Paul Bland

Arbitrators Are Answerable To No One

Cross-posted from the Consumer Law & Policy Blog.

In an ever-growing trend, corporations have moved to excuse themselves from the normal civil justice system by shifting disputes that their customers or employees may have against them from courts into the private judging system of arbitration. In this situation, instead of having lawsuits alleging consumer fraud or racial discrimination or similar types of claims handled in court, corporations are requiring consumers and employees to bring their claims before private arbitrators who are largely selected by private arbitration firms who compete with each other to be selected by the corporations.

While consumer and civil rights advocates have raised a host of concerns about this system of private judging, one concern that has consistently arisen is that the decision of the private judges are almost subjected to any meaningful review by courts. Drawing upon a long strand in American political thought that it is unwise to give any one power that is not subject to any meaningful check or challenge, consumer and civil rights advocates have questioned the wisdom of sending important consumer and statutory cases into a system where one person will make a decision that will almost certainly never be seriously questioned.

These policy concerns have been completely rejected by the U.S. Supreme Court. About 15 to 20 years ago, there was a lively controversy in this country about whether arbitrators should be given the power to decide cases involving important statutes that Congress had passed to protect the public at large. “Arbitration may be alright for deciding contract and commercial disputes between two businesses,” the argument essentially ran, “but corporations should not have the power to push their customers and employees to bring civil rights and other public statutory claims in arbitration.” In a several different cases, the U.S. Supreme Court has flatly rejected these arguments. The Court has held that a broad variety of federal statutory claims are subject to mandatory arbitration agreements.

In several of these cases, including decisions holding that investors’ claims under the federal securities laws and that the claims of alleged victims of employment discrimination under the civil rights laws could be the subject of binding arbitration clauses, the U.S. Supreme Court flatly rejected arguments that it was inappropriate, unwise or illegal to force such claims into arbitration because the arbitrators’ decisions were not reviewable. The Supreme Court gave these arguments the back of its hand, flatly stating that “although judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute.”n1

This, then, is the gist of the Supreme Court’s answer: there may not be much judicial review of arbitrators’ decisions, but it’s “sufficient.” To put the Supreme Court’s conclusion in context, it should be noted that the general rule is that judicial review of arbitrators’ decisions “is very narrow; one of the narrowest standards of judicial review in all of American jurisprudence.”n2

So we know what the Supreme Court says – that judicial review is “sufficient” – but is that really true? What is the record? It’s an important question, as more and more disputes are going into arbitration. The record suggests that the judicial review of arbitration is less than minimal; it approaches non-existent. Consider a couple of illustrations:

o The U.S. Court of Appeals for the Seventh Circuit, in Chicago, remarked in a decision issued this year that courts should not review arbitrators’ interpretations of contracts even if they are “wacky,” so long as the arbitrator attempted to “interpret the contract at all.” Talk about setting the bar pretty low. If our courts refuse to correct even “wacky” contract interpretations from private arbitrators, is judicial review really “sufficient” to ensure that the arbitrators are following the law?n3

o The U.S. Court of Appeals for the Third Circuit, in Philadelphia, considered an arbitrator’s decision that “inexplicably” cited and relied upon language that was not included in a key document. The court held, though, that “such a mistake, while glaring, does not fatally taint the balance of the arbitrator’s decision in this case. . . .”n4 Where arbitration decisions are upheld even when they are based upon “glaring mistakes” of law, is judicial review really “sufficient”?

o In a case involving famous pro baseball player Steve Garvey, the U.S. Supreme Court held that “courts are not authorized to review the arbitrator’s decision on the merits” even if the arbitrator’s fact finding was “silly.”n5 This is setting the bar even lower. If arbitrators are permitted to make “silly” decisions about the facts of cases, then how can one seriously defend the Supreme Court’s conclusion that judicial review is “sufficient” to ensure that arbitrators will enforce the laws?

o In another case, the California Supreme Court held that even when an arbitrator’s decision would “cause substantial injustice” on its face, that it was not subject to judicial review. If arbitrators can make wrong decisions that cause “substantial injustice,” is judicial review really sufficient?

o In a case decided a few months ago by the U.S. Court of Appeals for the Eleventh Circuit in Atlanta, the court angrily decried persons who try to “convert arbitration losses into court victories,” and noted that the only basis for challenging an incorrect arbitration decision is where a party can prove with “clear evidence” that the arbitrator was conscious of the law and deliberately ignored it; that a “showing that the arbitrator merely misinterpreted, misstated or misapplied the law insufficient.”n6 The court went on to state that parties who challenge arbitration awards should be sanctioned more often for asking for judicial review, that this would be “an idea worth considering” in order to discourage future challenges to arbitration.

The law governing judicial review of arbitration also encourages arbitrators not to give any reasons for their decisions, because then it is entirely impossible to attack their decisions.n7 As a result, many arbitrators have told me that they are discouraged by the major arbitration firms from producing written decisions in most cases, and the law basically gives arbitrators a means of putting themselves beyond any scrutiny.

The upshot of all this is clear – arbitration is largely a system above and beyond the law. Once an arbitrator makes up her or his mind about a case, courts are almost always going to turn their back on the matter. The attitude seems to be that “we want to send cases to arbitration in order to clear dockets and save courts time; if people are going to then ask the court to look at cases where the arbitrator got it wrong, that undermines the whole point of the system.”

When the Supreme Court was writing some of its leading decisions saying that huge categories of cases could be forced into arbitration, it promised Americans that they wouldn’t lose their legal rights, because judicial review of arbitration would be “sufficient.” What Americans have actually gotten is a system where courts refuse to review or question arbitration decisions that are “wacky,” “silly,” based upon “glaring mistakes” of law, and that cause “substantial injustice,” and where it would be a good idea for courts to impose hefty financial sanctions on anyone with the temerity to question such a decision.

If that is a system of judicial review that is “sufficient,” I’d REALLY hate to see what an insufficient judicial review system would look like.

i) This language appears in both Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 n. 4 (1991) (holding that claims under the Age Discrimination in Employment Act may be the subject of pre-dispute binding arbitration agreements) and Shearson/American Express Inc. v. McMahon,482 U.S. 220, 232 (1987) (holding that claims under the federal securities statutes may be the subject of pre-dispute binding arbitration agreements).

ii) Lattimer-Stevens Co. v. United Steelworkers of Am. Dist. 27, 913 F.2d 1166, 1169 (6th Cir. 1990).

iii) See Wise v.Wachovia Securities, Inc., 450 F.3d 265, 269 (7th Cir. 2006).

iv) Brentwood Medical Associates v. United Mine Workers of America, 396 F.3d 237 (3d Cir. 2005).

v) Major League Baseball Players Ass’n v. Garvey, 532 U.S. 504, 509 (2002).

vi) B.L. Harbert International, LLC v. Hercules Steel Co., 441 F.3d 905 (11th Cir. 2006).

vii) See Fellus v. AB Whatley, Inc., 2005 WL 9756090 (N.Y. Sup. Ct. Apr. 15, 2005) (in the absence of a reasoned decision supporting an arbitration award, there was no basis for court to decide whether arbitrator manifestly disregarded the law.); H&S Homes v. McDonald, 2004 WL 291491 (Ala. Dec.17, 2004)(in the absence of an explanation of damages awarded by arbitrator, court had no basis to determine whether arbitrator manifestly disregarded the law; arbitrator’s failure to give reasons for the award did not itself constitute manifest disregard of the law).

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Posted at 11:54 AM, Oct 19, 2006 in Mandatory Arbitration
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