Will Arbitration Render Civil Procedure Professors an Endangered Species?

Jean R. Sternlight
University of Missouri-Columbia School of Law

 

  1. Introduction: given the changes in the real world of dispute resolution, are we civil procedure professors devoting sufficient attention to arbitration?

  2. An increasing number of private disputes are required to be resolved through arbitration rather than litigation

    1. Numbers are very hard to come by, as arbitration is a private process.

    2. Anecdotal information on disputes subject to arbitration

      1. Many international commercial disputes are arbitrated, rather than litigated, to take advantage of arbitration's greater neutrality and enforceability (through the NY Convention). See generally Gary B. Born, International Commercial Arbitration (2d ed. 2001), e.g. at 7.

      2. Many domestic commercial matters are arbitrated, particularly in fields such as construction, franchise, admiralty, shipping. The number of commercial disputes resolved through arbitration has risen, even as the number of litigated contract disputes has fallen. See generally Marc Galanter, "Contract in Court; Or Almost Everything You May or May Not Want to Know About Contract Litigation," 2001 Wis. L Rev. 577, 588 (expressing doubt, nonetheless, that the growth in arbitration alone is responsible for the "disappearance" of 300,000 or so contract disputes from court dockets as compared to a decade earlier).

      3. The increasing phenomenon of "mandatory" or "compelled" arbitration with respect to consumer, employment, medical, franchise, and other disputes

        1. One study found that 35% of the transactions for important goods and services in the life of the average "Joe" in Los Angeles were subject to arbitration provisions. Linda Demaine & Deborah Hensler, "Arbitration Clauses in Consumer Contracts: The 'Average Joe's' Experience," __ Law and Contemporary Problems ___ (forthcoming 2003). Arbitration clauses were most prevalent for Joe's financial transactions (credit cards, banking, investment, accounting).

        2. The Supreme Court has made it clear that arbitration is "favored," and that virtually any kind of dispute can be subject to mandatory arbitration, unless it can be shown that arbitration would not allow full and fair vindication of a federal claim, or unless it can be shown that the arbitration clause is invalid using standard contractual sorts of arguments. E.g., Mitsubishi v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985) (requiring automobile franchise to arbitrate antitrust claim against automobile franchisor); Shearson/American Express, Inc. v. McMahon, 482 U.S 220 (1987) (holding that a consumer could be compelled to arbitrate securities fraud and RICO claims against brokerage); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (holding that brokerage employee could be required to arbitrate age discrimination claim); Green Tree Financial Corp. - Alabama v. Randolph, 531 U.S. 79 (2000) (requiring consumer to arbitrate claim under Truth in Lending Act, where consumer failed to present sufficient evidence to show arbitration would be excessively costly as compared to litigation).

        3. Additional examples: medical and other types of insurance; banking and credit cards; cell phones and land lines; services like termite extermination, Direct TV, tax preparation; on-line transactions like E-Bay; product purchases; employment agreements; health care; loans; . . . . For a discussion of the expansion of mandatory arbitration to cover personal injury claims see Elizabeth G. Thornburg, "Contracting with Tortfeasors: Mandatory Arbitration Clauses and Personal Injury Claims," ___ Law & Contemporary Problems ___ (forthcoming 2003).

        4. Deterrence: One effect of mandatory arbitration may be to discourage bringing of claims in any forum. When one credit card provider mandated arbitration, just four consumers filed claims against the company, in a period in which the company arbitrated 51,622 claims against its customers. Caroline E. Mayer, "Win Some, Lose Rarely? Arbitration Forum's Ruling Called One-Sided," Wash. Post, Mar. 1, 2000 at E1.

  3. What's the Big Deal? Isn't civil procedure still relevant? Sure, but we may not be emphasizing the right things in the right proportions.

    1. Personal jurisdiction: in agreeing to arbitration, parties submit to the pj jurisdiction of the arbitrator as well as the court that will hear any motion to confirm or vacate

    2. Subject matter jurisdiction: disputes over smj are largely irrelevant, as parties agree that the dispute is subject to arbitration; however, there may be disputes as to whether a federal court has smj to compel arbitration or enforce an arbitral award; the Federal Arbitration Act is an unusual federal act that does not itself provide smj

    3. Choice of law: arbitration clauses often specify substantive and arbitral law

    4. Drafting of pleadings: federal or state civil procedure rules are not relevant; arbitral rules are typically far less specific and technical

    5. Discovery: typically far less discovery is permitted in arbitration than in litigation, and typically the granting of discovery is left to the discretion of the arbitrator

    6. Motions: although motions are sometimes used in arbitration to resolve disputes short of a hearing, this is less common than in litigation

    7. Class actions: arbitration raises many new issues

      1. The Demaine/Hensler study showed that 31% (16/52) of the arbitration clauses that covered the average Los Angeles Joe's transactions explicitly prohibited Joe from participating in a class action, either in litigation or in arbitration. Demaine & Hensler, supra

      2. In Bazzle v. Green Tree the Supreme Court is considering the propriety of arbitral class actions. See 351 S.C. 244 (S. Car. 2002) (upholding multi-million dollar award made in arbitral class action), cert. gr. 123 S. Ct. 817 (2003).

      3. Some courts have found that arbitral class action prohibitions are unconscionable. E.g., Ting v. AT&T, 182 F. Supp. 2d 902, 930-31 (N.D. Cal. 2002), aff'd in relevant part, 2003 WL 292296 (9th Cir. Feb. 11, 2003). See also Jean R. Sternlight & Elizabeth J. Jensen, "Using Arbitration to Eliminate Class Actions: Efficient Business Practice or Unconscionable Abuse," ___ Law & Contemporary Problems ___ (forthcoming 2003)

      4. Still, many courts have sent class action claims to arbitration, and have assumed that class actions cannot be brought in arbitration

    8. Jury trial:

      1. Agreement to arbitration effectively waives jury trial rights;

      2. Yet, courts don't typically examine whether the arbitration clause has been entered knowingly, voluntarily and intelligently, as they would in the case of a traditional+ jury trial waiver; see Jean R. Sternlight, "Mandatory Binding Arbitration and the Demise of the Seventh Amendment Right to a Jury Trial," 16 Ohio St. J. Disp. Res. 669 (2001).

    9. Appeal: appeal standards are much more limited in arbitration than in litigation; arbitral awards can only be vacated for a very limited set of reasons such as corruption on the part of the arbitrator

    10. Due process:

      1. Most courts have held that due process restrictions do not apply to arbitral, processes, as there is no state action. Duffield v. Robertson Stephens & Co., 144 F.3d 1182, 1200-1202 (9th Cir. 1998)

      2. A few scholars have tried to construct arguments for state action; see Richard C. Reuben, "Public Justice: Toward a State Action Theory of Alternative Dispute Resolution," 85 Cal. L. Rev. 577 (1997) (contending that litigation and arbitration systems are sufficiently entangled such that imposition of arbitration involves state action); Jean R. Sternlight, "Rethinking the Constitutionality of the Supreme Court's Preference for Binding Arbitration: A Fresh Assessment of Jury Trial, Separation of Powers and Due Process Concerns," 72 Tulane L. Rev. 1(1997) (urging that state action exists to the extent courts interpret arbitration clauses by relying on a preference for arbitration over litigation)

      3. Interesting due process issues are raised by the possibility of arbitral awards of punitive damages and arbitral class actions

  4. Are We Likely to See a Rollback in the Growth of Arbitration?

    1. Courts' Response to the Growth of Arbitration

      1. Whereas arbitration was once viewed skeptically by the courts, today it is looked upon with "favor," as required by the Supreme Court

      2. Courts make no general distinction between those arbitration agreements entered between two parties of roughly equal knowledge and power, and those imposed by a company on a consumer, employee, franchisee, or other "little guy"

      3. Courts' have placed a few limits on the use of mandatory arbitration

        1. If a claim is brought under federal law, and if the arbitration clause is such that the claimant can show it would not be able to fully vindicate its rights under federal law, then the court should not enforce the clause; Green Tree Financial Corp. - Alabama v. Randolph, 531 U.S. 79 (2000).

        2. The most egregious arbitration clauses may be voided on such grounds as unconscionability, lack of consideration, or fraud.

        3. U.S. Constitutional arguments have not worked particularly well, although the jury trial argument would seem to have good potential in a limited range of cases

        4. Many arguments that might have been made under state statutes will be preempted. See Doctor's Assocs. Inc. v. Casarotto, 517 U.S. 681 (1996).

      4. Will companies voluntarily stop using arbitration so much?

        1. With consensual arbitration, i.e. company to company, there has apparently been some move away from arbitration and toward mediation. Some companies and their lawyers are becoming frustrated with an increasingly formal and thus slow and expensive arbitration process. See John Lande, "Getting the Faith: Why Business Lawyers and Executives Believe in Mediation," 5 Harv. Neg. L. Rev. 137 (2000). Some companies and their lawyers are also put off by the effective inability to appeal arbitration awards. But, arbitration remains very popular.

        2. With respect to mandatory arbitration, an increasing number of companies still seem to be imposing arbitration. However, as companies have to deal with successful attacks on mandatory arbitration clauses, as well as occasional big plaintiff victories that are effectively unappealable, some companies are now considering using jury trial and class action waivers rather than arbitration.

      5. Possibilities for legislative change

        1. Given the FAA's preemptive scope, any major changes must come from Congress.

        2. Legislation has repeatedly been introduced to prevent mandatory arbitration in the consumer and employment arenas, but it has not gone very far.

        3. A bill was recently adopted to protect automobile franchisees from mandatory arbitration imposed by automobile franchisors. The Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001, S. 1140, was signed into law as Section 11028 of the 21st Century Department of Justice Appropriations Authorization Act, Pub. L. No. 107-273, § 11028, 116 Stat. 1758, 1835-36 (2001).