Introduction #

Arbitration is a form of ADR which litigates disutes outside of the formal court machinery. Mandatory arbitration is a practice in which a business requires employees or consumers to agree to arbitrate legal disputes with the business rather than going to court. Such agreements are generally enforceable and effectively bar employees or consumers from going to court, instead diverting legal claims into an arbitration procedure that is established by the agreement drafted by the company and required as a condition of employment or of doing business with it. The claim is these processes are cheaper, faster, and more efficient, while remaining fair. In reality they serve to eliminate meaningful recourse for violations of contract or of the law.

Problems #

Pre-Dispute Arbitration agreements force people into a form of ‘Rustic Justice’ whose primary purpose to evade meaningful accountability for violations of contract or statutory rights. It has no place in consumer or employment contracts of adhesion.

The Supreme Court has repeatedly ignored the plain meaning of the statutes, congressional intent in writing the FAA, as well the standard rules of statutory interpretation effectively rewriting Title 9 to invent a “national policy favoring arbitration” as a form of “do it yourself-tort reform". ^{1 2 3 4 5 6}

Arbitration is inherently a creature contract. The defining feature is not simplicitly or speed but rather party agreement. ⁷ As such most of this document is in generalities and discusses typical consumer and employment contracts. It is difficult to study because only a small fraction of awards are published and awards are only a fragment of the overall proceedings. ^{8 9} It is also difficult to study due to the combination of ethical issues preventing unbiased blind studies for real parties. ¹⁰

There may be reasons to elect for arbitration post-dispute on the advice of a qualified attorney. This article also ignores voluntary arbitration agreement such as those negotiated in collective bargaining agreements.

General Information #

• The underlying issue with forced arbitration is the imbalance of power. ¹¹

• Arbitration, when passed, was designed for contract disputes between merchants, not statutory claims or between entities of unequal bargaining power. ^{12 13 14 15} In fact members of Congress expressly disavowed touching either consumer or employment contracts - and even went so far as to make that explicit with respect to employment. ¹⁶ Julius Henry Cohen, the author of United States Arbitration Act, testified that the bill would be applicable in federal courts only. ^{17 18}

• Arbitration, as practiced, is unique to the United States ¹⁹

• The FAA was intended to be a procedural remedy available in the federal courts ²⁰. It was never intended by the enacting Congress to apply in state court. ^{2 21 22} In fact, its constitutionality “rests upon the constitutional provision by which Congress is authorized to establish and control inferior Federal courts”… and not solely upon “upon the exercise of the interstate-commerce”. ²³

• Arbitration requires the waiver of jury trials. While the jury is probably still out on this issue, there is a general perception that arbitrators give smaller awards than juries. ²⁴

• When the contract limits remedies in other ways (reduced time to bring claims, limitations on injuctive relief, etc.) it is normally subject to Judicial review. Not so with arbitration. In fact, stepping “outside the bounds of the contract” are one of the few reasons arbitrator’s awards can be vacated. ²⁵

• An award can only be vacated if (1) it was procured by corruption or fraud, (2) evident partiality or corruption, (3) the arbitrator refused to hear relevant evidence, or (4) the arbitrator exceeded the power defined in the arbitration agreement. ²⁶ These exceptions are interpreted narrowly with great deference given to the arbitrator. It may not overturned due to an error of fact, contract interpretation, or law. ²⁷

• In civil court the attorneys could have sanctions against them if they pointlessly delay the proceedings. Less so arbitration.

• Comparing outcomes in litigation and arbitration actually underestimates the regressive effect, since it fails to capture individuals dissuaded from initiating action altogether. ²⁸

• Where the employee was self-represented the employee win rate was substantially smaller versus cases where the employee was represented by counsel. Award amounts are also smaller. ²⁹ This counters the argument that arbitration may reduce the need for attorneys.

• The FAA creates an incentive for entities to self-deregulate through private contract ³⁰

• Companies may suffer adverse publicity if it is perceived as attempting to use arbitration to gain unfair advantage over its customers, vendors, or the public. Although these economic incentives toward fairness are not trivial, neither are they particularly powerful. A company’s problematic arbitration conduct is unlikely to be significantly salient to its overall customer base or the general public. ³¹

• Empirical Data is hard to obtain. ³² Companies may not provide relevant information to consumers even when legally required. ³³

• Forced arbitration clauses and class action bans are now a basic feature of form contracts ³⁴

Empirical Data & Research #

• We have little empirical verification of the claims made both for and against arbitration and ADR, including positive assertions made about reduced cost, speed, and access to dispute mechanisms. ³⁵ The little empirical data we have consistently shows an anti-employee bias. Basic questions such as the typical characteristics and outcomes of cases in employment arbitration remain to be definitively answered. ³⁶

• Although the plaintiff compensation rate would be very instructive of the role of litigation, because of a lack of data, it cannot be computed from prior research ³⁷

Claim Suppression #

• In 2018, there were an estimated 826,537,000 consumer arbitration provisions in force yet consumers filed only 6000 arbitrations each year. ³⁸

Access To Counsel #

• The lower probability of victory, the lack of class representation, and meager legal fees discourage attorneys from representing individuals in arbitration proceedings. This is particularly a problem where the fees will be paid on contingency (most employment and consumer cases). ^{39 40 41}

• This becomes a cycle where employees struggle to retain representation because of low payouts in arbitration, and employees get lower payouts in arbitration because they are unrepresented. ⁴²

Meaningful & Informed Choice #

• Many contracts do not inform the customer that they are waiving the right to a jury trial or the right to proceed in any other forum. ⁴³

• A CFPB consumer survey found that 79% of consumers didn’t know whether any credit card agreements they signed had an arbitration clause, and only 7% understood that they could not sue their credit card issuer if their contract did include such a clause. ⁴⁴

• Any individual signer of any individual “agreement” often has no other choice if they wish to get a job, to establish a credit history, or even cell phone service. ³⁰

• Concentration at the firm level has handed a relatively small number of companies outsized influence over the contractual terms that govern most transactions. This same consolidation has further tilted the balance of power away from workers and consumers, rendering them largely captive to whatever contractual terms businesses choose to impose. ⁴⁵

Bias & Fairness #

• Proving the “evident partiality or corruption” of a unilaterally selected arbitration panel member is a near impossibility and, indeed, is rarely an issue in any arbitration proceeding. ⁴⁶

• Mandatory arbitration provides for employers the advantage of crafting even objectively fair rules to their advantage. They can decide unilaterally, for example, whether hearing proceedings will be recorded, whether briefs will be filed, and in what time frame, and where the arbitration will be held. Their rules can also dictate the scope of discovery. ⁴⁶

Historical Information #

• The author of the FAA said that Arbitration “was not designed to major importance involving constitutional questions or policy in the application of statute” ⁴⁷

• The Federal Arbitration Act was “is directed primarily toward settlement of commercial dispute” ¹⁵

• Until the mid-1980s, arbitration was primary used for international contract disputes, collective bargaining agreements, and other large-scale commercial dispute resolution ^{48 49}

• In the pre-1980s world of traditional commercial arbitration, the parties often sought arbitration to have arbitrators familiar with a given industry apply the customary norms of the industry ⁵⁰

• New York’s arbitration act was passed in 1920 followed by the Federal Arbitration act in 1925 largely at the behest of commercial trade organizations. ⁵¹ They wanted resolution according the norms of the industry instead of by external law. ⁵²

• Prior to the various arbitration acts of the mid 1920s the common law doctrine allowed for revocibility. ⁵³

Employment #

• Plaintiffs’ overall economic outcomes are on average 6.1 times better in federal court than in mandatory arbitration and 13.9 times better in state court than in mandatory arbitration ($328,008 versus $23,548) ³⁹

• Employee win rates in mandatory arbitration are much lower than in either federal court or state court, with employees in mandatory arbitration winning only just about a fifth of the time, which is 59 percent as often as in the federal courts and only 38 percent as often as in state courts^{54 41}

• Differences in damages awarded are even greater, with the median or typical award in mandatory arbitration being only 21 percent of the median award in the federal courts and 43 percent of the median award in the state courts^{54 41}

• Average outcome in mandatory arbitration is only 16 percent of that in the federal courts and 7 percent of that in state courts ⁵⁴

• Employee win rates are lower in cases based on employer promulgated procedures than in cases based on individually negotiated contracts. ⁵⁵

• The mandatory arbitration–litigation gap in outcomes has a direct effect on the ability of individual workers to recover compensation for the injuries they have suffered. ⁵⁶

• Repeat player employers fair better than first-timers. ⁵⁷ When they win against repeat player employers, employees recover only 11% of their claims. When they win in cases involving one-shot employers, they recover 48% of their claims. ^{58 57 59}

• There is strong evidence for a repeat employer-arbitrator pairing effect in which employees tend to win less often and recover smaller amounts when the employer and the arbitrator are involved in multiple cases together ⁶⁰

• Arbitrators that are picked by the employers more than once

• Arbitrators feel beholden to companies. Beneath every decision is the threat of losing business. ⁶¹

• Arbitrators habitually handle cases for the same corporate defendants over the course of four years. ⁶²

• Higher-level employees with resources for representation and use of the Commercial Arbitration Rules were more likely to gain favorable results than those lower-level employees who were subject to the Employment Arbitration Rules. ⁶³

• Employees in nonunion contexts are still mostly one-shotters and are often unrepresented; also employees in arbitrations against repeat player employers do not fare as well as employees against nonrepeat player employers. ⁶³

• The share of workers subject to mandatory arbitration exceedss 55 percent is growing. Among companies with 1,000 or more employees, 65 percent have mandatory arbitration procedures. 30 percent also include class action waivers in their procedures ⁶⁴

• The sources of data available to study arbitral behavior may end up painting a rosier picture of labor arbitration than is warranted. More accurate empirical data is limited. ⁶⁵

• Employment arbitrators are often law firm associates or partners who are not labor law specialists. ⁶⁶

Investment #

• Investment advisers are not required to disclose information about arbitrations with their clients. ⁶⁷

Class Actions #

• Arbitration provisions regularly include class action waivers, and since there is a cost to arbitration, bringing a single claim can be detrimental. ⁶⁸

• The ability to block class actions is the primary motivation to compel arbitration. It is rare for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions. ⁶⁹

• The ban on class actions in particular makes it unlikely that many claims of corporate wrongdoing—particularly those that involve small sums for each in large groups of individuals—will ever be heard. As Justice Breyer opined, “Only a lunatic or a fanatic sues for $30.” ⁷⁰ If the filing fees and other prospective costs of arbitration amount to more than what could be gained with a favorable judgment, then a claim will almost certainly not be brought.

• Ninety percent of mandatory arbitration agreements include a class action waiver ⁷¹

• A commercial entity can cloister itself away from significant financial liability, as well as any correlative damages award meant to deter unsavory behavior ⁷²

• “by far the most effective” tool to undermine class actions has been “arbitration provisions expressly waiving the right to any collective adjudication” ⁷³

• Most arbitration agreements do not require reasoned or even written opinions, punitive damages, or other remedial possibilities ⁷⁴

• By avoiding class actions companies can also avoid FRCP §23(b)(2) injuctive relief. That is, they could avoid judicial orders to stop their behavior generally instead merely in specific cases.

Consumer Credit #

• Although proponents claim that arbitration decreases litigation costs for consumers, consumers often do not receive any benefit of reduced costs through forced arbitration. Only twenty-five consumers with claims of less than $1000 obtained relief in an AAA arbitration in 2010 and 2011. ⁴⁴

• There is no evidence that arbitration clauses lead to lower prices for consumers. ⁷⁵

Cost #

• Even when arbitration litigation costs less than judicial litigation, the timing of some required arbitration costs, such as upfront fees for the arbitrator, can make it likely that the arbitration-plaintiff will be unable to proceed in that forum. ⁷⁶

• Arbitration can cost more than a judicial forum such that a claimant can be discouraged from using arbitration when it is voluntary. ⁷⁷

• Employees compelled to arbitrate under mandatory-arbitration agreements often bear arbitrator-fee costs that far exceed what a union party would pay for the representation of a bargaining-unit employee ⁴⁶

• Making the employer pay the fees does not fully solve the problem as arbiters are aware of who pays the fees and produce biased results.

Opt Out Clauses #

Why do some contracts of adhesion have opt-out clauses?

• They reduce the chance that the contract will be held to be procedurally or substantially unconscionable

• They allow the employer to avoid e.g., JAMS minimum standards. In particular they allow the companies to argue that the arbitration is not “required as a condition of employment”. ⁷⁸

Confidentiality #

• Court records are typically public. Arbitration proceedings are often confidential as a matter of practice or even contract. This makes it difficult to hold companies accountable for the actions. It also makes it difficult to use evidence in one case in another.

Following The Law #

• Arbitrators are not required to follow or even know the law. ^{79 80} Their rulings can be overturned only in narrow circumstances (in “manifest disregard”) where the arbitrators must be found to have “understood and correctly stated the law but proceeded to ignore it.” ⁸¹

• Despite not being required to follow (or know) the law they may have Absolute Immunity from statements they make. Importantly, this is true even if they are not operating in objective good faith. ⁸²

• Overall, the evidence on whether arbitrators follow the law in their awards is inconclusive… analysis of statutes by labor arbitrators often is “cursory and conclusory.” ^{83 84}

• Many arbitration awards contain no statement of reasons, so that it is difficult if not impossible to determine whether the arbitrators have followed the law. ⁸⁵

• The overwhelming majority of awards do not cite to any external authority (statutes, administrative authorities, case law) or secondary sources. ^{65 86}

• Even if a court determines that the arbitrators did not follow the law, in most cases the court will uphold the award. ^{85 87}

Qualifications of Arbiters #

• There are no rules for who may be an arbitor (except if specified in the contract)

• In contrast to litigation, where jurists are subject to enforceable rules designed to foster impartiality and resist corruption, there is no government mechanism for attempting to foster arbitrator neutrality and competence. ⁸⁸

Developing The Law #

• Because arbitration agreements are often confidential, and even when not they are not clearly reasoned or published they make it difficult to establish norms and ensure that equally situated persons are treated equally. ⁸⁹

• The effects of removing entire classes of litigation from the stream of the common law effectively halts the development of legal common law. ⁹⁰ For example it is judge made rules that define permissible conduct under Title VII, the FLSA, and state employment laws. Private arbitration of these disputes allows defendant-employers to disregard such laws and prevent public development in regards to new behavior. ⁹¹

• An arbitrator’s authority is based on contract and thus has limited incentive to consider the effects of their awards on third parties ⁸⁵

Federalism #

• States usually determine their own contract law which can differ on damages, injunctive relief, availability of specific performance, and claims arising from contract law. However, the Keating decision stripped state courts of the power to address arbitration provisions and their enforceability. ⁹²

Supreme Court Errors #

• The Keating decision that the FAA is intended to be substantive law rather than procedural law is wrong. ⁹³

Kangaroo Court #

• Arbitration in such contexts clearly fulfill any of the three definitions of a Kangaroo Court. ⁹⁴

  1. A self-appointed tribunal or mock court in which the principles of law and justice are disregarded, perverted, or parodied.
  2. A court or tribunal characterized by unauthorized or irregular procedures, esp. as to render a fair proceeding impossible.
  3. A sham legal proceeding.

• An alternative definition of a “kangaroo court” is a forum in which the structure and operation of the forum result in an inferior brand of adjudication even if the tribunal is not gripped with intentional bias ⁹⁵

Mass Arbitration #

While mass arbitration has been used as a tool to help even the playing field it has several problems:

• It requires that the law firm do the marketing and outreach to find affected employees or consumers. In a class action court case this happens as a part of discovery.

• It requires that affected individuals affirmatively sign up instead of allowing for representative actions.

• This is especially a concern since people may be worried by real or perceived risk of affirmatively signing up.

Anti-SLAPP #

• Arbitration is not an “official proceeding authorized by law” and thus not subject to anti-SLAPP protection. ⁹⁶

Alternative Forums #

• Many arbitration agreements exempt claims brought in small claims court. ⁴³

Equality #

• Most contracts appear in many respects to put the consumer on equal terms with the business that drafted them. This helps defend against claims of unconscionably. However, limitations on discovery hurt consumers more than business (as the business holds most of the relevant information). Administrative and filing fees fall disproportionately on the consumer (even when split equally). Class actions are almost always precluded. The types of claims most often brought by business against consumers (such as IP disputes) are precluded. The appearance of equality is deceptive. ⁹⁷

• The majority of negotiated business contracts lack arbitration clauses. This suggests that companies value, even prefer, litigation as the means for resolving disputes with peers. The systematic eschewing of arbitration clauses in business-to-business contracts also casts doubt on the corporations’ asserted beliefs in the superior fairness and efficiency of arbitration clauses. ⁹⁸

Super Contract #

Arbitration has special carve outs in the law that make them unique amongst other contract.

• Arbitration law follows federal common law even though contract law is typically state law. ⁹⁹

• Arbitration clauses must be enforced even when they are part of an illegal contract. ^{100 101}

Anti Trust #

• Proving antitrust damages requires costly economic analysis, private plaintiffs generally cannot bring suits unless they can split expenses, be it through joining as a class or sharing costs some other way. By allowing class action waivers to stand in Italian Colors the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse. ^{102 103}

Even Its Proponents Want To Change It #

• Even consumer-oriented proponents of arbitration or other forms of ADR want to reform it rather than keep the system as-is. ¹⁰⁴

• The proponents of arbitration to resolve disputes do not address class-action waivers. ¹⁰⁵

Regulatory Authorities #

Some have argued that regulatory authorities are better positioned to resolve systematic issues instead of relying on class actions class-actions or similar actions.

• The EEOC does not have sufficient resources to litigate the majority of cases. ¹⁰⁶

Possible Advantages or Arguments in Favour #

While arbitration is generally negative for both employees and consumers there is a little bit of silver lining.

Speed of Resolution #

• Arbitration is actually faster than litigation. Cases typically take around two to two-and-a-half years to reach trial but mean time to disposition for an employment arbitration case that resulted in an award was 361.5 days. ¹⁰⁷ However, it is also important to recognize that most cases in both litigation and arbitration are settled before a final hearing. Furthermore much of the reason for the reduced length of resolution is that arbitration gives up important procedural rights.

• A recalcitrant defendant can delay the start of meaningful proceedings a long time.

Fees & Costs #

• Amongst the studied cases, the employer paid all arbitration fees 97 percent of the time, indicating that the employer-pays rule is generally being enforced in AAA employment arbitration cases. ¹⁰⁸ This is primarily due to state law requiring employers to pay for arbitration fees.

• In consumer contracts, many have the business cover fees and costs. Some agreements cap consumer fees. In other cases the arbiter allocates the fee. ¹⁰⁹

Confidentiality #

• Court records are typically public. Arbitration proceedings are often confidential as a matter of practice or even contract. A lawsuit may bring embarassing or personal topics into the public record.

Due Process Protocols #

• Some providers have minimum protocols to enforce ‘due process’ and this may be enforced by the courts. ¹¹⁰

The Courts Aren’t Better #

• The current system for resolving employment claim emanates from a tort-based litigation system. Unlike torts, employment disputes are not only inevitable, but they are also, in some ways, healthy. Disputes can raise issues that need to be corrected at the workplace. Disputes are best resolved at the lowest level with minimal involvement from outsiders. ¹⁰⁵

Document Limitations #

This document has a few limitations and biases.

Missing Specificity #

• Many of the studies or analysis of arbitration don’t differentiate between forced consumer mandatory arbitration, labour arbitration, collective bargaining agreements, or even between businesses. To the extent possible this document tries to focus on and cite details that are either generally true or that focus specifically on consumer and non-collective labour contracts.

The Research Is Wrong #

• Much of the research about arbitration may be wrong in ways that invalidate the claims on this page. For example, some research “fail to include dispositive motions in their analysis”. ¹⁰⁴

• Since arbitration is faster than litigation, there may be less backpay. This makes direct comparisons more difficult. ³⁷

Labor Contracts Use Arbitration #

• Unions and management often conflict, almost all will agree that grievance and arbitration procedures facilitate conflict resolution in an efficient and effective manner. Of course, the union grievance arbitration system has two parties of relatively equal power, while there is no organization representing the individual employee in employment arbitration. ¹⁰⁵

References and Footnotes #