How the Supreme Court twisted a 1925 law to undermine the interests of citizens, employees and small business
Photo courtesy of Flickr user Tim Sackton
By David Morris
By arrangement with
In the last twenty years the Supreme Court has created a parallel judicial system to resolve disputes involving corporations that is effectively run by the very corporations whose behavior is under investigation.
Here is how that judicial coup against an independent judiciary occurred.
In 1925 Congress passed a simple four-page law, the
The FAA was a legislative attempt to satisfy businesses’ desire for speedy and affordable dispute resolution while also satisfying the judges’ desire for justice. Arbitration, a process in which both parties in a dispute agree to accept the ruling of an impartial third party, seemed an effective solution.
The result was a law very narrowly focused on commercial contracts voluntarily entered into by businesses of relatively equal strength. In a House floor debate Representative George Scott Graham (R-PA)
For the next sixty years the law worked as intended. Courts consistently upheld arbitration awards between businesses but also consistently held that the FAA was procedural not substantive. Arbitration did not trump federal and state laws, and the FAA did not apply to employment or consumer contracts.
A New Conservative Supreme Court Steps In
And then the composition of the Supreme Court dramatically changed. Richard Nixon came to office
It further ruled that this national policy applied not only to federal courts but to state courts and was substantive as well as procedural.
In 1984 the Supreme Court flexed its new conservative muscles. In a
Dissenting Justices vainly pleaded with their colleagues not to ignore the clear will of Congress and derail more than a half-century of uncontroversial implementation of the FAA. As Sandra Day O’Connor observed, “One rarely finds a legislative history as unambiguous as the FAA’s.”
In 2001 the Court, by a five-four vote,
The Problems With Arbitration
Arbitration may indeed be speedier and more affordable than the judicial process but it clearly undermines the ability of workers and customers and small businesses to gain a satisfactory outcome. A path breaking 2007
As for due process, Catholic University of America law professor Peter B. Rutledge
Complainants can be forced to travel thousands of miles and put up thousands of dollars upfront to attend an arbitration proceeding.
And while it is true that aggrieved parties can ask courts to vacate (essentially to overturn) an award, Rutledge
Corporations realize the disadvantages of arbitration from the complainant’s perspective. Which is why most arbitration clauses require only the weaker party (the consumer, employee, or franchisee) to arbitrate its claims, while allowing the dominant party (the corporation) to sue in court. As Public Citizen
And arbiters hired by the arbitration firm know that those who rule in favor of the company will be rehired and those who don’t won’t.
The arbitration process is rife with conflicts of interest. Arbitration organizations, such as the American Arbitration Association (AAA) and the National Arbitration Forum (NAF), compete to provide arbitration services for companies. Company contracts often designate a specific firm to handle arbitration. Firms that rule in favor of companies and offer the cheapest price—even if that cheap price translates into arbiters deciding each case in as little as five minutes—win the contract.
And arbiters hired by the arbitration firm know that those who rule in favor of the company will be rehired and those who don’t won’t. As arbitrator Richard Hodge
The curtain was drawn back on the seamy side of arbitration in 2008 when San Francisco city attorney Dennis Herrera sued the for-profit NAF, citing state records (California is the only state that compels companies to make arbitration decisions public) showing that of 18,075 collection arbitrations it handled consumers won just 30 of them. “Arbitrations of consumer debt matters are a sham—the sole purpose of which is to assist (NAF’s) debt collector clients in collecting money from consumers by creating an appearance that a fair and neutral arbitration has occurred and resulted in an enforceable award,”
In 2009 Minnesota Attorney General Lori Swanson’s also sued the NAF,
Despite this dismal record, the Supreme Court continues to bestow ever-increasing authority on binding arbitration procedures.
In 2011, in still another five-four
Charles Schwab & Co quickly
In 2013, in a case involving small businesses suing American Express, the Roberts Court
The percentage of employers using forced arbitration and class action bans more than doubled from 21 percent in 2011 to almost 46 percent in 2014. Today it is all but impossible to successfully litigate a class action suit. Public Citizen
Today, as F. Paul Bland, Jr., Executive Director of Public Justice, notes in the new film by the Alliance for Justice,
One court has
What Can Be Done?
Sometimes public outrage works. In April 2014, two days after the New York Times reported that General Mills planned to force consumers to give up their right to sue the company, the company
Congress could explicitly forbid forced arbitration. The Military Lending Act of 2006 prohibits lenders from including arbitration clauses in contracts with members of the military or their families. The Dodd-Frank Act expressly forbids the use of forced arbitration in mortgage loan agreements, and authorizes the Consumer Financial Protection Bureau (CFPB) to issue broader regulations prohibiting or limiting arbitration agreement, which it probably will do later this year (although any rule will apply only to agreements entered into more than 180 days after it goes into effect.)
Since Republicans gained control of Congress little has been done. The Arbitration Act, which would broadly void forced arbitration contracts, has languished in Congress. A bill to prohibit any school receiving federal student aid from restricting students’ ability to pursue legal claims in court likely will not come to a vote.
Even without Congressional permission, the Executive branch can act. In July 2014 President Obama signed an executive order barring employers on federal contracts from forcing workers to bring workplace discrimination, sexual assault or sexual harassment cases only through arbitration.
The Centers for Medicare & Medicaid Services has
State and regulatory agencies can play a role. Just four days after the Minnesota suit was filed, the NAF agreed not to accept new cases from credit card companies, banks, and many other firms. A broader class action suit against several large banks
He also argues that states responsible for enforcing the law and can argue that enforcing the law is hindered by confidentiality provisions in arbitration agreements and the lack of a written record.
Some argue that states can and should play an important role. An insightful
Seligman notes that Congress expressly reserves the right of states to act in two sectors: insurance and transportation. He maintains that states have potentially powerful tools at their disposal. One is their ability to condition awarding contracts based on the existence and reach of arbitration clauses. He also argues that states responsible for enforcing the law and can argue that enforcing the law is hindered by confidentiality provisions in arbitration agreements and the lack of a written record.
Seligman also argues that a state may be able to intervene when an individual cannot and points to a recent court case in which the Supreme Court
States and the President are beginning to use the tools they have to chip away at this new private judicial structure. We need to urge them to maximize their efforts and we need to publicize how much damage 5 men on the Supreme Court have done to the integrity of our judicial system.
David Morris is co-founder and vice president of the Minneapolis- and DC-based Institute for Local Self-Reliance and directs its Public Good Initiative. His books include The New City-States and We Must Make Haste Slowly: The Process of Revolution in Chile.