If you think you will have your day in court when aggrieved by civil injustice, think again. More likely, you will be headed for a meeting run by a professional arbitrator. Ironically, the Supreme Court is to blame. It is leading a quiet transformation by moving the country from using public court trials to secret arbitration hearings.
Justice in a court of law emphasizes fairness, using costly traditional practices: impartial juries, trained judges, media-saturated trials open to the public, discovery of information, published opinions explaining judicial reasoning and review by an appellate panel. Arbitration prizes efficiency, as umpires choose winners and losers quickly and cheaply. Hearings occur behind closed doors without press coverage and skip the protracted steps of discovery, published explanations, or appeal, even if obvious errors are made.
Today’s Supreme Court strongly favors arbitration over litigation, not only for battles between businesses, where efficiency is paramount, but for the rest of us too, as consumers, employees, homeowners or patients. That is why, in standard forms that people sign, you can find dense verbiage in small print that few people read (or could understand if they did), relegating all disputes to arbitration. Chances are you have signed such contracts, whether with your bank, cellphone service provider or doctor. They prescribe how the process will work, often requiring a one-on-one affair, preventing the aggrieved from banding together to forge strength in a class action.
Nearly 90 years ago, Congress passed the Federal Arbitration Act to reverse the repugnance many state judges of that period had to arbitration agreements. In the past two decades, the Supreme Court has been rereading this law expansively to find a national policy favoring arbitration over litigation. Today’s justices claim they force arbitration only on those who freely opt for it, in accord with the principles of contracting. But they have redefined the meaning of contracting. For example, if you and your business partner agree to resolve disputes between the two of you in arbitration, the court may well rule that you also agreed to arbitrate with your business’ advisors too. In a more extreme and recent example, the court, by a 5-4 vote, simply ignored state laws that invalidate contracts that are unconscionable.
The court puts few curbs on its enthusiasm for promoting arbitration. It highlights no settings where it should be disfavored and rarely questions whether standardized forms pass muster as contracts, though this habit appears to make at least a few of the justices uncomfortable.
A new context where the court could set limits on arbitration emerged this month when the Carlyle Group, a private equity firm, announced plans to sell its securities to the public. It proposed language in its partnership agreement to require holders of its securities to resolve any dispute with the firm in arbitration, not court.
Following decades of precedent, the Securities and Exchange Commission refused to permit the offering to go forward with that provision. It referenced a venerable federal securities law holding invalid any agreement that would weaken its investor protections. Access to the federal judiciary is a core aspect of these protections. Otherwise, investors deceived by misleading disclosure would not get their day in court, and the public would never learn of the injustice. A principal purpose of the federal securities laws is to deter fraud — something the prospect of a protracted public trial offers that a private, confidential arbitration hearing does not. As a result of the commission’s pushback, and investor revolts, Carlyle withdrew its proposal.
That will not end the story, however, because other companies are intrigued by Carlyle’s position. And the Supreme Court’s strong bias favoring arbitration today raises doubts about whether it would back the commission’s time-honored stance. Therefore, companies that have public shares outstanding are likely to propose adding mandatory arbitration clauses to their charters. Yet the FAA never contemplated arbitration dictated by a corporate charter, only in a contract. A contract is epitomized by two parties in an exchange, not a group referendum passed by majority vote. So you might expect the Supreme Court to respect the long-standing national policy of investor protection that gives investors their day in court to challenge securities fraud.
But the Supreme Court, being captivated by arbitration and prone to stretching its imagination in this field, may find an innovative way to circumvent even this common-sense view. It could portray a corporate charter as a contract binding on even those who opposed it and rebuke the commission’s public policy concerns to channel all disputes over corporate securities into closed-door arbitration hearings.
The court’s unorthodox course has caught the attention of members of Congress, where bills are being proposed to invalidate mandatory arbitration clauses in certain settings. But the general public must be properly informed about this ongoing revolution in dispute resolution, which has been slyly stoked by a small group of judges in Washington whose biases paradoxically oppose the traditions of justice to which they swore professional allegiance.