A century ago, arbitration was a hot item. President Calvin Coolidge signed the Federal Arbitration Act on Feb. 12, 1925. It recognized private dispute resolution as a valid alternative to trials, and the arbitrator’s decisions in such disputes as binding, albeit subject to limited judicial review.
Two months later, The New York Times ran an article headlined, “Business Arbitration Spreads Over World.” It quoted Herbert Hoover, then a widely admired secretary of commerce and a backer of the legislation, as saying, “Next to war, the greatest source of economic waste in our national life is needless litigation.” In a June visit to the White House, the president of the Association of Cotton Textile Merchants said that thanks to the new law, “We believe American business will be freed in great measure from the strife and ill will which now arise because of disputes in the conduct of business.”
As we approach the centennial of the Federal Arbitration Act, though, the vibes around arbitration are considerably more jangly. When the practice makes news now, it’s often a customer complaining about being maneuvered into it. Consider:
A New Jersey couple who were badly injured when their Uber crashed were prevented from suing the company because, a court ruled last month, they had agreed to submit any claims to arbitration by consenting on the app to the company’s terms of service.
After a woman died from an allergic reaction after eating at a restaurant in a Walt Disney Parks and Resorts location, the company said her widower had waived his right to sue it when he signed up to try Disney+ years earlier. (Disney reversed itself in August after a public backlash and agreed to a trial.)
In 2018, it emerged that Stormy Daniels, the adult entertainer, had signed a sweeping agreement before Donald Trump was president that any disputes between them would be resolved by arbitration. That was in exchange for taking $130,000 to stay silent about her affair with him. She ended up going public anyway.
Can arbitration get its 1925 magic back? I think so. The solution is to return arbitration to the intended purpose when the law was enacted — mostly to resolve contract disputes between businesses — and stop trying to apply it to dealings where it doesn’t belong, including the bulk of claims by consumers and employees.
At its best, arbitration provides judgments that are fast, frugal and fair. Arbitrators are allowed to use more relaxed rules of evidence and to prevent foot-dragging by either side. Arbitrators are less likely to be swayed by a crafty appeal to emotion than a jury might be. Arbitration is good for cases that would be too expensive to pursue as individual actions and too idiosyncratic to pursue as class actions. Class actions have another problem: They frequently make a lot of money for lawyers, but very little for each person in the class they represent.
“Hands down, writ large, arbitration tends to provide faster recoveries, higher recoveries and a greater chance of recoveries for consumers and employees,” Matthew Webb, a senior vice president at the U.S. Chamber of Commerce’s Institute for Legal Reform, told me. (A recovery is the amount of money a claimant gets.)
Sometimes, though, people just want their day in court, as the country’s founders intended. And they don’t like to be told that they gave up that right when they hurriedly clicked through an online form — or gave their “implied consent” by making a purchase somewhere. Also, scholars aren’t all lined up behind the Chamber of Commerce’s argument that arbitration always produces better and faster returns. In employment cases, employees do worse in arbitration than in court, according to an article last year by Alexander J.S. Colvin of Cornell’s School of Industrial and Labor Relations and Mark Gough of Pennsylvania State.
Leo E. Strine Jr., a former chief justice of the Delaware Supreme Court, wrote in 2020 that the U.S. Supreme Court, in a series of decisions blessing the increased use of forced arbitration, “has allowed businesses to deny workers, consumers and human investors their day in court and has blocked states from exercising their sovereign right to decide how best to enforce their own laws.”
Strine is correct that courts, including the Supreme Court, are largely responsible for expanding arbitration into the nooks and crannies of society. In 1983, the Supreme Court ruled that “as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” A 2010 decision by the court further cemented the legal status of arbitration agreements. In 2018, the court upheld arbitration agreements that ban workers from joining forces to challenge employers over wages, overtime pay or civil rights. (Justice Ruth Bader Ginsburg called that decision “egregiously wrong.”) Last year, a Federal District Court largely granted the National Football League’s request that a racial discrimination case brought by a coach, Brian Flores, should be heard by the commissioner of the N.F.L. or someone he appoints rather than a judge.
The upshot is that the United States has become an arbitration outlier. “We stand alone. No other country uses arbitration as expansively as we do,” Imre Szalai, a professor of social justice at Loyola University New Orleans College of Law, told me.
Fortunately, there’s been some pushback. In 2019, the Centers for Medicare and Medicaid Services attempted to prohibit nursing homes from requiring people to sign binding arbitration agreements as a condition of admission or continued care, although its action was reversed by Congress. Also in 2019, the Supreme Court confirmed that independent contractors, not just employees, in the transportation industry are exempt from forced arbitration agreements. In 2022, President Biden signed a law ending forced arbitration in cases involving sexual assault or sexual harassment.
The Consumer Financial Protection Bureau has also fought abuses of arbitration. This month it banned Ejudicate, an online arbitration company, from arbitrating disputes about financial products. It said Ejudicate (since rebranded as Brief) had misled customers into believing it was a neutral party when it was working for a company that provided online vocational training.
Representative Hank Johnson, Democrat of Georgia, has been seeking passage of limitations on arbitration since he entered Congress in 2007. His bill — the Forced Arbitration Injustice Repeal Act (FAIR) — has passed the House twice but stalled in the Senate. It would eliminate mandatory arbitration clauses in employment, consumer and civil rights cases. He and Senator Richard Blumenthal, Democrat of Connecticut, reintroduced it in April with more than 80 co-sponsors in the House and 37 in the Senate.
Webb, the Chamber of Commerce expert on arbitration, said the FAIR Act is “a solution in search of a problem” that “would serve to undermine the availability of arbitration in pretty much the entire consumer space.” True, Webb said, parties would still be allowed to choose arbitration to work out a dispute, but in practice once there’s a dispute, “both sides are looking for advantage” and no one is in the mood to to agree to anything, including going into arbitration.
Though a supporter of arbitration, Webb has his own complaints, namely the new gambit of “mass arbitration” by lawyers who flood the system with claims that are expensive to respond to. “Even if the claims are meritless, or completely frivolous, the business is either pressured to settle, abandon arbitration altogether or pay that huge fee simply to have the chance to defend itself,” the institute wrote last year.
The centennial of the Federal Arbitration Act provides an opportunity for reform. The College of Commercial Arbitrators is organizing a conference next year at American University in Washington to discuss the past century of the act and what’s in store. I talked to one of the organizers, John Barkett, a lawyer who frequently serves as an arbitrator in complex cases. He said he sympathizes with people who feel they have been hoodwinked or coerced into giving up their right to a trial. But he also sympathizes with those who want to speed up justice and avoid nuisance lawsuits. So he’s torn.
I’m torn, too, but the public’s anger over the status quo tells you that something has gone very wrong. To me, the FAIR Act goes in the right direction in limiting the scope of arbitration. Szalai, the Loyola law professor, who is also an arbitrator, said he would love to see next year’s conference produce ideas that would return arbitration to its original — limited — purpose. “It started out with good intentions, but we’re at a point of saturation,” he said.
Elsewhere: Taking Advantage of Depositors
A new study finds strong evidence for the argument that some banks take advantage of unsophisticated customers by offering them low rates on their deposits. Banks sell certificates of deposit that are bad deals even compared with other C.D.s from the same banks of longer or shorter maturities, Matthias Fleckenstein of the University of Delaware’s Lerner College of Business and Economics and Francis Longstaff of the University of California, Los Angeles, Anderson Graduate School of Management, conclude in a working paper.
From 2001 to 2023, slightly over half of the C.D. portfolio offerings that the researchers analyzed included C.D.s that were “dominated” — that is, unambiguously worse than others in the portfolios — Fleckenstein and Longstaff found. They couldn’t prove that the inconsistent pricing was deliberate, but wrote that selling C.D.s that are bad deals may be the tip of the iceberg — “a broad reflection of a bank’s overall activity relative to its unsophisticated customers.” They added: “Having financially unsophisticated customers could be an important contributing factor to bank profitability.”
They based their analysis on publicly available data from S & P RateWatch and the government, but did not name any banks.
Quote of the Day
“The academic literature is clear that an independent central bank is important and, on average, leads to superior economic outcomes, though the effects are not awe-inspiring. And the Arthur Burns experience is a vivid example of what can go wrong when the White House coordinates with the Fed. So, suspicions of such coordination/partisanship should be taken seriously, and the next administration should choose a neutral Fed leadership.”
— Kevin Hassett, a chair of President Trump’s Council of Economic Advisers, in an interview with Goldman Sachs (Oct. 21)
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