When arbitration subverts democracy: by blocking access to the courts, mandatory arbitration and separability undermine the rule of law.

The rise of alternative dispute resolution over the last 30 years has had a profound impact on American justice. Many empirical studies show that ADR methods, such as mediation and arbitration, have produced better outcomes for millions of disputants--results that suit the real needs and interests of the parties through a process that is often more satisfying than traditional litigation.

However, this movement has had costs--and some of those costs have been high. It has contributed, for example, to what law professor Marc Galanter has called "the vanishing trial"--a precipitous drop in the number of jury trials in federal and state courts in the last 40 years. (1)

Another, far more troubling cost is a general reduction in access to the courts. While the number of trials may be decreasing for a variety of reasons, at least the parties get inside the courthouse doors. With mandatory arbitration, even that possibility disappears. When citizen access to justice is denied, the courts and the rule of law--crucial components of our constitutional democracy--are undermined.

Specifically, two different arbitration mechanisms--mandatory arbitration and separability--improperly deny access to courts, which subverts the rule of law.

Mandatory arbitration is now common in a wide variety of disputes, including those involving employment, financial services, and health care. The U.S. Supreme Court essentially upheld the practice for statutory claims more than a decade ago in Gilmer v. Interstate/Johnson Lane Corp. (2) In that landmark case, the Court for the first time held that a statutory age discrimination claim could be compelled into arbitration.

That decision gave the green light to the nascent mandatory arbitration movement, and it paved the way for mandatory arbitration's massive expansion into other areas.

In a typical situation, the institutional actor--for example, an employer, securities brokerage, or health care provider--includes a provision in the boilerplate language of a standard contract calling for the mandatory and binding arbitration of any dispute arising under the agreement. Generally, the parties may not refuse to arbitrate a claim and may not appeal the arbitrator's decision on substantive grounds. Equally significant, because arbitration is an informal process, the arbitrator generally is not required to follow the law and need not even be a lawyer.

There is nothing inherently wrong with arbitration as a dispute resolution process. Parties may prefer that their cases be decided according to standards other than the rule of law, such as industry practices or workplace norms. Moreover, arbitration can be faster than traditional litigation, and less costly. Arbitration has been included in collective bargaining agreements for decades and has proven effective in managing labor workplace disputes.

However, arbitration in employment, consumer, health care, and other contexts is fundamentally different because it is often imposed unilaterally by the drafter of a contract, generally on a take-it-or-leave-it basis. For example, if you want to work for a firm as a stock broker, you must agree to arbitrate any dispute arising out of that employment relationship rather than seek a remedy in court where relevant rules of law will apply to your case. The door to the courthouse is closed, permanently, except for the possibility of judicial review of arbitrator misconduct.

The number of cases mandatory arbitration diverts from the courts every year is unknown, but if the annual reports of one major provider, the American Arbitration Association, is any indication, it is hundreds of thousands. (3)

Separability 

Separability is a common law arbitration doctrine holding that arbitrators, not courts, generally are to decide the validity of contracts that include broad arbitration provisions.

It derives from the Supreme Court's landmark decision in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., which arose out of a paint manufacturer's contention that a contract with a consultant was induced by fraud. (4) The question was who should resolve the matter, a judge or an arbitrator. In a perhaps unparalleled display of judicial sophistry, the Supreme Court said the relevant statute, the Federal Arbitration Act, required that an arbitrator make the decision because the arbitration provision was a contract to be viewed as "separate" from the main contract (for consulting services). (5)

Broadly, this separability doctrine requires an arbitrator rather than a court to decide any challenge to a contract that includes a broad arbitration provision and is based on a traditional contract defense. However, several state courts and a few federal ones have taken a narrower view of the doctrine. For example, some courts have held that the separability doctrine applies only to claims that the larger, or "container," contract is voidable (such as when induced by fraud or duress), and does not apply to claims that the contract is void (such as when its content is illegal). (6)

The Supreme Court will decide the validity of this exception this term in Buckeye Check Cashing, Inc. v. Cardegna. The case reviews a Florida Supreme Court decision repudiating the separability doctrine by holding that a court, not an arbitrator, must decide whether a paycheck-cashing service's contract is illegal under state usury law. (7)

Democratic values

Both mandatory arbitration and separability block access to the courts and the application of the law to legal disputes. When institutionalized, these methods have potentially serious ramifications for the rule of law as a component of democracy.

The rule of law is the cornerstone of American democracy and includes the orderly resolution of disputes. While alternative dispute resolution stretches the traditional notion of the rule of law because it allows for decision-making that is not dependent on legal rules, it has become an integral part of the justice system in our constitutional democracy. Still, when alternative dispute resolution is run, sponsored, or endorsed by the law, we should at least expect it to foster rather than diminish democratic governance.

Dispute resolution is more likely to enhance democratic governance when it promotes traditional democratic values, such as personal autonomy, participation, and due process. (8) When these and other democratic and social values--such as accountability, rationality, equality, public trust, and a spirit of reciprocity--are thwarted in a dispute resolution process that is connected with the government, it diminishes the effectiveness of democratic governance overall. This is true in both traditional public governance as well as in private institutions, such as the workplace.

Both mandatory arbitration and separability frustrate rather than foster these democratic values. The most significant value is personal autonomy--the freedom to choose whether to go to court or to arbitrate. With mandatory arbitration, someone other than the plaintiff makes the decision to forgo the courts and the protections of the rule of law. When this decision is made by a large institutional player, it reinforces a perception of inequity between the parties. Worse yet, with separability, the decision is made by the courts, by operation of law.

While both parties have the right to participate in the arbitration process, participation is constrained because the rule of law is not available to guide the decision of the arbitrator. This undermines due process in the sense of perceived procedural fairness--with direct implications for the trust we have in our legal institutions and our willingness to comply with the rule of law.

Trust is generally a function of whether our expectations of others are fulfilled or frustrated, particularly in risky or ambiguous situations. As many trial lawyers know, people expect to have their day in court when a dispute arises (even when the law doesn't support that expectation). This sense of entitlement is a powerful social norm and a basis on which the public's trust in the rule of law is built. This trust is reinforced when we go to court or decide for ourselves that we would rather resolve a dispute in another way, including arbitration. It is breached when we seek and are denied access to courts by means such as mandatory arbitration and separability. This breach of expectations erodes our trust in the rule of law itself.

This loss of trust can have important effects, including our diminished willingness to comply with the rule of law voluntarily. Researchers have found that people's willingness to comply with legal rules generally does not depend on whether they agree with the substance of the rule but rather on their belief in the integrity of the rule-giving process--whether the rules are legitimate and deserving of compliance. (9) Remarkably, we tend to judge that legitimacy by such measures as the degree of personal autonomy, participation, and due process--the traditional values of democracy--involved in the rule-giving process.

By denying citizens the right to a day in court, arbitration imposed through mandatory processes and separability fosters cynicism and distrust in the rule of law, undermining its legitimacy. Thread by thread, such access-stripping mechanisms tear apart the very fabric of democracy itself.

RELATED ARTICLE: Prepare your mandatory arbitration case with resources from the ATLA Exchange.

The ATLA Exchange has many resources to help members prepare cases challenging mandatory arbitration: litigation packets, Law Reporter court documents, case abstracts, and more. For more information, contact the Exchange by phone at [phone] or by fax at [phone], or visit www. exchange.aria.org.

Mandatory Arbitration Litigation Packet (updated July 2005; 2,081 pages). Plaintiffs' briefs, motions, petitions, and interrogatories from consumer, employment, nursing home, and insurance cases, as well as valuable secondary resources, including a litigation checklist of recurring issues encountered by attorneys practicing in this area; and more than 20 case summaries of the most important U.S. Supreme Court cases concerning mandatory arbitration.

Ackerman v. Money Store. The unpublished opinion in a case holding that an employer violated New Jersey's antidiscrimination law by interfering with the plaintiff's right to a jury trial when it terminated her employment for refusing to sign an arbitration agreement. (No. LR3431)

Badie v. Bank of America. Various briefs and motions supporting and opposing summary judgment, trial and post-trial briefs, the court's decision and judgment, the parties' appellate briefs, and the appellate court's opinion in a case holding that a mandatory arbitration clause is an unenforceable modification to a contract if it was not within the reasonable contemplation of the parties when they signed the original contract. (No. LR3369)

Broughton v. Cigna Healthplans of California. ATLA's amicus curiae brief in a case holding that a claim for injunctive relief under state consumer law may not be subject to arbitration. (No. LR3551)

Cheng-Canindin v. Renaissance Hotel Associates. The parties' appellate briefs in a case holding that a hotel employee handbook's dispute resolution procedures did not amount to an arbitration agreement, and the hotel could not compel arbitration of a wrongful termination claim. (No. LR2934)

Crawford v. Cavalier Manufacturing. The plaintiff's complaint, the defendants' brief in support of a motion to compel arbitration, and the plaintiff's supplemental response to that motion in a case holding that an arbitration clause in a manufactured-home sales contract and financing documents was invalid. (No. LR3507)

Grundstad v. Ritt. The plaintiff's appellate brief in a case holding that a guarantor could not be compelled to arbitrate his liability under an arbitration clause in the underlying contract even though his agreement was in the same document. (No. LR2977)

Lambdin v. District Court. The parties' motions and briefs in a case holding that an employment agreement's arbitration provision was void under the Colorado Wage Claim Act, which prohibits waiver of rights. (No. LR2730)

Majdi v. Circuit City Stores, Inc. The plaintiffs' complaint in a case involving allegations of wrongful termination and racial discrimination where a store required applicants to sign an arbitration agreement in order to be considered for employment. (No. LR3572)

Prudential Insurance Co. of America v. Lai. The parties' appellate briefs and amici curiae briefs in a case holding that a Title VII plaintiff will be forced to arbitrate only if he or she knowingly agreed to do so. (No. LR2359)

Wilson v. Waverlee Homes, Inc. The plaintiffs' brief opposing the defendant's motion to compel arbitration in a case holding that a binding arbitration clause in installment sales and financing contracts conflicted with the Magnuson-Moss Act. (No. LR2989)

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Notes

(1.) Marc Galanter, The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts (2004), available at www.abanet. org/litigation/vanishingtrial/vanishingtrial.pdf (last visited Nov. 22, 2005).

(2.) 500 U.S. 20 (1991).

(3.) In 2001, the American Arbitration Association reported that it administered more than 218,000 cases. AM. ARB. ASS'N, 2001 ANNUAL REPORT 2 (2001). In 2000, it reported its sixth consecutive year of "record caseload" with more than 198,000 cases. AM. ARB. ASS'N, 2000 ANNUAL REPORT 2-3 (2000). It has not included this information in more recent reports.

(4.) 388 U.S. 395 (1967).

(5.) For a critique, see Richard C. Reuben, First Options, Consent to Arbitration, and the Demise of Separability: Restoring Access to Justice for Contracts with Arbitration Provisions, 56 SMU L. REV. 819, 838-55 (2003).

(6.) See, e.g., Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136 (9th Cir. 1991); Jolley v. Welch, 904 F.2d 988 (5th Cir. 1990); Concannon v. Smith, Barney, Harris, Upham & Co., 805 F.2d 998 (11th Cir. 1986). For further discussion, see Reuben, supra note 5, at 852-55; see generally Steven Walt, Decision by Division: The Contractarian Structure of Commercial Arbitration, 51 RUTGERS L. REV. 369 (1999).

(7.) 894 So. 2d 860 (Fla.), cert. granted, 75 U.S.L.W. 3570, 3729, 3733 (U.S. June 20, 2005) (No. 04-1264). See Allison Torres Burtka, Supreme Court Weighs Enforcement of Arbitration Clause in "Payday "Loans, on page 14 of this issue.

(8.) For discussions of this in the context of public governance and in the private workplace, see Richard C. Reuben, Democracy and Dispute Resolution: The Problem of Arbitration, 67 J. L. & CONTEMP. PROBS. 279 (2004); Richard C. Reuben, Democracy and Dispute Resolution: Systems Design and the New Workplace, 10 HARV. NEGOT. L. REV. 11 (2005).

(9.) See generally Tom R. Tyler, Public Mistrust of the Law: A Political Perspective, 66 U. CIN. L. REV. 847 (1998) (discussing various studies in the context of public justice); Lynne M. Andersson & Thomas S. Bateman, Cynicism in the Workplace: Some Causes and Effects, 18 J. ORG. BEHAV. 449, 451-54 (1997) (discussing various fairness factors as predictors of cynicism in the private workplace).

RICHARD C. REUBEN is an associate professor at the University of Missouri-Columbia School of Law. He can be reached at [e-mail].