Overruled


More Responses to Commenters
February 13, 2009, 6:24 pm
Filed under: Ian | Tags: ,

Commenting on my most recent post about arbitration, Marie Anderson offers a fair response:

Ian – another distinction to consider is when corporate entities or other sophisticated parties mutually agree to arbitrate claims arising out of a commercial contract. Surely you don’t want to waste judicial resources for a lawsuit between Big Company A and Big Company B, when the two signed a complex, well-negotiated deal, including a binding arbitration clause, and relations between A & B eventually sour.

Marie is, of course, correct, when two sophisticated parties of reasonably equal bargaining power agree to arbitrate their disputes, this is a fair and voluntary arrangement and there is no reason to force them into litigation.  Abusive arbitration occurs when a powerful company traps or tricks a relatively powerless consumer into arbitration.

One reason why the first kind of arbitration is acceptable and the second is not is the secretive nature of arbitration.  In virtually every state, arbitrators are not required to disclose their past decisions, so individual consumers and workers have no way of knowing which arbitrators are fair and which ones are biased in favor of corporations.  Big companies, however, are frequently defendants in lawsuits because when you employ thousands of people and do business with thousands of customers, many of them are bound to have a dispute with you after a while.  This means that Wal-Mart and Bank of America know exactly which arbitrators have ruled in their favor before, but you and I do not.

So the arbitrators themselves have a perverse incentive.  If they rule against a big company, that big company will refuse to hire them in the future.  But if they screw a consumer, that consumer will probably never face a lawsuit or arbitration again.  As a result, even if a binding arbitation clause lets both the corporate party and the human party have equal say in hiring an arbitrator, the corporation knows exactly who they want, and the ordinary American has no idea what to do.

When one big company sues another, however, both parties have similar knowledge of the field of arbitrators, and the arbitrators themselves have no financial reason to prefer one party over the other.  So arbitration between powerful parties of reasonably equal bargaining power is generally fair.

Indeed, this is exactly the balance struck by the Arbitration Fairness Act.  The AFA will stop the most abusive arbitration practices, such as employers who fire any worker who won’t agree to binding mandatory arbitration, but allow merchants and other sophisticated parties to continue to use binding arbitration  if they choose.

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