What Does the Arbitration Fairness Act of 2009 Have to Say About Commercial and Industry Arbitration Involving Sophisticated Parties?
Part V: Summing Up
This is the final part of our multi-part post on the Arbitration Fairness Act of 2009 (the “Fairness Act”). We did not address all aspects of the Fairness Act, but focused our attention on whether the Act may change the status quo in arbitrations involving only sophisticated, commercial entities.
So what does the Arbitration Fairness Act of 2009 have to say about commercial and industry arbitration involving sophisiticated parties? If you have been following our last six posts, you know the answer is not clear, and that the only thing that can be said with any degree of certainty is that the Fairness Act will result in litigation between sophisticated parties concerning the continuing viability of two fairly settled principles of arbitration law — severability and what we refer to as the Own Jurisdiction Rule. That may be good news to some and bad news to others.
The point of our posts has not been to take a position on how we believe the Fairness Act should be interpreted if enacted. Rather, our prinicipal concern is that the Act lacks clarity as applied to disputes involving sophisticated, commercial entities. We have tried to demonstrate that point by walking the reader through the sometimes convoluted interpretative processes necessary to reach one result or the other.
It may be that the drafters wish to abolish severability and the Own Jurisdiction Rule in all cases falling under Chapter 1 or simply where one party claims that the arbitration agreement falls under Proposed Section 2(b). But the drafters need to make their intent clear. If persons who might be affected by the Act know what the drafters have in mind, then they can support or oppose the Fairness Act as they see fit. Otherwise, persons will decide whether they wish to support, oppose or remain silent based on their own private assessments of the likelihood that they may be involved in litigation, its importance, and how it might turn out. By intentionally or unintentionally obscuring or misstating their intent, the drafters have done all a great disservice.
We have said very little concerning the principal purpose of the Fairness Act, which is to render invalid and unenforceable arbitration agreements requiring the arbitration of consumer, employment, franchise and statutory civil rights disputes. There are undoubtedly those who believe they have been “victims” of the arbitration system, and that they would have prevailed in court. And there are undoubtedly instances where arbitrators have rendered awards that were arguably unfair to consumers, but which could not be vacated under the very deferential standards of review applicable to arbitration awards. By the same token, there are no doubt instances where arbitrators have rendered awards against commercial entities that were arguably unfair and not subject to meaningful review. And we suspect that the largest category of cases are those in which disputes were resolved fairly and efficiently.
Is arbitration a perfect system for resolving consumer, employment, franchise and statutory civil-rights disputes? Of course not. But no matter what the dispute, there is no such thing as a perfect system for resolving it.
Does the Fairness Act represents sound congressional policy? It does not – unless, of course, throwing the baby out with the bath water represents sound parental policy.
To the extent there are pervasive problems, the answer is not to abolish arbitration of consumer, employment, franchise and statutory civil rights disputes, and assign a whole new caseload to an already overburdened state and federal judiciary. The answer is to identify with specificity what those problems are, determine whether it is necessary to address them, and, to the extent it is necessary, to do so through narrowly-tailored legislation. For example, underlying the Fairness Act is the notion that certain arbitration organizations may have an institutional bias toward their corporate customers, who presumably send them repeat business. Assuming that is true (and we do not suggest it is), perhaps it could be remedied by placing some modest restrictions on the ability of large commercial entities to require that party-appointed arbitrators (or even neutrals) must be affiliated with a single arbitration service provider chosen by the commercial entity. There are no doubt other narrowly-tailored measures that might be enacted to help improve consumer, employment, franchise, and statutory civil rights arbitration, assuming there is a legitimate need for such improvement.
But any legislative reform that might be enacted must take costs into account. Consumer, employment, franchise and statutory civil rights arbitration has been the norm for quite some time. While we have not researched empirical data on the numbers of disputes of these types that are resolved in the United States each year by arbitration, we believe it safe to assume that the numbers are very large. If the Fairness Act is passed, all or most of those disputes will end up in state or federal courts. Deciding all of those new cases will presumably require additional resources, the cost of which must be borne by the taxpayers.
In addition, the informality of arbitration can (but does not always) make it a cost-effective alternative to court proceedings. Thus, other costs that must be considered are increased legal fees and litigation expenses that may be incurred by commercial entities and consumers if the Act is passed.
If Congress is indeed serious about the Fairness Act, then it should commission the General Accounting Office to conduct an appropriate analysis to determine what the cost of the Fairness Act might be. Part of that study ought to focus on whether, and if so, to what extent, there is any basis for the Fairness Act’s litany of “findings”. That way, members of Congress can make a reasoned assessment of the costs and benefits and proceed (or not proceed) accordingly.
So there you have it. We are indeed skeptical about the Fairness Act in general, not just about its consequences in cases involving only sophisticated commercial entities. We are particularly skeptical because we believe that the principal beneficiaries of the Act will be lawyers, not consumers — and not just so-called “trial lawyers,” but all lawyers handling cases that, as a result of the Fairness Act, will be heard in a judicial rather than an arbitral forum, will be the subject of Federal Arbitration Act satellite litigation, or both. Perhaps the Arbitration Fairness Act might more accurately be described as the “Lawyers’ Full Employment Act”. . . .
We shall keep our readers apprised of developments as and when they occur.
Tags: Arbitrability, Arbitration, Arbitration Fairness Act, Federal Arbitration Act, GAO, General Accounting Office, severability
