Recently Congress voted to disapprove the Consumer Financial Protection Bureau’s Arbitration Agreements Rule, which would have prohibited agreements to arbitrate in certain consumer financial contracts that bar consumers from participating in class actions. The debate about the Rule was heated. The question at hand was whether it makes sense to allow financial companies to bar consumers from participating in class actions, when the class action is the only real mechanism for consumers to get relief in cases where a financial company has wronged many consumers, each in a small amount, but in the aggregate in a large amount. But that important policy question got caught up in a broader question about whether arbitration itself is the problem. The process of consumer arbitration itself was described as a “kangaroo court,” or as a “secretive” process that, because of its secrecy, denied consumers justice.
I don’t want to discuss the policy question about class actions, which to my mind is a real, serious question with serious arguments on both sides. I do have some perspective on the other question, the question about the arbitration process more generally, as I’m an arbitrator who serves on the American Arbitration Association’s commercial and consumer panels. I should start off by saying that I don’t speak for all arbitrators, just for myself, and I certainly don’t speak for the AAA. But for what it’s worth, here is my take on some myths you frequently hear about arbitration.
- Myth: The arbitrators are in the financial company’s pocket. At the start of every case, I make a disclosure to both parties that lets them decide whether to object to my appointment on the grounds of a conflict of interest. For example, I disclose whether I or my firm has ever represented one of the parties, or brought a claim against one of the parties. I disclose any professional or social relationships with counsel for the parties or their firms, or with any witnesses. I disclose whether I’ve ever served as an arbitrator in which the witnesses have testified, or involving the same parties. And so forth. If either party wishes, it can challenge my appointment with the AAA based on my disclosures. I do my best to ensure that I do not serve as an arbitrator in any case where my impartiality could reasonably be called into question.
- Myth: The process favors big businesses over consumers. The arbitration process differs in significant ways from the ordinary rules of civil procedure that apply in court. Sometimes these differences work to one party’s advantage, sometime to the other’s. For example, in general there is much less pre-hearing discovery in arbitration than is available in court (more on that below). In a particular case, a consumer’s lawyer may want to get more document discovery than the arbitrator will permit, or to take depositions, or to send a bunch of subpoenas to third parties. But in other cases, the business wants discovery that it can’t get. I can recall a recent case where I denied a business’s request to take its customer’s deposition. Take another example: in arbitration, there is generally no appeal (though a court can vacate an arbitrator’s award on very limited statutory grounds). That finality does not advantage consumers generally or businesses generally; it advantages whichever party wins the case. The same is true of other features of arbitration that differ from court: it’s impossible to make a blanket statement about whether they favor one kind of litigant or another.
- Myth: In arbitration, you can’t get discovery. As I’ve just noted, in general, arbitrators allow less discovery than one can get in court. In my experience, what this means in practice is that the parties and the arbitrator hammer out case-specific rules about what discovery will and will not be allowed, bearing in mind the issues in the case, the cost of discovery in time and money, and so forth. (This ability to tailor the procedure to the needs of the case, by the way, is one of the main advantages of arbitration). But to take the example with which I’m most familiar, the AAA Consumer Rules require the arbitrator to permit sufficient discovery to “provide for a fundamentally fair process.” I have ordered fairly extensive discovery in cases in which it was clear that the essential information the claimant needed to prove its case wasn’t otherwise available to it.
- Myth: Arbitration is a kangaroo court, and arbitrators don’t know what they’re doing. There’s no question that arbitration is serious, but in some ways less formal than a courtroom. The rules of evidence do not apply, there is much less pleading practice and motion practice, the proceedings may or may not be recorded, and the hearing itself is less formal than a trial. As you know if you read Letters Blogatory, I’m a lover of civil procedure, so don’t get me wrong—I think that the Federal Rules of Civil Procedure are one of the greatest mechanisms for getting to true and just results that humanity has invented, though certainly not the cheapest or most efficient! (Speed is one of the clearest advantages of arbitration over traditional litigation, which commonly takes years). I think much of the formality that attends a civil action in court—the elaborate pleadings, the motions to dismiss and for summary judgment, the rules of evidence, etc.—are built around the institution of the jury trial and about ensuring that juries get to hear only those claims that the law would permit the jury to approve (and only those defenses that the law would permit the jury to approve). There is less reason for them in an arbitration, just as there is less need, for example, for emphasis on the rules of evidence in a bench trial, since a judge, like an arbitrator, knows how to weigh the evidence in a way that a lay jury might not. That’s not to say that there’s no room for these formalities in arbitration: the AAA rules provide for pre-hearing dispositive motions, though not as a matter of right, and they can be useful in some cases if a party can demonstrate that an evidentiary hearing is not necessary. Overall, my experience tells me that the arbitration process is not better or worse than the process in court—it’s just different. It can be advantageous to one party or another depending on the circumstances of the case.
With regard to the claim about the quality of arbitrators: all I can say about this is that I, and every arbitrator I know, tries incredibly hard to “get it right.” Some cases are straightforward and have a straightforward answer. Some are not, and that can call for the arbitrator to make tough calls about the law or about the facts. But the arbitrators I know are capable of making those decisions and conscientious about doing it as fairly as can be. That’s not to say there aren’t bad arbitrators out there, but then, there are also bad judges, and consumers and other litigants have more say in selecting their arbitrator than they do in selecting their judge.
- Myth: Arbitration is unduly secretive. Arbitration is private, which means that in general a hearing is not open to the public. On the other hand, absent an agreement or an unusual arbitral rule, arbitration is usually not secret. Parties are free to talk about anything that happens in the arbitration and to circulate the arbitrator’s award, when it’s rendered. I’m a big believer in the importance of the right of public access to the courts. That said, I can tell you that even in pretty big disputes with a lot of money at stake, it’s pretty common for the most important events in a case heard in court, including the trial, to take place in an empty courtroom with no spectators, and only the judge, the parties, the lawyers (and, in a trial, the witnesses and the jury) present. And even in court, the vast majority of cases (contract cases, anyway) don’t result in a trial in any event. So the lack of public access is a real difference, but perhaps not as meaningful in a practical sense as it may seem.
There are real issues of concern for arbitration. The foundation of arbitration is the consent of the parties, but in the world of consumer contracts, which everyone knows are not really negotiated, there are real questions for the courts about to what extent agreements to arbitrate should be enforced. Deciding those issues is above my pay grade. But it’s important to understand that for consumers who end up in arbitration, either gladly or unhappily, there are arbitrators out there who strive to decide cases with scrupulous attention to fairness.