We Now Have a Justice System Just for Corporations

David Morris writes about arbitration in On the Commons We Now Have a Justice System Just for Corporations. "How the Supreme Court twisted a 1925 law to undermine the interests of citizens, employees and small business."

In 1925 Congress passed a simple 4-page law, the Federal Arbitration Act (FAA). Businesses that preferred a simpler and faster arbitration process in business-to-business transactions to costly and protracted court battles urged Congress to act because federal courts often refused to enforce many arbitration clauses.

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.

For the next 60 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.

In 1984 the Supreme Court flexed its new conservative muscles. In a case involving the right of Southland’s 7-11 franchisees to sue under the California Franchise Law the Court reinterpreted the 1925 law as a Congressional declaration of a “national policy favoring arbitration”. It further ruled that this national policy applied not only to federal courts but to state courts and was substantive as well as procedural. No matter how one-sided the balance of bargaining power once a business signed a contract with an arbitration clause it was forced to abide by the decision of arbiters even if they ignored relevant state and federal laws and even if the decision-making processed was biased against the complainant. 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 5-4 vote, extended the FAA to cover employment contracts.

He then discusses the many problems of arbitration. One telling thing:

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.

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 maintains, “You would have to be unconscious not to be aware that if you rule a certain way, you can compromise your future business.”