Tuesday, September 18, 2007

LeRoy on the Finality of Employment Arbitration

Leroy Michael LeRoy has just posted on SSRN his article (forthcoming Notre Dame L. Rev.) Misguided Fairness? Regulating Arbitration By Statute: Empirical Evidence of Declining Award Finality.  Here's an excerpt from the abstract of his important findings:

I collected data in 426 federal and state court rulings in employment disputes from June 1975 through April 2007. Federal district judges confirmed 92.7% of arbitrator awards, compared to 78.8% for state courts.  This statistically significant difference was also observed for appellate courts, where the confirmation rate in federal courts was 87.7%, contrasted to 71.4% for state courts.

The anomalous structure of the FAA explains why federal courts are more deferential than state courts.  The statute allows litigants to choose federal or state court to challenge an award.  In federal court, the standard of review is among the narrowest in the law . . . .  Fewer states now replicate the FAA, as a growing number adopt more intrusive standards.

The Revised Uniform Arbitration Act is exacerbating this situation. Passed in 2000, RUAA has been enacted by 12 states - and the number is likely to grow.  RUAA aims to curb recent abuses in arbitrations by legislating fairness into this process.  However, by strictly regulating arbitrator disclosures, and limiting arbitrator powers to order attorney's fees and other relief, RUAA creates new and more conditions that erode the finality of arbitration decisions . . . .

State expansion of reviewing standards poses three significant problems: (1) Foremost, this trend is fragmenting the national policy that favors arbitration by allowing a plurality of judicial review standards.  When Congress and the Supreme Court beat the drum to proclaim that the FAA provides a national arbitration policy, they are wrong.  (2) The results imply that RUAA will stimulate forum shopping.  Award winners should run to federal court to confirm their awards, while challengers should race to state court to improve their odds of vacatur.  In time, the judicial inconsistency that I document will undermine cost, efficiency, and time saving advantages of arbitration over court adjudications.  (3) A moral hazard is created when losers at arbitration are tempted to renege on their contractual promise to submit to binding arbitration in order to pursue do-over adjudication . . . .



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