Tuesday, September 25, 2012

Padis: Regulate Arbitration

NjustGeorge Padis (Texas 2012) has just posted on SSRN his Note (forthcoming Tex. L. Rev.) Arbitration Under Siege: Reforming Consumer and Employment Arbitration.  Here's the abstract:

In its recent terms, the U.S. Supreme Court has taken up the issue of arbitration - most notably in AT&T Mobility LLC v. Concepcion, Rent-A-Center West v. Jackson, and Stolt-Nielson S.A. v. AnimalFeeds International. All three decisions expanded the scope of federal arbitration in consumer and employment contexts in important and surprising ways. Scholars have been sharply critical of these decisions: For example, Concepcion prompted Dean Erwin Chemerinsky to remark in an op-ed in the L.A. Times that the decision is 'part of a disturbing trend of the five most conservative justices closing the courthouse doors to injured individuals . . . . [and] favoring the interests of businesses over consumers, employees and others suffering injuries.'

Meanwhile, cases like Jones v. Hallburton (portrayed in the HBO movie Hot Coffee) have cast a public spotlight on arbitration, and arbitration is under siege. Congress has enacted two measures to address this problem: The Consumer Financial Protection Bureau is empowered to address the issue of consumer arbitration and a defense appropriations rider in 2010 - portrayed in Hot Coffee - prohibits arbitration in employment contracts by defense contractors. A third proposal, the Arbitration Fairness Act, would ban arbitration in all consumer and employment contracts. This Article argues that the approach in the Supreme Court - broadly enforcing all arbitration agreements regardless of the specific nature of the dispute - is too broad and extends arbitration into areas where it presents serious problems, most notably the small-claim consumer class action context. But the congressional reforms banning arbitration in all consumer and employment contracts are also overly broad.This Article proposes a middle ground: Administrative regulations promulgated by the Consumer Financial Protection Bureau and the EEOC that provide dispute-specific guarantees for consumers and employees and safe harbors for companies.

Maybe.  But the EEOC has only procedural (not substantive) rulemaking authority under Title VII, and neither the CFPB nor the EEOC have rulemaking authority regarding the FAA.  Thus, this leaves the door open for the Court to say that the text of the FAA trumps the regs of the EEOC/CFPG; even if the text of the FAA really doesn't, cases like Stolt-Nielsen and Concepcion illustrate that the Supreme Court is all too willing to wilfully misread the plain language of the FAA in favor of the Court's policy preference for arbitration.  The solution, ultimately, is to get a new Court majority.



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The Note proposes new legislation to authorize the EEOC and CFPB to promulgate the necessary.

Posted by: George Padis | Sep 25, 2012 7:32:08 AM

I agree with the poster about the current court. I note that the author didn't mention the NLRB's D.R. Horton doctrine (Mr. Padis, if you're reading this and it's not too late for publication, I would recommend at least touching on it briefly). Sadly, though, I have no doubt that D.R. Horton is going to meet the same fate as Discover Bank did in Concepcion, though I'm quite convinced the Board's decision is correct as a matter of substantive law-- the SCOTUS will just make up some nonsense about "enforcing arbitration agreements as written", as they did in Concepcion to defy the plain language of the FAA's savings clause.

There are actually two problems going on with present-day arbitration. One is the class action waiver problem, which doesn't really have anything to do with arbitration at all. The only reason arbitration agreements and class action waivers have recently been found hanging out together is that under current SCOTUS doctrine, arbitration agreements have turned into super-contracts which are basically immune from attack on any ground, including the fact that parts of them flagrantly contravene public policy. And class action waivers are the "contracts flagrantly contravening public policy" du jour.

The second problem is the less pressing, but still significant, fact that arbitrators are structurally incentivized to favor "repeat player" companies that give them business. My preferred solution to this issue is not to burden the EEOC or other agencies with regulating arbitrators, and certainly not to throw arbitration out the window completely (I think the evidence is pretty good that, when not burdened by unfair rules or hidden conflicts of interest, arbitrators actually do a much better job of justice in employment-law cases than the federal courts do).

In my fiat world, I would create a new, independent regulatory agency tasked solely with regulating arbitration and would require all arbitrators to make documentation of recent parties, decisions, and outcomes publicly accessible. California already requires a lot of this, so there's a good model statute available, which can be tweaked as needed. The early returns suggest that sunshine is indeed an excellent disinfectant when it comes to putting unfair or one-sided arbitrators out of business.

As an added bonus, the same agency can be assigned the task of review of arbitral awards, a thankless job that I'm sure the federal courts would be happily quit of.

Posted by: Anon | Sep 25, 2012 9:17:56 PM

Thank you for your suggestion on NLRB's D.R. Horton. I address both the issues you raised in my paper: (1) class-action-waiver/unconscionability issue and (2) repeat-player issue (among others). In the context of the class-action context, I argue that contract law's unconscionability doctrine--central to the Court's holding in Concepcion--is about consent, a concern that is largely irrelevant in the class action context where the real issue is substantive deterrence. The paper proposes rules that require many of the reforms you suggest. For example, to increase substantive deterrence and to enable economies of scale in litigation, I propose websites for small-claim consumer actions that publish claims and win rates. That way a consumer could simply look on a website to see if they purchased an AT&T phone, for example, during the time period that is the subject of litigation. Then the consumer could fill out a form and get her $14.

On the issue of repeat players, I propose a repeat player for the consumer or employee: a consumer or employee advocate who advises the would-be plaintiff employee or consumer, most importantly, on the selection of the advocate.

On the issue of new independent agency, my concern was cost. I believe that amending the FAA or adopting new legislation that empowers the CFPB and EEOC to police arbitration procedures could address most of the issues without the expense of a brand new agency.

Thank you for your thoughtful comments and suggestions, and, as the paper will be published in January, I will have time to incorporate your recommendations.


Posted by: George Padis | Sep 27, 2012 9:12:13 AM

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