Article Summary: Arbitration and State Action

In Arbitration and State Action, Professor Sarah Rudolph Cole, Squire, Sanders & Dempsey Designated Professor of Law at The Moritz College of Law at The Ohio State University, responds to the argument that arbitration is a state action subject to the Constitution's procedural due process requirements. If courts were to accept this argument, many of the advantages of arbitration would be eliminated and there would be a significant, adverse effect on the use of arbitration. In response to this contention, Cole outlines the Court's state action doctrine and critically assesses the arbitration as state action theory as it applies it to three different types of arbitration: (1) court-ordered arbitration, (2) agency-initiated arbitration, and (3) contractual arbitration. She concludes that while constitutional violations in agency-initiated arbitration and court-ordered arbitration are actionable, those which arise in private, contractual dispute resolution procedures are not.

First, Cole explains that under the Supreme Court's state action doctrine, the constitutional protections of due process and equal protection only apply to the actions of governmental entities. Thus, a constitutional action against an individual or entity can only be maintained where it has been determined that this person or organization is acting on behalf of the state. In order to make such a determination, the Supreme Court has elaborated several state action tests.

In this article, Cole explains two of those tests: entanglement and public function. Under the entanglement test, the court determines whether the government is “entangled” in the conduct of the private person or entity. This inquiry considers “whether there is such a close nexus between the state and challenged action that the action may be ‘fairly treated as that of the state.'” Under the public function test, a state action is present when a service that is traditionally an exclusive governmental function is entrusted to a private individual or entity.

In Part II of her article, Cole provides independent analysis on the state action theory in relation to three forms of arbitration and critiques the commentators' and courts' conclusions on this issue. She quickly explains that court-ordered arbitration is clearly a state action because the court, a government actor, mandates the party to participate in the process. Thus, constitutional due process requirements must be met in court-ordered arbitration.

Next, she explains the complicated question of whether agency-initiated arbitration involves state action. Cole argues that courts have not answered this question correctly. She analyzes the relationship between agencies and the private parties the agencies regulate to conclude that agency registration requirements often create state action when the private entity requires the registrant to resolve disputes using arbitration.

Finally, Cole applies the Supreme Court's state action doctrine to private contractual arbitration agreements. Critics argue that a state action exists when courts enforce private arbitration clauses in contracts between private individuals, as well as when courts uphold arbitration awards. However, after applying the entanglement and public doctrine tests, Cole explains that the courts have correctly held that neither the enforcement of arbitration agreements, nor the use of the court system to enforce arbitration awards, constitutes a state action.

In her conclusion, she also briefly suggests actions that agencies should take to ensure due process protections are being met in agency-initiated arbitration proceedings. In sum, Cole's article provides an in-depth discussion of the state action doctrine and accurately describes the implications of finding a state action doctrine in arbitration.

Sarah Rudolph Cole, Arbitration and State Action, can be found in 2005 B.Y.U.L. Rev. 1 (2005).