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INTRODUCTION:
Arbitration is not a new concept, even though brand-new legislation and public attention have brought new interest to the topic. Whether through employment agreements or consumer transactions, you have almost certainly been subject to an arbitration agreement.
Arbitration is a form of alternative dispute resolution where parties agree to have their dispute resolved by a neutral third party outside the courts, and the parties agree to be bound by that arbiter's decision. A paradigmatic example would be two businesses agreeing to an arbitration clause in a contract to avoid the added time and expense of a court proceeding should anything go wrong with their agreement. In this instance, the utility of arbitration seems clear—to save time and money between business-savvy parties. However, arbitration clauses are also used in employment disputes and consumer transactions, where the benefits of arbitration are much less certain.
The streamlined, and often confidential, arbitration process serves the interests of businesses because of the lack of procedural guardrails. Thus, this system inadvertently leaves consumers and employees needing more protection. Many of the checks and balances in the traditional legal system are notably absent from arbitration. Confidentiality of arbitration leaves consumers in the dark about wrongful business or labor practices. Arbitration threatens to eventually snuff out class actions since each consumer's claim could be severed by compelled arbitration. The courts only review an arbitration award under one of the narrowest review standards available. Further, arbitration does not set or use precedent; arbiters are not required to follow precedential law, which is the cornerstone of our common law legal system.
Arbitration is known as a “creature of contract.” At the core of arbitration is the understanding that agreements can be binding or nonbinding, depending on the terms of the contract. Binding arbitration requires both parties to accept the arbiter's decision as final. In contrast, nonbinding arbitration would allow parties to go through the regular court avenue if they disagree.
Binding arbitration has serious consequences, and although decisions are not court-enforceable without mutual agreement in nonbinding arbitration, the additional hurdles placed on claimants dissuade them from challenging decisions. Even though no judge presides, no jury is present, and no arguments are heard in front of a bench, an arbitrator's decision during binding arbitration is equally, if not more, binding than judicial opinions.
Arbitration is also not going away. By utilizing the Federal Arbitration Act ("FAA"), Congress has made it clear that there is a national policy favoring arbitration. This means that states cannot have differing standards regarding arbitration provisions—the FAA requires that arbitration be viewed on "equal footing" as other kinds of contracts. If parties agree to arbitration, they will go to arbitration. If a state unilaterally decides that compelling arbitration violates its public policy, any law or action against arbitration is likely preempted. This has a significant impact on the public interest sector.
ARBITRATION'S IMPACT ON PUBLIC INTEREST:
Since arbitration derives its power from a valid contract, whether or not to go to arbitration is a choice. However, with binding arbitration clauses popping up in nearly every contract, how much of a choice is there but to enter into arbitration? For example, Lyft’s terms of service contain an arbitration clause. Unhappy with that? You cannot go to Uber because it also has a binding arbitration agreement. Where arbitration agreements impact the public interest area of law is the need for a meaningful choice between arbitration and litigation.
Arbitration can have its benefits. Specifically, it can be more efficient, and the ability to select an arbitrator is likely a benefit for complex cases. For example, having an arbitrator with expertise in software engineering would be advantageous for both parties in a software dispute. However, the push to accept arbitration on equal footing as litigation threatens to ask disenfranchised individuals to lose the principle of judicial fairness for efficiency.
ARBITRATION ALLOWS FOR POWER IMBALANCES BETWEEN PARTIES TO REMAIN:
Arbitration is particularly problematic where the involved parties are a corporation and a consumer or employee. Arbitration raises new concerns about the power imbalances between the wealthy and those who are not. Specifically, arbitration does not set legal precedent, which means that an aggrieved party cannot point to past cases to show the extent and egregiousness of conduct, not to mention arbitration is likely confidential. Largely due to confidentiality limitations, the individual is only privileged to know about their own arbitration. So, for cases between a corporation and an aggrieved employee or consumer, the aggrieved party may likely only view their case in isolation. In contrast, the corporation may look at previous or concurrent arbitration proceedings it has undertaken and benefit from that breadth of knowledge. As such, the corporation has the ability to reflect on information from all past and present arbitration proceedings to its advantage.
ARBITRATORS RECEIVE THEIR CONTRACTS FROM THE PARTIES:
Unlike judges, arbitrators get paid by being contracted by the parties, which means there is an incentive to perform in the way that would most benefit a party likely to contract the arbitrator again. This is particularly problematic for public interest attorneys because arbitrators are not impeded from accepting future or contemporaneous contracts with the same entity. This is known as the "repeat player bias." While the judicial system is also not free from bias concerns, that does not negate concerns with arbitration's partiality.
This imbalance is particularly stark between a party member, who may be an individual or family, against a corporation that holds significant power in comparison. The likelihood of any person being involved in multiple arbitrations is extremely low, while a corporation's likelihood of engaging in multiple arbitrations is much higher. If a corporation is involved in multiple arbitrations simultaneously with different parties, nothing prohibits it from attempting to contract with the same arbitrator.
ARBITRATION CONCERNS ARE COMPOUNDED DUE TO ITS DIFFICULTY IN OVERTURNING AWARDS:
Overturning an arbitration award is very difficult. This is because the courts can only overturn arbitration awards in extremely narrow circumstances, and the more prominent arbitration forums do not even allow for an appeals process. Essentially, a party may be forced into arbitration and not even allowed to dispute an unfavorable reward. While this finality aspect is a favorable feature of arbitration, it still begs the question of whether arbitration allows our public policy values of efficiency to outweigh our values of fairness.
CONCLUSION:
In conclusion, while arbitration may have favorable aspects, this is likely only sometimes true in the public interest context, where many cases are between influential individuals and disenfranchised parties. As a consumer, consider opting out of arbitration if this is available. As an attorney, the best practice is to familiarize yourself with the arbitration process since it is here to stay.
*The views expressed in this article do not represent the views of Santa Clara University.