Op-Ed:  No, arbitration isn’t evil, but safeguards are needed

There seems to be a lot of confusion about arbitration. Judging by recent media accounts, it’s a crooked business designed by thieves for the purpose of cheating the virtuous.

Richard Cordray, director of the Consumer Financial Protection Bureau, was recently quoted in this newspaper saying, “Consumers should not be asked to sign away their legal rights when they open a banking account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.”

Cordray is right. But arbitration is not the problem. The situation is more complicated than that.

Let’s start with a review of some terms. If two parties have a dispute, the simplest thing they can do is sit down and discuss it until they reach a settlement. That is negotiation. If they can’t reach a settlement by themselves, they might call in a neutral third party to help them negotiate. That person is a mediator, and that process is mediation.

If a settlement is not possible, the parties might ask a neutral third party to listen to the case and make a decision. That’s arbitration.

Negotiation, mediation and arbitration are all alternative dispute resolution, or ADR, mechanisms; they take place outside the court system. ADR exists because the court system is complicated, slow, formal and expensive. Courts are essential in the conduct of civil society, but they are not ideally suited for the resolution of many ordinary disputes.

The gold standard for arbitration is the system in place in labor relations. Under most collective bargaining agreements in the United States, disputes arising between employers and labor unions are resolved by arbitrators. The parties have roughly equal bargaining power, they agree on how the arbitrators will be selected, and they jointly determine the procedural rules to be followed.

The system is designed so that an arbitrator will make a living only as long as his or her decisions are seen by both sides as well reasoned and fair. A labor arbitrator who is perceived to favor one side or the other will be quickly out of a job.

This leads to another of the advantages of arbitration over court proceedings. In addition to being faster, less formal, less expensive and more closely tailored to the individual circumstances of the parties, arbitration is final.

Let’s go back to our two parties. If they decide to let an arbitrator decide their dispute, it’s because they both agree she has the requisite subject matter expertise and they both trust her to be fair and impartial. In agreeing to let her hear the case, they also agree to be bound by her decision.

Courts in general will honor the parties’ right to enter into such an agreement, and they will not disturb the arbitrator’s decision, even if it is not the decision the court itself would have reached. That’s what makes arbitration final.

As long as the parties jointly agree to arbitrate, jointly agree who the arbitrator will be and jointly agree on the rules, it makes sense to provide finality. When one party controls the process, it does not.

When one party has all the power, it’s what is known as “cram down arbitration.” You want to join this health club, sign up for that cable TV plan, buy that electronic gizmo or move mom into that nursing home? Sign this impenetrable, multi-page agreement. Voila, you have agreed to arbitrate any dispute that may arise and to do so under whatever terms the drafter of the contract may have chosen to impose.

In cram down arbitration, obviously, one of the parties has zero bargaining power. There is no negotiation to choose the arbitrator or to set the rules under which she serves. If one party controls the selection of the arbitrator, impartiality is compromised. If the rules impose a class-action ban, requiring everyone with a complaint to arbitrate their claims separately, meaningful redress is effectively precluded. The opportunity for mischief is limited only by the imagination of the drafters of the document.

In that situation, finality is a huge mistake. The courts should not hesitate to intervene when onerous terms are imposed in cram down arbitration.

Keeping ADR fair is a complex task, and the laws that apply to it are evolving. The right of competent adults to enter into contracts should be preserved, and the courts should defer to the rulings of arbitrators selected under fairly negotiated contracts. At the same time, arbitration agreements entered into without any meaningful opportunity for negotiation of their terms should be subject to careful judicial scrutiny.

Arbitration is not the problem. The greedy and cynical perversion and distortion of arbitration is the problem.

Barry Goldman is an arbitrator and mediator, a member of the part-time faculty at Wayne State Law School in Detroit and the author of “The Science of Settlement.”

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