim suppressing.  The Supreme Court’s endorsement of claim-suppressing arbitration is likely to lead to a dramatic spike it its use. With a blanket immunity against class actions, the clauses will be especially attractive. The decision in AT&T Mobility v. Concepcion destroyed consumer and employment class actions. Those with claims too small to pursue are deprived of a remedy. It is still possible to correct this glaring error. A new version of the Arbitration Fairness Act was introduced the same day Concepcion was decided. At this point, the intervention of the other political branches is necessary to correct the mistakes of the Supreme Court.

The full article is available at http://ilj.law.indiana.edu/.
*Summary by Brittany Doggett, Moritz Class of 2013

Posted in: Volume 10, Issue 3

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