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Arbitration is at the Root of all Evil, According to the New York Times

 By George H. Friedman*

 An ongoing multi-part series in the New York Times on its “investigation” of and “exposé” on arbitration seemingly blames arbitration for pretty much everything bad going on in the world.  As an arbitrator, arbitration expert, law professor, author, and Chairman of the Board of Arbitration Resolution Services,[1] I must respond. I must.  I’m like the news anchor in the classic movie, “Network,” starring Faye Dunaway and Peter Finch.  At a pivotal juncture in the movie, the increasingly unhinged Finch urges viewers to open their windows and shout out: “I’m mad as Hell, and I’m not going to take this anymore!

Slanted, one-sided and interminable

First, the long three-part series is one-sided. My law students will back me up on brevity.  A long, repetitive and often rambling paper will be returned with a comment saying, “You really need to be more succinct and focused!”  The series is long on stories, but short on analysis and data.  Anecdotes are not data, and taking stories – especially from only one side – and drawing broad conclusions is intellectually dishonest.  Should readers assume that all Times’ reporting is dishonest because Times Reporter Jason Blair engaged in journalistic fraud?  Just asking.

Also, where is the data showing arbitration harms consumers? The Consumer Financial Protection Bureau’s own data published in a March Report to Congress if anything show arbitration is not harmful and that class actions offer ineffective relief for individual consumers. CFPB’s Report shows that most consumers don’t even bother participating in class actions and when they do get tiny recoveries – cents on the dollar or coupons for future business.  Of course, left unsaid is that class action lawyers tend to do just fine.

 What’s the alternative?

Succinctly stated, litigation stinks, and class actions are even worse for individuals.  I’ve blogged often on this general topic, but I especially recommend Ten Things About Litigation That Arbitration Critics Won’t Tell You. I love this part:  “Arbitration’s detractors like to tout the benefits of a trial by jury, and criticize arbitration for denying consumers their Seventh Amendment right to trial.  But is that so?  The right to a jury trial can be waived, which is what happens when there is clear, mutually-agreed-upon agreement to arbitrate. Also, almost 100% of civil lawsuits never go to trial. That’s right, between motions to dismiss, summary judgments, and other events that happen in court cases, almost no cases go to trial.  Don’t take my word for it.  The American Bar Association conducted a major study of this issue.  How did it come out?  Here’s a spoiler alert: the title of the article describing the results is The Vanishing Trial.  The ABA reports that only 1.8% of civil actions actually went to trial, meaning 98.2% did not.  A later survey upped this to 98.8%. In state courts, the National Center for State Courts reports that civil jury trials are down 28% from 1976 to 2002, and now represent 0.6% of all dispositions.  So much for your day in court.  By contrast, arbitrators are trained to allow the parties to present their case, and some arbitration rules[2] severely limit motions to dismiss in consumer cases.”

 Arbitration is fair and that’s where the focus should be

The Federal Arbitration Act (“FAA”), courts, and established arbitration providers address blatantly unfair clauses and systems.  And the series overlooks the basic fact that arbitration is fair.  Borrowing from my own prior blog posts, in extolling the upside of litigation, arbitration’s critics often paint arbitration as a form of second-class justice.  This is simply not the case.  Says who? Besides me, the Supreme Court says so.  In overturning its own anti-arbitration ruling in Wilko v. Swan[3] issued 36 years earlier, the Court in Rodriguez v. Shearson/American Express, Inc.[4] said “To the extent that Wilko rested on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants, it has fallen far out of step with our current strong endorsement of the federal statutes favoring this method of resolving disputes. Once the outmoded presumption of disfavoring arbitration proceedings is set to one side, it becomes clear that the right to select the judicial forum and the wider choice of courts are not such essential features of the Securities Act…”  Two years later in Gilmer v. Interstate/Johnson Lane Corp.[5] the Court evaluated whether arbitration was a fair process, and concluded it was.  In ordering arbitration of a claim involving the Age Discrimination in Employment Act, the Court goes on at length to review the arbitration process, and concludes that it is “fair” (fair process, right to counsel, right to pick arbitrators, fair panel, fair amount of discovery, written award). In short, the arbitration process is fair and is not an inferior form of justice.

As to courts policing unfair arbitration systems, see for example Hooters v. Phillips,[6] where the U.S. Court of Appeals for the Fourth Circuit held “the promulgation of so many biased rules – especially the scheme whereby one party to the proceeding so controls the arbitral panel — breaches the contract entered into by the parties. The parties agreed to submit their claims to arbitration– a system whereby disputes are fairly resolved by an impartial third party. Hooters by contract took on the obligation of establishing such a system. By creating a sham system unworthy even of the name of arbitration, Hooters completely failed in performing its contractual duty.”

Also, there are established due process fairness protocols for employment, consumer, and health care arbitration, as well as a Code of Ethics for arbitrators.  Established arbitration providers follow them and won’t administer a case under a non-complying arbitration clause.

Inconvenient truths

Also not addressed are some inconvenient truths.  For example, the series fails to mention that even with arbitration clauses and class action waivers, regulators retain their ability to independently address corporate wrongdoing.  In EEOC v. Waffle House,[7] the Supreme Court ruled that the EEOC does NOT stand in the shoes of the employee who has signed an arbitration clause, meaning the EEOC can pursue litigation to address corporate wrongdoing even where individual employee has signed an employment contract containing an arbitration clause.

Also, the argument about “repeat players” ignores the fact there are well-organized consumer, investor, and employee-rights bars who can also “blackball” arbitrators. And, of course, the consumer’s ability to walk away from unfair arbitration clauses and take their business elsewhere is not discussed.

And, there are sometimes bad results in individual law suits, too.  Should we do away with courts?  The series refers to the “dusty” FAA.  The Federal Arbitration Act is a time-tested federal law.  Is the Civil Rights Act “dusty”?  What about the 14th Amendment?  Again, just asking.

 Conclusion

After seemingly blaming arbitration for pretty much everything from ISIS to climate change, the third installment in the series takes on religion-based arbitration.  Is nothing sacred?

_____

*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator.  He is also a member of the AAA’s national roster of arbitrators.  He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional.

 

[1] Not speaking for ARS here.  This is just me speaking.

[2] See, for example, FINRA Code of Arbitration Procedure for Customer Claims Rule 12504.

[3] 346 U.S. 427 (1953), available at http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?friend=kmarx&navby=volpage&court=us&vol=346&page=436.

[4] 490 U.S. 77 (1989), available at https://scholar.google.com/scholar_case?case=4986456804213944237&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

[5] 500 U.S. 20 (1991), available at http://supreme.justia.com/cases/federal/us/500/20/case.html.

[6] 173 F.3d 973 (1999), available at http://caselaw.findlaw.com/us-4th-circuit/1068799.html.

[7] 534 U.S. 279 (2002), available at http://caselaw.findlaw.com/us-supreme-court/534/279.html.

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