SELF-DEREGULATION, A �NATIONAL POLICY�OF THE SUPREME COURT
3 Nevada L. Rev. 259 (2002)
An Age for Tulip Bulb Salesmen
The last quarter century or so has been a period of extraordinary national hubris. That hubris was reflected in the widely shared and self-congratulatory belief that the death of Marxism proved that its adversary, our Capitalism, is the true path to public virtue and social welfare. Since about 1980, we have been insistently assured that we will all prosper most and enjoy life best if we will just allow the markets of the world to apply their magical unseen hands. Freedom of contract, the 19th century notion definitively deflated by Roscoe Pound in 1909, was revived and elevated to the level in many minds of one of the Four Freedoms for which World War II was fought.
An appropriate insignia for this recent period is the tulip bulb, an emblem redolent of the obsession of the Dutch people during a time in the 17th century when that country experienced its embarrassment of riches. The comparable obsession of our time was that with �dot-com� investments and the so-called new economy. That obsession provided the moral context for a bewildering array of scams perpetrated not by desperate members of the criminal class but by chief executive officers and directors of major business enterprises and by distinguished members of the accounting and legal professions animated by unalloyed greed. The lesson to be re-learned from recent experience is that effective law enforcement is needed to control the behavior of the sharks found in every marketplace. Economic power is, like any other form of power, subject to abuse, as most Americans well understood a century ago and have now sadly re-learned.
The policy assuring unfettered freedom of contract is, for that reason, one of the bigger tulip bulbs of our time, begetting a false faith in deregulation in all its forms. The poster boy of our Tulip Bulb Era is Kenneth Lay, the leader of Enron, an institution resembling a 17th century tulip bulb in its overvaluation. Mr. Lay and his associates were champions of the principle of deregulation except when regulation was to their own advantage. Just as tulips can be very ornamental, deregulation can be very beneficial to the public, but as a broad policy uncritically acclaimed, it is moral and political snake oil. In the wrong place, a tulip is a weed.
The American Tradition of Private Law Enforcement
Associated with our momentary blindness to the realities of marketplace predation has been a reaction against important features of our legal traditions including the profession bearing much of the burden of defending people from sharks. Standing at the head of that reaction and leading the assault on laws enacted to control business sharks has been our Supreme Court of the United States.
The Court�s assault on business regulation has often seemed to be unwitting, possibly the product of a shared ignorance of the realities of the human condition as experienced by ordinary mortals, and by a timely if misplaced confidence in the enduring virtues of the freedom of contract empowering business to shape the rights of lesser citizens. Justices have consistently explained their actions by assertions about the world that are at odds with manifest reality as experienced by lesser persons. Their program has been no less improvident because of their apparent innocence of motive. They have led the federal judiciary to foster lawlessness in the relationships between the corporate champions of free enterprise and the consumers, patients, debtors, employees, franchisees, and others over whom they exercise economic dominion.
Central to the Court�s improvidence has been its failure to notice the importance of private law enforcement in the American constitutional scheme. The willingness of the American people to tolerate the aggressive conduct of much American business and the relative weakness of their divided governmental powers has been fostered by their sense that the law is theirs and is available to deter and remedy the ubiquitous predatory instincts and conduct of business. Through most of the 20th century, to secure fair dealing in the marketplace, Americans fearing economic predators have relied not on the integrity and vigor of a bureaucracy, but primarily on the private bar and the civil jury, institutions that cannot be controlled by economic barons in the ways that governmental regulators sometimes can.
This American tradition of private law enforcement has roots in 18th century mistrust of government. It is an indirect result of the schemes of checks and balances designed to prevent any part of our federal, state or local governments from gaining too much political power over the people or, incidentally, over predatory business enterprises. Among those checks and balances, none has been more important than the right to jury trial in civil cases. The universal affirmation of that right in both state and federal constitutions assured separation of powers within the judicial branch, limiting the power of our judges both state and federal, virtually all of whom bring partisan political credentials to their work and who are therefore at least in appearance vulnerable to domination by those with great economic power. Eighteenth century Americans insisted on the civil jury as an institution less vulnerable to bribery or intimidation than any other institution of the governments they were creating. Trial by jury served then, and serves now, to establish democracy at the courthouse, assuring individual citizens that they have a convenient, independent, and apolitical forum to hear grievances they may have against economic predators.
In the 19th century, law enforcement by private lawyers and civil juries came to be recognized as an essential element of our legal system. That recognition led to the development of the American rule against fee-shifting, the allowance of contingent fees, and the award of bounties to lawyers and their clients who pursued predators with claims of rights created to constrain the excesses of power. Among federal statutes creating civil bounties were the voting rights law of 1870, the Interstate Commerce Act of 1887, and the Sherman Act of 1890. The first two employed a one-way fee shift, so that the bounty was paid directly to the plaintiff�s lawyer; the third introduced the concept of treble damages. The English tradition of exemplary damages available in all manner of trespass actions was also dusted off and given wider use.
Private law enforcement was further enhanced in the 20th century with the developments of discovery rules enabling counsel to investigate abuses of economic power and the class action rule facilitating the aggregation of small claims against predators and thus making the assertion of such claims economically viable. There was also enlarged use of the one-way fee shift as a bounty to successful hunters of business predators. By 1970, the private lawsuit was widely recognized in the United States as the most effective means of controlling the abuse of economic power. And American courts were recognized around the world as those most hospitable to individuals who have experienced harm and the most effective at protecting their interests by deterring economic predation, including the taking of risks with other peoples� safety and welfare.
This unique hospitality of our courts has served to compensate for defects in our legislative and executive branches deliberately weakened by the Founders with their scheme of checks and balances. It also compensates for a major flaw in our political process that has appeared in the last half century, i.e., expensive political campaigns requiring large contributions from persons and groups advancing special interests, including those of diverse business interests, and thus enhancing the political power of those with wealth and weakening the political power of those lacking it. While legislatures and politically responsive bureaucracies have been inhibited by the influence of special interests, the state and federal courts have in recent times stood as the political institutions most responsive to the concerns and interests of individual citizens who work for a living.
This political role of American courts has of course always been resisted by those who put their faith in the beauty of market economics, freedom of contract, and the profit motive as means to achieve the public good. Those views have often prevailed in our tulip bulb age and generated the epidemic of deregulation withdrawing the executive branches of federal and state governments from many programs of law designed to protect the public. Deregulation was accompanied by plentiful journalism reporting a much exaggerated law explosion and dramatizing allegedly extravagant awards and lawyers� fees acquired by means of private enforcement of law regulating business. For a time, such awards and fees were said to disable American business from competing effectively in the world markets.
In this time of national hubris, many of our leaders disparaged the instruments of private law enforcement. The Vice President of the United States was sent to denigrate the legal profession, especially those of its members who represent victims. Even workers were prone to glorify the benign aims of corporate managers. A measure of that glorification has been the astonishing levels of compensation conferred on corporate executives by their interlocking boards of directors. A few years ago, we observed the merger of Daimler Benz and Chrysler resulting in the consolidation of their management teams. A major problem faced was that Chrysler executives received compensation packages many multiples of those of their German colleagues despite the fact that the German factory workers received compensation substantially higher than that of their American co-employees. This reality of executive compensation reflected a tradition of mutual indulgence infecting American boardrooms, whose members are, like Justices, often removed from much contact with the more ordinary human condition by guarded subdivisions and skyboxes.
Congress had a hand in the development of this elevated managerial class. The system of tax incentives set forth in the Internal Revenue Code in the last quarter of the 20th century not only resulted in extravagant levels of compensation for top managers, but also encourages predatory and risk-taking behavior by the corporations over which they preside. This is a manifest effect of provisions providing capital gains treatment for income acquired from the exercise of stock options provided as part of a package of executive compensation, a system known as �stealth compensation.� The stock option prods management to secure short-term profits inflating the current market price of the securities they have rights to sell.  Managers are thus induced to leave to their successors any public relations or other secondary problems resulting from conduct imposing costs or harms on those over whom they can exercise economic power. It is likely also a factor in the short time perspective of American managers that so much publicly held stock in the hands of portfolio managers whose talents are measured by their success in predicting short-term results. Such managers can vote large blocs of shares and withhold support for executives who fail to produce short-term results.
For example, one might imagine a contemporary management of an automobile company responsible for making and selling ill designed sports utility vehicles having a tendency to roll over. Our tax law and our institutional investors urge the directors of such a firm to reward the responsible managers for postponing revelation of information regarding the dangerous defect at least long enough that those officers and directors responsible for the resulting harms can exercise their options and thereby obtain an early and comfortable retirement. They might be expected to direct their lawyers to settle claims generously but on condition of absolute secrecy to prevent word of the defect from getting around. Assessments of the risks that some people would be killed in preventable accidents might not outweigh the raging demand for short-term profits. Even The Economist, ever an advocate of extensive freedom of contract, has decried our system of executive compensation as an inducement to economic recklessness.
It is in the context of these developments that the actions of the Supreme Court ought be seen. In the apparent belief that unrestrained profit seeking brings out the best in corporate management, the Court established its �national policy� allowing economic predators and risk-takers to contract at least partially out of the system of effective private law enforcement and compensation for risk imposed on others, thereby exposing consumers, employees, small businesses, and other persons of limited economic bargaining power to a thousand wounds.
The Federal Arbitration Act of 1925
The instrument of the Court�s mischief has been the Federal Arbitration Act of 1925, a statute re-written by the Court a half-century after its enactment and applied not only to trump later-enacted federal laws but also to pre-empt effective enforcement of state laws enacted to protect citizens and small business from the predatory impulses of some business executives, features no elected body would ever enact.
The 1925 Act expressed the limited purpose of Congress to reverse a rule imposed by some federal courts, one declared under the authority of Swift v. Tyson to be a rule of federal common law, a form of jurisprudence eradicated by the Supreme Court 13 years after enactment of the Arbitration Act. Had Erie been decided fifteen years earlier, there would have been no Federal Arbitration Act and the present subject would have been left in the hands of the National Conference of Commissioners on Uniform State Laws, where in the constitutional scheme of things it would seem to belong. It was an oversight on the part of Congress that the statute was not repealed in 1940, for after Erie, it had lost its purpose.
The objectionable rule of federal common law that Congress sought to reverse was one holding that predispute agreements regarding the resolution of future disputes are revocable. That rule was the common law rule often observed by 19th century courts as a protection of improvident individuals from their tendency to underestimate the value and importance of clauses reducing their procedural rights in an unforeseen dispute over the performance of the contract. It recognized the limits to the foresight, interest, and energy most individuals bring to the planning of transactions and events with respect to the remote possibility that they might lead to disputes, limits that are not imposed on parties who are engaged in one of many similar transactions some of which are certain to end in controversy.
This common law rule was associated with the doctrine that arbitration is a method of dispute resolution entirely dependent on private contract made to settle an existing dispute. There were no rules or standards imposed on arbitrators and there could be no review of their awards unless the contract explicitly so provided. A different scheme was generally found in legal systems not rooted in English common law. In the Roman civil law tradition; predispute arbitration agreements are enforced, but legal restraints are imposed on arbitrators to assure their compliance with the governing code provisions. English law was amended in 1950 to convert arbitration into a legal process like that found on the continent. That has not happened in the United States.
As re-written by the Supreme Court a half century after its enactment, the 1925 Act now directs state as well as federal courts to enforce predispute arbitration clauses applicable not only to disputes arising out of the contract, but also to disputes arising out of the enforcement of legislation enacted to protect one party to a contract from the other. By this reconstruction of an old law, the Court has empowered those with economic power to use contracts to diminish the enforceability of laws enacted to inhibit their power by requiring citizens enforcing those laws to pursue their claims in private forums not accountable for their fidelity to law. The Court has simply failed or refused to notice that such private forums are not suited to the enforcement of public law.
The common law rule addressed by the 1925 Act had been partially obsolesced by the railroad. A manufacturer in New York and a wholesaler in Iowa had trouble making deals if each was at risk of being sued in the other�s state court. They needed to create a private forum more to be trusted than the courts of either, a problem soon to be encountered in international trade. Many commercial states therefore departed from the common law rule against enforcement of predispute agreements restricting access to legal forums and allowed merchants to make enforceable predispute agreements designating a forum to enforce the terms of the contracts of which they were a part. But some federal courts declined to adhere to local state law as so modified. Congress therefore sought to liberate business from what had become an impediment to interstate commerce. While thus allowing them to make predispute agreements to arbitrate that could be enforced in federal as well as state courts, Congress did nothing to assure that arbitrators would be bound by law, surely because no one then envisioned the possibility that a Court would require anyone to arbitrate claims other than those between merchants involving alleged breaches of contract. Its law was intended for the use of businessmen who were presumably able to evaluate and sometimes to negotiate contract provisions controlling the resolution of contract disputes in neutral private forums. If businessmen wanted to make elastic deals to be enforced by neutrals at some place equally remote to the parties, who were not bound by rules of court and were free to make compromise awards, that was not a concern to Congress.
Thus, in its first half century, the Federal Arbitration Act posed no serious problems for anyone. It was interpreted in a manner generally consistent with state law expressed in many states in a uniform law upholding predispute arbitration agreements in commercial contracts.
Meanwhile, however, the role of private law enforcement was steadily growing in its importance as a distinctive feature of our political system. While the New Deal was a moment of enthusiasm for the administrative process, by 1950 most American legislators had come to suspect (as had 18th and 19th century Americans) that administrative agencies at all levels of governments tend to become too closely allied with those whom they regulate to be as effective as they need to be. Congress remained cognizant of the possible uses of administrative law enforcement, but private enforcement became the pattern for much business regulation.
In the middle of the 20th century, it was consistently held in both federal and state courts that claims arising under state or federal laws enacted to protect weaker parties to contracts (to be distinguished from claims seeking to enforce contracts) are not subject to binding arbitration except when both parties agree to resolve an existing dispute by such private means. For example, among the federal statutory rights explicitly held to be immune to predispute binding arbitration were claims arising under the Fair Employment Practices Act, the Securities Act, and the antitrust laws.
Similarly, bills of lading and passenger tickets had long been subjected to statutory regulation. No one can be reasonably expected to read such instruments recording routine events in the conduct of commercial carriage; federal law has accordingly long forbidden the use of such instruments by carriers to disclaim or limit liability. Notwithstanding federal laws proscribing provisions that �lessen� the carriers liabilities, and long-honored decisions invalidating choice of forum and arbitration clauses in such contracts, the Court has in recent times reduced the ability of bailors to enforce their property rights by requiring them to arbitrate in compliance with clauses buried in the fine print of the instrument given them when they entrusted their goods or their persons to the carriers.
It seemed obvious to just about everyone as recently as 1975 that laws enacted in the public interest to confer rights on individuals or small business should not be defeated by contract provisions making such regulatory laws inapplicable to the contracting parties. If parties could agree not to be bound by the otherwise applicable antitrust laws or the minimum wage laws of the United States, many of the business practices constrained by those laws would be shielded from enforcement of those laws by the terms of contracts between the predator and the victim, who would be required to consent to victimization as a condition of doing any business or work at all. And if contracting parties could for that reason not be permitted to agree to nullify regulatory laws, it followed that neither could a business self-deregulate by imposing contract provisions stripping weaker parties of procedural rights needed to enforce their statutory rights. Predispute arbitration clauses having that effect were not explicitly forbidden in 20th century legislation only because no legislators, judges, or lawyers making or enforcing federal laws imagined the enforcement of such clauses. This general principle was acknowledged by the Supreme Court in 1953 with respect to the Securities Act. That decision was overruled in 1989 as the Court extended its �national policy� impeding private law enforcement.
The shared assumption that mandatory predispute arbitration is unsuited to the enforcement of statutory rights conferred on weak parties to contracts is also expressed in international law. Articles V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards promulgated in 1958 and ratified by the United States in 1970 relieves the courts of ratifying nations from any obligation to enforce arbitration awards that are contrary to the public policy of the nation in which enforcement is sought. Article II of the Convention requires enforcement of agreements to arbitrate only matters that are �capable of settlement by arbitration.� For example, many nations regard disputes between employers and employees as non-arbitrable and awards resulting in mandatory arbitration as non-enforceable on grounds of public policy. The Convention thus gives the force of international law to the restraint on freedom of contract that was a part of the federal law in 1970 when the treaty was ratified. Had the Convention superseded American laws limiting freedom of contract in that respect, there would have been substantial, indeed overwhelming, opposition to ratification without a reservation to protect the system of private enforcement of such regulatory laws as the antitrust or the minimum wage laws.
The Court, while giving sweeping application to the 1925 Act as an expression of a �national policy� favoring private dispute resolution (a policy first discovered in the statute in 1983), acknowledged that the Act does not apply �where Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.� However, the Court has not yet encountered a statute that appeared to it to evince such an intention. There were, indeed, several important laws enacted by Congress around the time of the ratification of the international treaty that would at the time of their enactment have been deemed (like the antitrust and securities laws) not capable of enforcement by arbitration. Let us consider how the federal courts have effected impairments of their enforceability by applying the Supreme Court�s �national policy� entrusting enforcement to private forums.
No one in 1970 could have supposed that a claim arising under the federal Automobile Dealers� Day in Court Act of 1956 was arbitrable pursuant to a predispute arbitration clause in a dealership contract. That 1956 statute reflected the widely shared perception that private enforcement of law is necessary in America if small business in the automobile industry is to be protected from predatory big business. It commissioned automobile dealers and their lawyers to cabin the economic power of manufacturers as private attorneys general. Dealers and lawyers enforcing that law are not merely private seekers of gain but are protectors of Congress�s national policy favoring protection for locally owned businesses.
The legislation was drafted in the chambers of Senator Joseph O�Mahoney of Wyoming. It was designed to strengthen in a general way the legal position of the automobile dealers in their relationship to manufacturers, especially the positions of dealers in small towns who sell relatively few cars and who accordingly have weak bargaining positions in their relations with the manufacturers from whom they buy their inventory. Manufacturers are tempted to favor larger dealers with better supplies of the best-selling models, and to dump on small dealers the inventory that is hardest to sell. The public interest served by regulatory law is the preservation of a measure of autonomy in local business, thus protecting our communities � especially smaller ones � from the deadening effect of making all their citizens the servants of enormous enterprises.
The substantive provisions of the 1956 Act thus shared the purpose of the federal antitrust laws to prevent brutal deployment of economic power. They were crafted with a jury trial in mind. Manufacturers were simply enjoined to deal with dealers �in good faith;� and afforded a defense if they could prove a lack of �good faith� on the part of the dealer. That elastic standard, like the law of negligence, was designed to invoke the moral judgment of the community served by the law. A litigant mistrustful of a politically appointed or elected judge was expected to demand trial by jury.
The standard of good faith was perhaps correctly interpreted narrowly to forbid only threats or unreasonable coercion by the manufacturer. The common form of coercion was to require small dealers to buy more cars or cars of different models than they are able to sell. Few �good faith� cases under the Act have actually been presented to a jury, and fewer still are the verdicts for dealers that have withstood post-trial motions or appeals. Yet, courts declined to apply any special standard for the review of verdicts rendered on claims brought under the Act and if there was evidence of coercion, good faith was an issue for the jury. 
Although the 1956 Act does not explicitly authorize injunctive relief, preliminary injunctions have been afforded to dealers who appeared to be victims of coercion or intimidation. The Supreme Court of Minnesota deciding a case brought under the federal law but in a state court, held that courts are empowered by the Act to enjoin a dealership termination that would not meet the standard of �good faith.�
The Automobile Dealers� Day in Court Act did not produce a flood of litigation. It did cause manufacturers to modify their business practices favorably to the interests of smaller dealers, and it did change the tone of the conversation when dealers were bargaining with manufacturers over diverse issues arising in the conduct of their shared enterprise.
Because the federal law was narrowly interpreted, there remained grievances by local automobile dealers who were overborne by national and international manufacturers. States enacted similar laws and by 1990 every state except Alaska had enacted a statute on the subject. The federal statute was explicit that no state law protective of dealers was preempted by it. Some state laws provided more explicit standards than �good faith.� Some created administrative agencies to hear disputes between manufacturers and dealers. All of this legislation, like the federal law, was intended to limit the manufacturers� freedom of contract. As federal experience foretold, in no state was there a �flood� of cases under state laws. The primary effect of the state legislation, like that of the federal, was to alter bargaining positions of the parties and reduce the vulnerability of franchisees to arbitrary use of the economic power of manufacturers.
Only one case involving the federal automobile dealers� statute has reached the Supreme Court of the United States, and no issue regarding it was decided by the Court. So far as one can tell, the Justices have never given serious thought to the problem of the relationship between local dealers and manufacturers or to that of effective enforcement of laws enacted to regulate that relationship. The one case they reviewed involved a dispute between a Mitsubishi dealer in San Juan, Puerto Rico and the Japanese manufacturer. Mitsubishi initiated arbitration pursuant to the dealership agreement, which provided for arbitration in Japan of all disputes arising between the parties, and it brought an action in the federal court in Puerto Rico to compel Soler to arbitrate half a world away from its business. Soler counterclaimed for defamation and violations of the Sherman Act, the Federal Automobile Dealer�s Day in Court Act, the Puerto Rico competition act, and the Puerto Rico Dealers� Contracts Act. In its defense, Soler alleged that Mitsubishi had forced it to buy more cars than it could sell. The franchise agreement provided for arbitration in Japan. The District Court stayed its proceeding pending arbitration of the dealer�s claims. The Supreme Court held that the dealer would indeed have to arbitrate his antitrust counterclaim against the Japanese manufacturer in Japan, thus overruling earlier decisions holding that antitrust claims are not subject to predispute arbitration clauses. It offered the Puerto Rican dealer the reassurance that the arbitrators in Japan would faithfully enforce the Sherman Act, calculating that the task for the Japanese arbitrators was not different from that performed by federal courts discerning foreign law in the manner provided by Federal Rule 44.1. Perhaps a transcript would be made, the Court assured itself, an opinion would be prepared by the three Japanese arbitrators, and their award would be reviewed by the federal court in Puerto Rico for errors of law. If such review of an award were indeed to be provided, this would be an extraordinary revision of traditional arbitration law in the United States. That possibility will be considered below.
Not presented to the Court was the question whether the dealer�s claim under the Automobile Dealer�s Day in Court Act should be decided in the first instance by an arbitrator in Japan. The Court justified its decision with respect to the antitrust laws by dismissing the public purpose of the law, denying the role of the San Juan dealer as a private attorney general, and declaring the purpose of the antitrust laws to be merely the compensation of private victims that it is their right to waive. That declaration entailed a judicial rewriting of the antitrust laws having the specific effect of repealing the treble damage provision, because of the general unavailability of that remedy in any forum in Japan. If an automobile dealer can surrender to the manufacturer in advance of needing them its rights under the antitrust laws, it would seem to follow that it can also surrender its rights under the 1956 Act. Lower federal courts have since so held, despite the manifest distortion of the term �day in court� to mean a �day in arbitration� and the equally manifest impropriety of moving the jury issue of �good faith� into a private forum. If such decisions are upheld, the 1958 statute will have been trumped or superseded by a 1925 statute. The Court has not explained the jurisprudence reflected in this intellectual gymnastic.
Meanwhile, the National Automobile Dealers Association is not taking the matter lightly. Mandatory arbitration deprives them of the fruits of many years of struggle in the corridors of Congress and our state legislatures. The Judiciary Committee of the United States Senate has unanimously reported a bill denoted as the Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001. The meat of that proposal is the addition of Section 17 to the Federal Arbitration Act of 1925 to exempt controversies arising out of motor vehicle franchises unless both parties consent in writing to use arbitration to settle an existing controversy.
The Petroleum Marketing Practices Act of 1978
In 1978, a similar federal law was enacted to protect owners and operators of filling stations. The Petroleum Marketing Practices Act was enacted to protect local businesses smaller than automobile dealers. It recognized their �continuing vulnerability . . . to the demands and actions of the franchisors,� i.e., major oil companies who were their suppliers. This law was enacted in response to predatory behavior by the oil companies during the petroleum shortage caused by the OPEC conspiracy of the late 1970s. Like the law protecting automobile dealers, that Act plainly envisioned private enforcement in law courts. The term �good faith� reappears as the standard of conduct to which the local businessman may be held by a franchisor canceling or refusing to renew a franchise. And the statute explicitly authorized equitable relief against wrongful termination of a franchise, a form of remediation to which arbitral tribunals are not well suited. Some lawsuits resulted from its enactment, but no flood. The statute succeeded in modifying the power relationships between filling station operators and major oil companies.
The Supreme Court has never heard argument on a case brought under this Act. And no court has yet been reported to hold that claims arising under it are arbitrable pursuant to a predispute agreement. At least one major oil company, ARCO, did write an arbitration clause into its franchise agreements. The Ninth Circuit held that clause invalid because it was not merely an arbitration clause; the features dooming its enforcement were that it explicitly reversed the statute�s provision for fee shifting, foreclosed the statutory provision for exemplary damages, and foreshortened the time for asserting a claim. Whether in light of the Supreme Court�s re-writing of the 1925 Act the courts should enforce a less overbearing arbitration clause in a petroleum dealer�s franchise agreement remains to be decided.
Unlike most federal commercial law including the Dealers Day in Court Act, the petroleum marketing law explicitly preempted otherwise applicable state franchise laws limiting the right of the oil companies to terminate a franchise. This had the effect of making the federal courts the forum of choice for the entertainment of dealers� claims. The preemption provision was, however, in keeping with long-established practice, read narrowly to retain in force other state laws protecting franchisees. The framework of state contract and tort law remained in place. In 1994, the petroleum marketing act was amended explicitly to preempt state laws requiring an oil company to pay for the goodwill of a terminated dealership. The policy of Congress in enacting the law in 1978 was to add strength to the position of the vulnerable franchisees. It would be contrary to the purpose of that legislation for the courts to weaken the position of franchisees by enforcing dispute resolution clauses impeding the access of the franchisees to the judicial forum provided by that Act in lieu of then existing remedies available to franchisees under state law. When Congress perceives a need to confer protection on the oil companies from greedy filling station owners, it knows how to do that, as it did in 1994.
In 1968, Congress addressed the need to protect borrowers from deceitful and overbearing terms written into loan agreements made by interstate lenders. The Truth in Lending Act respected the freedom of the creditor and debtor to contract, but sought to enable borrowers to understand the terms of loans so that comparison-shopping might be possible and so borrowers might know when they were victims of usurious charges.
A problem faced by Congress was devising a suitable remedy for violations of the Act. Individuals victimized by violations of the law would have difficulty in proving damages because they would have to show in what respects they might have fared better if they had been more fully informed. The solution reached was to provide penalties limited in amount to $1,000 to be paid to a successful plaintiff, plus attorneys� fees.
It was recognized at the outset that the primary method of enforcement of the Act would be through the class action device created by the Supreme Court in the 1966 amendment to Rule 23. Lobbyists for organizations of lenders were horrified by their prospects. Their fears were overborne by the advocacy of the Federal Reserve Board who reported that the class action would be indispensable to enforcement, affirming that its �threat elevates a possible Truth in Lending lawsuit from the ineffective �nuisance� category to the type of suit which has enough sting in it to assure that management will strive with diligence to achieve compliance.� This point was reiterated by the Act�s sponsors. To reassure lenders that they would not be exposed to massive penalties for trivial offenses, a cap of $100,000 was imposed, to be raised in 1974 to $500,000. 
While the Federal Reserve Board and the Federal Trade Commission were assigned roles in the administration of the Act, enforcement was left largely to private class action lawyers. The scheme, including class action enforcement, was extended in a 1976 law to lease transactions. As recently as the late 1990s, there were about a dozen reported class actions cases a year brought to enforce these laws. This was hardly a bursting of the floodgate, but it was a sufficient level of regulatory activity to keep lenders at least somewhat on their toes in providing the necessary information to borrowers and to keep the law�s requirements in the public eye.
In recent years, some lenders and lessors have succeeded in substantially deregulating themselves by barring suits to enforce the law. The trick is, of course, the predispute arbitration clause that binds each debtor to pursue his claim individually in a private arbitral forum created for him or her. This is a complete bar to most valid claims because a $1,000 claim is to almost everyone not worth asserting in arbitration any more than in court even though the attorney�s fee will be charged to the defendant if the claim succeeds.
The practice of using arbitration to defeat Truth in Lending law has been contested. But the court of appeals panel entertaining the issue found that Congress has never explicitly prohibited individual arbitrations as a means of enforcement, and therefore the �national policy favoring arbitration� made predispute clauses enforceable notwithstanding their devastating effect on the legislative scheme. The court followed the example of the Supreme Court in disregarding the role of the class action plaintiff and counsel as a private attorney general performing a public service in bringing to account those who violate the Act. A better solution was available of allowing a class action to go forward before an arbitral tribunal.
In 1975, Congress enacted the Magnuson-Moss Act applicable to contracts for the sale of �consumer goods� and declared a national policy encouraging �warrantors to establish procedures whereby consumer disputes are fairly and expeditiously settled through informal dispute settlement mechanisms.� The Act does not apply to sellers of services except services for the repair or maintenance of goods sold. It provides a federal judicial remedy for breaches of express warranties, but authorizes sellers of consumer goods to contract for private resolution of warranty disputes through non-binding arbitration if the private forum offered to the consumer meets standards imposed by the Federal Trade Commission. When such an informal forum is provided, consumers can invoke federal jurisdiction to enforce a warranty only after they have presented their grievance to such a non-binding forum. This would be a rare outcome, but the possibility left the consumer with some modicum of power in his or her relationship with the seller. The Act also expressly proscribes �deceptive warranties" defined in part as those failing �to contain information which is necessary in light of all of the circumstances, to make the warranty not misleading to a reasonable individual exercising due care� or those whose terms limit their �scope and application as to deceive a reasonable individual.�
Any dispute resolution clause in a contract for the sale of consumer goods in interstate commerce that reduced the access of consumers to law courts to enforce express warranties would seem to violate the Act, the sole exception being a clause authorizing non-binding arbitration conducted in an ADR program approved by the Federal Trade Commission. Moreover, a clause lessening the ability of the consumer to enforce a warranty could be properly seen as �deceptive� and thus a substantive violation of the Act. Indeed, what could be more deceptive than a written warranty tucked inside a package that requires a consumer to assert any claim for its breach in a prohibitively distant or expensive forum?
Congress was explicit in the Magnuson-Moss Act that it did not intend in any way to pre-empt state law remedies for breach of implied warranties of merchantability imposed by the Uniform Commercial Code. Such remedies might be pursued in state court, or federal court if an independent basis for federal jurisdiction were available. Of course, the 1975 Act did not override the Federal Arbitration Act because in 1975 the 1925 Act was not thought to be applicable to consumer transactions. It is now being contended, however, that the 1925 Act as rewritten by the Supreme Court after its enactment overrides the Magnuson-Moss Act by allowing the seller of consumer goods to impose on the unwary consumer mandatory binding arbitration in a forum not approved by the Federal Trade Commission. That interpretation of the legislation is at odds with utterances of the Federal Trade Commission designated by Congress as the overseer of compliance with the Act. It is contended, however, that the FTC�s policy is not an expression of the necessary Congressional intent to preclude arbitration, that only Congress itself can articulate an exception to the �national policy� of the Supreme Court.
It is true that the Act in its provisions encouraging non-binding arbitration manifested a hope of Congress that civil juries would not be needed to enforce warranties. But, while the Magnuson-Moss Act encourages more amiable alternatives, it, like the Truth in Lending Act, explicitly anticipates the use of the class action as a last resort to correct the behavior of predatory sellers of consumer goods who make their sales with the help of deceptive warranties or whose transgressions are too minor to warrant individual lawsuits. A party bound by an arbitration clause in an adhesion contract is thereby (the lender hopes) excluded from participation in a class action. A business that includes such a clause (if valid) in all its consumer contracts may thus elude the risk of class action enforcement of Magnuson-Moss at the same time that it defeats enforcement of Truth in Lending.
In addition, the Magnuson-Moss Act provides a one-way fee shift as a bounty to the successful plaintiff�s lawyer to encourage private law enforcement. Such an entitlement may be enforced by an arbitrator, but on the other hand it may not. Indeed, an arbitrator is free to forsake the American rule and tax fees against an unsuccessful plaintiff, thereby discouraging private law enforcement fostered by the Act.
Predispute arbitration clauses in consumer transactions should be especially suspect. It is fanciful to speak of such instruments as contractual for they are anything but an expression of mutual assent. Like bills of lading or insurance policies, they are inherently unreadable to most citizens, even those who are not illiterate, or disabled, or for whom English is a foreign language. Moreover, few consumers are contemplating a future dispute at the time they are making a purchase. Like other provisions in contracts of adhesion, they should be carefully scrutinized for fairness by any court asked to enforce them. However, unless lower federal courts are in error in their reading of the Supreme Court�s �national policy,� a vendor of consumer goods can substantially gut the Magnuson-Moss Act by writing an expedient predispute arbitration clause into his written bill of sale form. And it seems likely that many are now doing so.
RICO was yet another law enacted to encourage private attorneys general to punish predatory business practices. The statute is chiefly a criminal law, but one provision authorizes law enforcement in civil actions brought by private counsel and subject to the Seventh Amendment right to trial by jury. To win a RICO civil case, the plaintiff has to prove the elements of the criminal case, but does not have to overcome the presumption of innocence faced by a public prosecutor seeking a verdict of conviction. The case to be proved, whether in a civil or in a criminal proceeding, is that a defendant has engaged in a pattern of activities of the sort enumerated in the Act; these include diverse forms of fraud, bribery, and extortion. The role of the plaintiff as a private attorney general is confirmed by statutory provisions for treble damages and one-way fee-shifting.
Despite these features of the law, the Court held in 1987 that civil RICO claims are not to be distinguished from antitrust claims with respect to their arbitrability under the 1925 Act. Again, it seems clear that no one voting for the Act in 1970 could have anticipated the possibility that the Court would impose its �national policy� extending the Federal Arbitration Act into almost every corner of the legal landscape. In 1970, it was quite clear that the 1925 Act did not apply to claims under the Act.
The extent of the impairment of RICO enforcement is a matter for speculation. One Court of Appeals has held that an arbitrator may (but of course need not) award treble damages under the Act. Nevertheless, it seems clear that the Congressional purpose in imposing civil liability on offenders was made less likely of attainment by the imposition of the Court�s arbitration policy. Businessmen who fear the risk of liability for fraud, bribery, or intimidation can gain some comfort by imposing predispute arbitration clauses on those with whom they deal, with the arbitration to be conducted without civil discovery or the American rule on fee-shifting by a tribunal bearing no resemblance to a jury.
Thus far, we have considered only the Court�s �national policy� of weak enforcement of federal laws regulating business. Its weakening of state law regulating business has been, if possible, more complete. A majority of the members of the present Court have acknowledged at one time or another that this was a serious mistake.
The critical decision came in 1984 in Southland Corp. v. Keating. The Court there interpreted the Federal Arbitration Act to preempt a provision in the California Franchise Investment Act voiding mandatory arbitration clauses in franchise agreements made between local enterprises and national or international ones. As dissenting Justices O�Connor and Rehnquist observed at the time, this interpretation was contrary to any purpose ever expressed by Congress. Congress had acted in 1925 to shield state law governing commercial transactions from an intrusive federal judiciary. The Court in 1984, instead of enforcing the national law protecting the legislative jurisdiction of the states, created its �national policy favoring arbitration� and applied it to frustrate efforts of states to employ their courts to enforce regulations of business, whether in its relations to consumers, employees, or any other individuals who might be victimized by the exercise of superior economic power. As dissenting Justice Stevens observed at the time, the decision in Southland was contrary to the long-established principles of preemption dictating that preemption �in a field traditionally occupied by state law� occurs only when Congress clearly expresses that intent, and then no more than absolutely necessary to effect the Congressional purpose. Those principles are exemplified in the treatment of the federal regulatory laws discussed above, as each was assigned minimal or no preemptive effect except insofar as Congress clearly expressed an intent to preempt. Congress has never expressed any purpose of pre-empting state laws that limit freedom of contract or authorize private enforcement of legislative policy save perhaps in the field of health care insurance.
It is true that the law of most states favors arbitration as an informal method of resolving contract disputes. The Uniform Arbitration Act expressing that policy has been fairly widely enacted. Revisions have been recently proposed and are under consideration in many states.
Nevertheless, all states also regulate contracts. For example, the terms of insurance policies written and sold by insurers are regulated in every state. It is the premise of insurance regulation that citizens cannot be expected to read and understand the intricate terms of the policies they buy. No state would allow an insurance company to write a clause into an insurance policy authorizing an arbitrator not bound by law to act as the authoritative interpreter of the instrument. Insurance policies are perhaps more difficult to read than most printed contracts, but they are on the other hand more likely to be read and considered than documents intended to govern transactions with consumers, or employment manuals that the employee knows to be non-negotiable. Congress has disavowed any intent to preempt state insurance laws with such clarity that even the Supreme Court would presumably agree that insurance policies are not subject to the Federal Arbitration Act.
But conventional American contract law expressed in the American Law Institute�s Restatement of Contracts and in the Uniform Commercial Code adopted in every state cautions against the enforcement of overbearing terms in other printed �adhesion� contracts. One of the first cases refusing to enforce dictated terms in such a �contract� was decided as a matter controlled by federal common law by the Supreme Court of the United States in 1889, in the days of its strongest commitment to freedom of contract. The contract law of no state allows parties to contract out of its regulatory laws, or to write unconscionable terms into printed forms recording routine transactions. It is perhaps the law in all states that it is unconscionable for a party who is a �repeat player� to write into a standard form contract a dispute resolution clause having the effect of stripping the �single-shot player� of procedural rights useful in private enforcement of laws enacted to deter predatory behavior by businesses. �Single-shot players� might be consumers, employees, patients, franchisees, and others who are not in a position to evaluate and resist onerous provisions disabling them from performing the role of private attorney general.
So far as I am able to detect, no legislature, state or federal, has ever knowingly authorized parties to write predispute arbitration agreements into contracts of adhesion. Nor has any state supreme court repudiated the long-standing and widely shared practice of disregarding business self-deregulation through contracts with vulnerable parties. But, to the contrary, many states have enacted many diverse laws to protect consumers, employees, and small businesses. Most such laws are privately enforceable in state courts with civil juries.
Thus, the specific California law invalidated in 1984 was not unusual; many states have legislation enacted to protect franchisees other than automobile dealers from predatory contract provisions. Because franchise agreements are commercial transactions resembling the contracts for the sale of goods in interstate commerce that Congress had in mind in 1925, the Court could have limited the 1984 decision preempting state law invalidating predispute arbitration clauses to contracts between business men who are presumably advised by counsel and who might possibly be expected to walk away from a deal infected with a dispute resolution clause stripping them of substantive rights not derived from the contract, or to exact a price for such a clause in other terms of the agreement.
No such distinction was made. In 1995, the Supreme Court extended its application of the Federal Act to preempt Alabama law protecting consumers of services from mandatory arbitration clauses in standard form contracts. The consumer in that case had ill advisedly signed a printed contract for the removal of termites from his home without deleting a provision requiring him to present any claim for breach of warranty to an arbitrator to be appointed by the American Arbitration Association. Twenty state attorneys general filed an amicus brief calling the Court�s attention to the consequences of the 1984 interpretation of the 1925 Act. They made the point that much law in most if not all states that regulates business practices is privately enforced by individual attorneys general and that arbitration clauses often serve to deter and even prevent such enforcement. Justice Breyer writing for the Court reassured the states� attorneys general that their governments were not preempted from regulating standard form contracts so long as the regulation did not discriminate against arbitration clauses. He underscored the language of Section 2 of the 1925 Act providing that an arbitration clause may be held invalid �upon such grounds as exist at law or in equity for the revocation of any contract.� These grounds would seem clearly to include unconscionability.
Justice O�Connor, concurring in the termite case, justified her vote on the ground that she felt bound by the doctrine of precedent to adhere to the Court�s 1984 interpretation, wrong though she continued to think that it had been. Perhaps she was also explaining the votes of Justices Rehnquist and Stevens, who had also dissented in the earlier case. Justice Thomas was not persuaded by her appeal to precedent and dissented on the grounds stated in her 1984 dissent. Justice Scalia also dissented, acknowledging that his support of the 1984 decision had been so erroneous that the Court had a duty to reverse it whenever five votes could be assembled for that purpose.
Thus, there are five members of the present Supreme Court who have stated in judicial opinions that the 1984 decision was erroneous and in need of correction by Congress, a body seldom attentive to such matters and incapable of organizing itself to achieve such corrections. The other four members of the Court have reassured us that the power lies in state legislatures to regulate standard form contracts so long as they do not discriminate against arbitration clauses. And all have insisted that arbitration is just another way of enforcing one�s rights. Not a single Justice of the present Court has openly avowed the belief that federal arbitration law should impede or prevent enforcement of state laws regulating business practices and limiting freedom of contract as applied to consumers or employees. The New Mexico legislature has responded to Justice Breyer�s invitation by legislating against unconscionable clauses that strip individuals of procedural rights they need to enforce their substantive rights against those who use standard form contracts, and perhaps others will soon follow. We ought to hope so.
However, the lower federal courts have meanwhile been prone to deploy the Court�s �national policy� to effect change not only in state law providing for judicial enforcement of business regulation legislation, but also in the state law of consumer and employment contracts. In order to resolve all doubts in favor of arbitration, some federal courts have also resolved all doubts in favor of contract even where the existence of any mutual assent is more than dubious, and despite a recent caution from the Supreme Court that the enforcement of an arbitration clause must be based on a contract assented to by a party being compelled to arbitrate. This indifference of lower courts to the reality of contract has been most evident in the enforcement of arbitration clauses in package inserts and the like. The provisions of Section 2 of the Act emphasized by Justice Breyer in his reassurance to the state attorneys general have been disregarded by several courts of appeals.
As noted, the Supreme Court has concealed, perhaps from itself, the consequences of its misdeeds by repeatedly asserting that arbitration is just another way to enforcing one�s legal rights. The Court would have us believe that those who impose predispute arbitration clauses on consumers and employees are merely serving the public interest in saving legal costs. Frequent repetition by the highest authority does not make the words true. The Court notwithstanding, commercial arbitration as it has developed in the United States is not a legal process and differs in vital ways from the adjudication of rights by courts. There are at least five fundamental differences.
First, there are concerns regarding the identity of arbitrators. Even if the issue is only one of contract interpretation, �Who interprets . . . will frequently be more significant than what the applicable law says about the agreement.� The arbitrators appointed pursuant to form contracts are generally screened by an arbitration organization accustomed to serving business interests. The arbitrators employed by such institutions are almost all formerly connected to business enterprise, or they are former judges whose judicial work was approved by businessmen. Prospective jurors with the same connections would be excused from sitting on many of the cases that the arbitrators decide. It is not unlikely that such decision makers will, at least unconsciously, tend to favor �repeat players� who may select them to decide future disputes against �single shot players� such as consumers or employees who are not likely ever to need their services again. Also, arbitrators are commissioned by contract and are therefore likely to be more diligent and effective in enforcing contract obligations than in enforcing statutes that intrude on the freedom of contract. While good arbitrators certainly try to overcome these sources of bias, and may often even succeed in doing so, there is no way that they can overcome the appearance of bias that is certain to diminish the optimism of individual claimants engaged in a dispute with a business firm. In this respect, appearance is more important than reality because it is the appearance that controls the settlement value of claims, and most claims are settled. Very few if any claims by consumers or employees have as much settlement value if they must be arbitrated.
More fundamentally objectionable than the appearance of conflicts of interest of arbitrators is that they are not jurors selected to represent the community at large. As noted above, numerous laws have been enacted by Congress to regulate business that were clearly drafted with the expectation that they would be enforced by civil juries. And many states have long regarded predispute waivers of the right to trial by jury as voidable in order to protect the rights of weaker parties to contracts. All such law has been set aside by the Court�s preemption decisions.
With respect to private rights created by Congress, it appears to be settled that enforcement may be assigned to administrative agencies that are politically accountable. Given that the purpose of the Seventh Amendment is to limit the power of life-tenured Article III judges, the assignment of responsibility for enforcement of federal laws to private arbitrators would also seem to be a choice permitted to Congress by the Seventh Amendment. But it is clear that Congress did not exercise that choice with respect to any of the laws discussed above. Even less defensible is the Court�s indifference to provisions of state constitutions empowering citizen-jurors to enforce state laws regulating the conduct of businessmen in their communities. The Court�s disregard for the civil jury in federal courts was first manifested in 1973 when it approved the action of district courts halving the jury in size, thereby assuring that there would be more exceptional juries and more exceptional verdicts of the sort to which critics of private law enforcement can point. No such �reform� of the jury would have been enacted by Congress, nor have states followed the federal practice in that regard.
Second, arbitrators need not be lawyers and are not required to know or enforce law. Where jury verdicts are subject to review to assure their fidelity to law, arbitral awards are not. As noted about, arbitrators in the United States are free to do equity or justice as they see it, and may render Solomonic awards giving a little something to each party to a dispute. They need not explain the reasons for an award and their decisions are rarely if ever subject to review on the substantive merits. While this feature of traditional arbitration practice is subject to modification by contract, it would be surprising indeed to find it modified in an arbitration clause in a printed contract presented to a consumer or employee.
Third, arbitrators in the United States have no enforceable duty to inquire into the facts. While they have a subpoena power, they need not use it and parties presenting their cases to an arbitrator have no right to compel the testimony of witnesses or the production of documents unless the arbitrator chooses to require it. In this important respect, American arbitrators are like many European judges who need not hear a witness unless they feel a need to.
The lack of access to adversary discovery of evidence (such as state and federal courts allow) can, for example, prevent an automobile dealer or filling station owner from investigating possible violations of the antitrust laws of the United States or other state or federal laws enacted to protect local dealers or franchisees that make predatory intent an element of a plaintiff�s claim. There is no requirement that a record be kept of the evidence considered by an arbitrator. Thus, the memorable case in which a local business through discovery found the smoking gun, a letter from one officer to the defendant giving the command �squish him like a bug,� would be unlikely to be replicated in arbitration.
Fourth, arbitrators in the United States cannot administer the full array of legal remedies available in court. They are not generally able to provide preliminary injunctions for those in need of that form of relief. While they can utter commands to a party, they have no contempt power enabling them to enforce any command regarding the future behavior of a party and can only hope for judicial support to compel compliance. After they render an award, arbitrators generally have no jurisdiction over future disputes such as a failure to comply with a command of the arbitral tribunal. They are sometimes legally disabled from awarding exemplary damages or imposing penalties or bounties conferred by statute. They cannot administer class actions requiring decisions regarding the rights of parties who have in no way consented to their jurisdiction.
Fifth, arbitration is not an open public process. It is clear that this is one of its attractions to predatory or risk-taking business because it diminishes the likelihood that the success of one claim by a consumer or employee will encourage others like it. Secrecy can also be achieved by settlement, but the settling claimant is always compensated for his or her forbearance. It may reasonably be questioned whether documents and other material uncovered by a private attorney general or personal injury plaintiff should ever be withheld from public view. A public enforcement proceeding serves to alert the general public to the need for regulation and enables them to measure the usefulness of their legal institutions. Secret proceedings or suppressed discovery material conceal from the public not only the risk of the harm at issue, but also an awareness that they are being served by the law enforcement efforts of their fellow citizens. Meanwhile, the business defendant resolving disputes secretly knows all about any successful claims and can guide itself accordingly while his or her adversary negotiates in ignorance.
In many of these respects, American arbitration law is to be distinguished from the law and practice of international commercial arbitration. Traditionally, the arbitrators in international commercial practice involving businessmen on both sides are appointed by a group having no connection to either party, thus neutralizing the influence of the repeat player. Often, there are three arbitrators, a custom rare in American commercial practice because it materially elevates the cost. Indeed, international commercial arbitration is often much more expensive than litigation in the courts of any country. Arbitration conducted under conventional international standards is usually preferred by those engaged in international commerce only because it is perceived to be a means of securing a neutral forum. In addition, it is customary in international practice for the award to include a finding of facts and a statement of reasons linking the decision to the controlling law. In some systems, such as that of the International Chamber of Commerce, there is even a possibility of appellate review of sorts. In any event, it is almost universally agreed in international practice that the arbitration panel is to enforce the law, not weigh the equities. The most commonly used rules of international commercial arbitration explicitly forbid arbitrators to decide �ex aequo et bono� as amiable compositeurs of business relationships, unless the parties ask for such cheerful conciliation service.
Mandatory arbitration pursuant to a predispute agreement should also be contrasted with consensual arbitration undertaken on an agreement between parties having knowledge of what is at stake in an existing dispute. Arbitration under those circumstances can save real costs. The agreement of parties to submit an existing dispute to arbitration reflects a level of mutual trust facilitating the voluntary exchange of information and evidence. They are also in a position to insist that the arbitrator be a person unlikely to be influenced by the relative frequency with which the parties might become future employers of the arbitrator. And they are not unlikely to welcome the possibility that the arbitrator will try to render a conciliatory award in lieu of straightforward enforcement of controlling law.
The D. C. Circuit in an opinion by Judge Harry Edwards has sought to confront some of these issues by imposing requirements on arbitration proceedings involving employees� claims of statutory rights that would make arbitration more nearly resemble a legal process. These �minimal standards of due process� require, for example, that the arbitrator be a lawyer schooled in the pertinent law who would write an opinion subject to judicial review. These standards are also reflected in Protocols observed by the American Arbitration Association in handling employment and consumer disputes. But predatory businesses writing predispute arbitration clauses into forms used to record consumer or employment transactions need not employ the AAA, and the opinion of Judge Edwards has not yet resonated outside the field of employment contracts, even though they do give some substance to the Court�s assurances that arbitration is just another way to enforce one�s rights. It seems not unlikely that if his standards of due process were applied to all mandatory predispute arbitration clauses imposed on consumers, employees, and franchisees, fewer such clauses would be written because the benefit to the �repeat party� would be much diminished. Even minimal due process would materially diminish the attractions of arbitration to business predators seeking self-deregulation.
Many predispute arbitration agreements are written not merely to confer jurisdiction on a private forum, but also to load the dice to the advantage of the repeat player drafting the forms. The ARCO franchise agreement clause previously adverted to is an example. The draftsmen of such forms are not satisfied merely to require the weaker individual party to engage in arbitration with its inherent inadequacies as a means of rights enforcement, but they also add bells and whistles making the designated arbitration forum especially ineffective as a means of enforcing the prospective adversary�s legal rights. They may seek to locate the arbitration at a distant place, or conduct it with an institution charging an enormous filing fee, or reverse the American rule on fee-shifting, or exclude the weaker party from participating in a class action, or forbid an award of exemplary damages, or shorten the limitations period, or make the individual promise to keep the award secret, or devise perhaps many other impediments to effective private law enforcement. Some or perhaps many of these bells and whistles may, as in the ARCO case, render the arbitration clause unenforceable. Lawyers writing such provisions may even be exposing themselves to personal tort liability. But to the extent that they are valid, they magnify the degree to which business can self de-regulate by means of arbitration clauses in adhesion contracts.
An example of bells and whistles is provided by the contract AT&T recently sought to impose on its California customers for long distance service. It was laden with added features leading Judge Bernard Zimmerman in deciding a suit challenging the terms of that contract to conclude that:
This lawsuit is not about arbitration. If all AT&T had done was to move customer disputes that survive its informal resolution process from the courts to arbitration, its actions likely would have been sanctioned by the state and federal policies favoring arbitration. While that is what it suggested it was doing to its customers, it was really doing much more; it was actually rewriting substantially the legal landscape on which its customers must contend. . . . It is not just that AT&T wants to litigate in the forum of its choice � arbitration; it is that AT&T wants to make it very difficult for anyone to effectively vindicate her rights, even in that forum. That is illegal and unconscionable and must be enjoined.
Even if my observations possibly overstate the weaknesses of arbitration as a means of rights enforcement � as indeed they would if Judge Edwards� due process requirements were universalized -- they reflect the perceptions of most lawyers whose clients are afflicted with mandatory arbitration clauses written into adhesion contracts. The usually intended effect of the predispute arbitration clause is to intimidate the weaker party, perhaps especially one whose statutory rights threaten the client of the draftsman. While predispute arbitration clauses written into standard form adhesive contracts are thus not straightforward renunciations of the statutory rights of weaker parties, they often are, as Judge Zimmerman states, restructurings of the legal landscape to be traversed by a claimant. Because arbitration is for numerous reasons less likely to result in the enforcement of legal rights, a legal claim that can only be arbitrated has less value to the plaintiff than a legal claim that can be litigated in an American court, and in some instances the settlement value may be reduced to zero. It is sophistry to deny this practical effect, which has the secondary consequence of weakening the enforcement of much law enacted to protect the public from predatory behavior by those with economic power.
In addition to the assurance offered by the Supreme Court that arbitration is just another way of enforcing one�s legal rights, the Court has also appeared to assume that mandatory predispute arbitration is just is a means of saving legal costs. Perhaps this assumption is the result of a conflation of predispute mandatory arbitration with consensual arbitration that has unquestioned capacity to reduce legal costs. It was indeed the assumption of the Magnuson-Moss Act that voluntary ADR can save legal costs and facilitate the assertions of rights by persons of limited means in disputes of limited value. In diverse forms including mediation, non-binding arbitration, early neutral evaluation, as well as binding arbitration, there may often be real opportunities to save costs. The problem is that those drafting mandatory predispute arbitration clauses are not motivated by any desire to facilitate the assertion of claims against themselves. The Court�s contrary assumption is one made in a legal skybox shielded from contact with reality.
We can be sure, of course, that mandatory arbitration does improve the profit picture for the parties who write such clauses into their standard form contracts. If that were not so, of course the clauses would not be in the contracts. It is also surely true that enforcement of mandatory arbitration clauses relieves the public fisc of costs that they must bear when disputants litigate. It also lightens the workloads of judges. In the latter respects, the question is raised whether the investment of public resources in the enforcement of rights and in the regulation of predatory business is a good investment. Those who are regulated may think not; those whose interests are protected are likely to disagree.
Possibly mandatory arbitration pursuant to a predispute agreement might also incidentally relieve some individual parties to adhesion contracts of some of their legal expenses. Cost saving is possible when the law applicable to the events is reasonably settled and the factual issues are uncomplicated and require the use of no special expertise. The Supreme Court in enforcing a mandatory arbitration agreement in 2000 indicated that it might not enforce such an agreement if it appeared that arbitration would be more expensive for the weaker party to the agreement. It would, however, be remarkable if mandatory arbitration clauses were intended by those who write them to strengthen the prospective bargaining positions of their adversaries by reducing their costs relative to those of the party writing the standard form. Nevertheless, the Court requires proof that this is so.
Economic theorists can and do argue that individuals benefit indirectly from the savings accruing to the corporate enterprise or the government in the form of lower prices or higher wages, and lower taxes. No doubt some cost savings are passed on as a result of market pressures. This is likely to be the case in markets featuring intense price or wage competition, such as the market for long-distance telephone service. It is, however, by no means clear that a prudent person of the sort envisioned by economic theory would trade a minor reduction in the price of goods and services or a minor increase in wages for a material reduction in his or her ability to enforce his or her rights under statutes enacted to protect such persons from their weakness. And redistribution of some of the savings in the form of lower prices or higher wages does nothing to deter or correct corporate misconduct, so that the public interest in law enforcement by private attorneys general is consistently disserved by mandatory arbitration clauses when applied to claims of statutory rights.
As suggested, the savings on legal expenses, if that is in the public interest, could be maximized simply by repealing laws enacted to regulate contracts to protect consumers, workers, patients, franchisees, and others. However, none of the latter-day champions of freedom of contract are heard to advocate repeal of any of the laws whose enforcements they would impede. Implicit in regulatory legislation by Congress and state legislatures are their economic determinations that (a) it is worth the cost to the public fisc to provide a public forum in which the individual rights conferred can be effectively enforced and the public interests served, (b) the busine