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Arbitration in the United States

Arbitration, in the context of United States law, is a form of alternative dispute resolution. Specifically, arbitration is an alternative to litigation through which the parties to a dispute agree to submit their respective positions (through agreement or hearing) to a neutral third party (the arbitrator(s) or arbiter(s)) for resolution. In practice arbitration is generally used as a substitute for litigation, particularly when the judicial process is perceived as too slow, expensive or biased. In some context, an arbitrator may be described as an umpire.[1]

Contents

HistoryEdit

Agreements to arbitrate were not enforceable at common law, traced back to dictum by Lord Coke in Vynor’s Case, 8 Co. Rep. 81b, 77 Eng. Rep. 597 (1609), that agreements to arbitrate were revocable by either party.

During the Industrial Revolution, large corporations became increasingly opposed to this policy. They argued that too many valuable business relationships were being destroyed through years of expensive adversarial litigation, in courts whose rules differed significantly from the informal norms and conventions of businesspeople (the private law of commerce, or jus merchant). Arbitration was promoted as being faster, less adversarial, and cheaper.

The result was the New York Arbitration Act of 1920, followed by the United States Arbitration Act of 1925 (now known as the Federal Arbitration Act). Both made agreements to arbitrate valid and enforceable (unless one party could show fraud or unconscionability or some other ground for rescission which undermined the validity of the entire contract). Due to the subsequent judicial expansion of the meaning of interstate commerce, the U.S. Supreme Court reinterpreted the FAA in a series of cases in the 1980s and 1990s to cover almost the full scope of interstate commerce. In the process, the Court held that the FAA preempted many state laws covering arbitration, some of which had been passed by state legislatures to protect their consumers against powerful corporations.

Types of ArbitrationEdit

Commercial and other forms of contract arbitrationEdit

Since commercial arbitration is based upon either contract law or the law of treaties, the agreement between the parties to submit their dispute to arbitration is a legally binding contract. All arbitral decisions are considered to be "final and binding." This does not, however, void the requirements of law. Any dispute not excluded from arbitration by virtue of law (for example, criminal proceedings) may be submitted to arbitration.

Furthermore, arbitration agreements can only bind parties who have agreed, expressly or impliedly to arbitrate. Arbitration cannot bind nonsignatories to an arbitration contract, even if those nonsignatories later become involved with a signatory to a contract by accident (usually through the commission of a tort).[2]

Labor arbitrationEdit

Arbitration may be used as a means of resolving labor disputes, an alternative to strikes and lockouts . Labor arbitration comes in two varieties:

  1. interest arbitration, which provides a method for resolving disputes about the terms to be included in a new contract when the parties are unable to agree, and
  2. grievance arbitration, which provides a method for resolving disputes over the interpretation and application of a collective bargaining agreement.

Arbitration has also been used as a means of resolving labor disputes for more than a century. Labor organizations in the United States, such as the National Labor Union, called for arbitration as early as 1866 as an alternative to strikes to resolve disputes over the wages, benefits and other rights that workers would enjoy.

Interest arbitrationEdit

Governments have relied on arbitration to resolve particularly large labor disputes, such as the Coal Strike of 1902. This type of arbitration, wherein a neutral arbitrator decides the terms of the collective bargaining agreement, is commonly known as interest arbitration. The United Steelworkers of America adopted an elaborate form of interest arbitration, known as the Experimental Negotiating Agreement, in the 1970s as a means of avoiding the long and costly strikes that had made the industry vulnerable to foreign competition. Major League Baseball uses a variant of interest arbitration, in which an arbitrator chooses between the two sides' final offers, to set the terms for contracts for players who are not eligible for free agency. Interest arbitration is now most frequently used by public employees who have no right to strike (for example, law enforcement and firefighters).

Grievance arbitrationEdit

Unions and employers have also employed arbitration to resolve employee and union grievances arising under a collective bargaining agreement. The Amalgamated Clothing Workers of America made arbitration a central element of the Protocol of Peace it negotiated with garment manufacturers in the second decade of the twentieth century. Grievance arbitration became even more popular during World War II, when most unions had adopted a no-strike pledge. The War Labor Board, which attempted to mediate disputes over contract terms, pressed for inclusion of grievance arbitration in collective bargaining agreements. The Supreme Court subsequently made labor arbitration a key aspect of federal labor policy in three cases which came to be known as the Steelworkers' Trilogy. The Court held that grievance arbitration was a preferred dispute resolution technique and that courts could not overturn arbitrators' awards unless the award does not draw its essence from the collective bargaining agreement. State and federal statutes may allow vacating an award on narrow grounds (e.g., fraud). These protections for arbitrator awards are premised on the union-management system, which provides both parties with due process. Due process in this context means that both parties have experienced representation throughout the process, and that the arbitrators practice only as neutrals. See National Academy of Arbitrators.

Securities arbitrationEdit

In the United States securities industry, arbitration has long been the preferred method of resolving disputes between brokerage firms, and between firms and their customers.[3] The arbitration process operates under its own rules, as defined by contract. Securities arbitrations are held primarily by the Financial Industry Regulatory Authority.

The securities industry uses pre-dispute arbitration agreements, through which the parties agree to arbitrate their disputes before any such dispute arises. Those agreements were upheld by the United States Supreme Court in Shearson v. MacMahon, 482 U.S. 220 (1987) and today nearly all disputes involving brokerage firms, other than Securities class action claims,[4] are resolved in arbitration.

The SEC has come under fire from members of the Senate Judiciary Committee for not fulfilling statutory duty to protect individual investors, because all brokers require arbitration, and arbitration does not provide a court-supervised discovery process, require arbitrators to follow rules of evidence or result in written opinions establishing precedence, or case law, or provide the efficiency gains it once did. Arbitrator selection bias, hidden conflicts of interest, and a case where an arbitration panel refused to follow instructions handed down from a judge, were also raised as issues.[5]

Judicial arbitrationEdit

Some state court systems have promulgated court-ordered arbitration; family law (particularly child custody) is the most prominent example. Judicial arbitration is often merely advisory dispute resolution technique, serving as the first step toward resolution, but not binding either side and allowing for trial de novo. Litigation attorneys present their side of the case to an independent teritary lawyer, who issues an opinion on settlement. Should the parties in question decide to continue to dispute resolution process, there can be some sanctions imposed from the initial arbitration per terms of the contract.

Validity of arbitration clausesEdit

Although properly drafted arbitration clauses are generally valid, they are subject to challenge in court for compliance with laws and public policy.[6] Arbitration clauses may potentially be challenged as unconscionable and, therefore, unenforceable.[7]

Typically, the validity of an arbitration clause is decided by a court rather than an arbitrator. However, if the validity of the entire arbitration agreement is in dispute, then the issue may remain subject to arbitration. For example, in Rent-A-Center, West, Inc. v. Jackson, the Supreme Court of the United States held that "under the FAA, where an agreement to arbitrate includes an agreement that the arbitrator will determine the enforceability of the agreement, if a party challenges specifically the enforceability of that particular agreement, the district court considers the challenge, but if a party challenges the enforceability of the agreement as a whole, the challenge is for the arbitrator."[8]

In other words, the law typically allows federal courts to decide these types of "gateway" or validity questions, but the Supreme Court ruled that since Jackson targeted the entire contract rather than a specific clause, the arbitrator decided the validity.[9] Public Citizen, an advocacy organization opposed to the enforcement of pre-dispute arbitration agreements, characterized the decision negatively: "the court said that companies can write their contracts so that the companies' own arbitrator decides whether it's fair to submit a case to that arbitrator."[10]

In insurance law, arbitration is complicated by the fact that insurance is regulated at the state level under the McCarran–Ferguson Act. From a federal perspective, however, a circuit court ruling has determined that McCarran-Ferguson requires a state statute rather than administrative interpretations.[11] The Missouri Department of Insurance attempted to block a binding arbitration agreement under its state authority, but since this action was based only on a policy of the department and not on a state statute, the United States district court found that the Department of Insurance did not have the authority to invalidate the arbitration agreement.[11]

In AT&T Mobility v. Concepcion (2011), the Supreme Court of the United States upheld an arbitration clause in a consumer standard form contract which waived the right to a lawsuit and class action.[12] However, this clause was relatively generous in that the business paid all fees unless the action was determined to be frivolous and a small-claims court action remained available; these types of protections are recommended for the contract to remain enforceable and not unconscionable.[13]

ProceedingsEdit

Various bodies of rules have been developed that can be used for arbitration proceedings. The rules to be followed by the arbitrator are specified by the agreement establishing the arbitration.

Enforcement of awardEdit

In some cases, a party may comply with an award voluntarily. However, in other cases a party will have to petition to receive a court judgment[14][15] for enforcement through various means such as a writ of execution, garnishment, or lien. If the property is in another state, then a sister-state judgment (relying on the Full Faith and Credit Clause) can be received by filing a form in the state where the property is located.[16]

VacaturEdit

Under the Federal Arbitration Act, courts can only vacate awards for limited reasons[17] set out in statute[18] with similar language in the state model Uniform Arbitration Act.

The court will generally not change the arbitrator's findings of fact but will decide only whether the arbitrator was guilty of malfeasance, or whether the arbitrator exceeded the limits of his or her authority in the arbitral award or whether the award was made in manifest disregard of law or conflicts with well-established public policy.

ArbitratorsEdit

Arbitrators have wide latitude in crafting remedies in the arbitral decision, with the only real limitation being that they may not exceed the limits of their authority in their award. An example of exceeding arbitral authority might be awarding one party to a dispute the personal automobile of the other party when the dispute concerns the specific performance of a business-related contract.

It is open to the parties to restrict the possible awards that the arbitrator can make. If this restriction requires a straight choice between the position of one party or the position of the other, then it is known as pendulum arbitration or final offer arbitration. It is designed to encourage the parties to moderate their initial positions so as to make it more likely they receive a favorable decision.

No definitive statement can be made concerning the credentials or experience levels of arbitrators, although some jurisdictions have elected to establish standards for arbitrators in certain fields. Some independent organizations, such as the American Arbitration Association offer arbitrator training programs, and arbitrators may cite their completion of that training as a credential. Generally speaking, however, the credibility of an arbitrator rests upon reputation, experience level in arbitrating particular issues, or expertise/experience in a particular field. Arbitrators are generally not required to be members of the legal profession.

To ensure effective arbitration and to increase the general credibility of the arbitral process, arbitrators will sometimes sit as a panel, usually consisting of three arbitrators. Often the three consist of an expert in the legal area within which the dispute falls (such as contract law in the case of a dispute over the terms and conditions of a contract), an expert in the industry within which the dispute falls (such as the construction industry, in the case of a dispute between a homeowner and his general contractor), and an experienced arbitrator.

Arbitration on televisionEdit

The "judge shows" that have become popular in many countries, especially the United States, are actually binding arbitration. The People's Court and Judge Judy are notable examples.

Arbitration Fairness ActEdit

See alsoEdit

ReferencesEdit

  1. ^ See, e.g., 9 U.S.C. § 5, Appointment of arbitrators or umpire
  2. ^ County of Contra Costa v. Kaiser Foundation Health Plan, Inc., 47 Cal. App. 4th 237 (1996). Kaiser Permanente argued in this case unsuccessfully that third parties who injure Kaiser members should be forced to arbitrate cross-claims against Kaiser.
  3. ^ Larson, Aaron (17 January 2015). "Resolving Investment Disputes by Arbitration". ExpertLaw.com. Retrieved 22 March 2018.
  4. ^ "FINRA Manual - Notices - 1992 - 92-65 SEC Approval of Amendments Concerning the Exclusion of Class-Action Matters From Arbitration Proceedings and Requiring That Predispute Arbitration Agreements Include a Notice That Class-Action Matters May Not Be Arbitrated". finra.complinet.com. Retrieved 2017-01-06.
  5. ^ Morgenson, Gretchen (6 May 2005). "Dear S.E.C., Reconsider Arbitration - The New York Times". New York Times. Retrieved 22 March 2018.
  6. ^ "Guide to Arbitration in New York" (PDF). CMS Legal. Retrieved 2012-05-10.
  7. ^ "Unconscionable Employment Arbitration Agreement Held Unenforceable | The Huffington Post". huffingtonpost.com. Retrieved 2017-01-06.
  8. ^ Rent-A-Center, West, Inc. v. Jackson. Supreme Court of the United States.
  9. ^ High Court Favors Arbitrator In Rent-A-Center Case. Law360.com.
  10. ^ "Congress Must Undo Damage of U.S. Supreme Court's Latest Anti-Consumer Decision". May 17, 2011. Retrieved 2011-01-12.
  11. ^ a b Wenzel KA. (2004). THE VALIDITY OF ARBITRATION AGREEMENTS IN INSURANCE POLICIES Archived 2011-07-26 at the Wayback Machine.. FORC Journal 15(4).
  12. ^ Horton D. (2012). Federal Arbitration Act Preemption, Purposivism, and State Public Policy. Forthcoming in Georgetown Law Journal.
  13. ^ Preventing the Runaway Arbitration: Practical Strategies and Solutions[permanent dead link]. ABA.
  14. ^ "The Basics of Confirming, Vacating, Modifying and Correcting an Arbitration Award Under the Federal Arbitration Act and the Texas Arbitration Act - FindLaw". Findlaw. Retrieved 2016-03-21.
  15. ^ Ware, Stephen J. (2001-03-21). "Paying the Price of Process: Judicial Regulation of Consumer Arbitration Agreements". Rochester, NY: Social Science Research Network. hdl:1808/7369. SSRN 264122.
  16. ^ "How to Enforce a Judgment in Another State". FreeAdvice. Retrieved 2016-03-21.
  17. ^ "State regulation of arbitration proceedings: judicial review of Arbitration Awards by State Courts". ResearchGate. Retrieved 2016-03-21.
  18. ^ 9 U.S.C. § 10(a)(1)

Further readingEdit

  • Jerold S. Auerbach, Justice Without Law?: Non-Legal Dispute Settlement in American History (Oxford: Oxford University Press, 1983).
  • Mark J. Astarita, Esq., Introduction to Securities Arbitration (SECLaw.com, 2000 - [1])
  • David Sherwyn, Bruce Tracey & Zev Eigen. "In Defense of Mandatory Arbitration of Employment Disputes: Saving the Baby, Tossing out the Bath Water, and Constructing a New Sink in the Process," 2 U. Pa. J. Lab. & Emp. L. 73 (1999); n.b., abbreviated source in this legal citation format is the University of Pennsylvania Journal of Labor and Employment Law, Vol. 2, p. 73.
  • Ed Brunet, J.D., Arbitration Law in America: A Critical Assessment, Cambridge University Press, 2006.
  • Gary Born, International Civil Litigation in United States Courts (Aspen 4th ed. 2006) (with Bo Rutledge) (3rd ed. 1996) (2nd ed. 1992) (1st ed. 1989)

External linksEdit