The Yale Law Journal

VOLUME
124
2014-2015
NUMBER
8
June 2015
2680-3203
Feature

Disappearing Claims and the Erosion of Substantive Law

J. Maria Glover

abstract. The Supreme Court’s arbitration jurisprudence from the last five years represents the culmination of a three-decade-long expansion of the use of private arbitration as an alternative to court adjudication in the resolution of disputes of virtually every type of justiciable claim. Because privatizing disputes that would otherwise be public may well erode public confidence in public institutions and the judicial process, many observers have linked this decades-long privatization of dispute resolution to an erosion of the public realm. Here, I argue that the Court’s recent arbitration jurisprudence undermines the substantive law itself.

While this shift from dispute resolution in courts—the public realm—to dispute resolution in arbitration—the private realm—initially undermined values and mechanisms of adjudication, the shift from public lawsuits to private arbitration now also threatens values and mechanisms of lawmaking. This new threat to the lawmaking function stems from a fundamental theoretical shift in the Court’s arbitration jurisprudence, cemented in its 2013 decision in American Express v. Italian Colors. As this piece explains, in Italian Colors, the Supreme Court subtly, but definitively, abandoned its descriptive and normative premise that freedom of contract was justified in the arbitration context because it would result in more cost-effective procedures for resolving disputes, and, accordingly, enforcement of federal statutory regimes. In its place, the Court adopted a reductionist vision of arbitration as any set of private dispute resolution procedures chosen by the parties, no matter how onerous or inefficient, and it held that the Federal Arbitration Act required courts to enforce whatever terms the parties chose.

Particularly given a pronounced reliance in the United States upon private litigants to enforce statutory directives, the Court’s recent arbitration jurisprudence now threatens the substantive law itself. Through private arbitration contracts, private parties can effectively rewrite substantive law by rendering a host of legal claims mere nullities. What’s more, private parties can exercise this quasi-lawmaking power almost entirely outside of public view, through rarely read and little-understood provisions in contracts of adhesion subject to scant public scrutiny or regulatory oversight. The largely unchecked power of private entities to recalibrate their legal obligations, now recognized by the Court, leaves little to stop an erosion of substantive law.

author. Associate Professor of Law, Georgetown University Law Center. I would like to thank Bert Huang, Justice Goodwin Liu, David Luban, David Super, Alan Trammell, David Vladeck, and participants at the Columbia Law School Courts and the Legal Process Colloquium for insightful comments. I would also like to thank Elizabeth Chao and the editors of the Yale Law Journal for their careful work throughout the editing process. Emily Merki, Logan Dwyer, and TJ McCarrick provided excellent research assistance.


Introduction

The Supreme Court’s recent arbitration jurisprudence represents the culmination of a three-decade-long expansion of the use of private arbitration as an alternative to court adjudication in the resolution of disputes of virtually every type of justiciable claim. As a result of this jurisprudence, cases that would otherwise proceed in the public realm—the courts—have been moved to a purely private realm, which is largely shielded from judicial and public scrutiny. Many observers have noted that this decades-long privatization of dispute resolutionand attendant adjudicative mechanisms has led to both a loss of confidence in public adjudication and a loss of public adjudication itself—an erosion of the public realm. However,the Court’s arbitration jurisprudence from the last five years—and particularly its 2013 decision in American Express Co. v. Italian Colors Restaurant1—does far more: it undermines the substantive law itself. Indeed, the Court’s most recent arbitration jurisprudence has conferred upon private entities a more fundamental power, antecedent to the authority to adjust the mechanisms of adjudication used to enforce substantive law. This power is more akin to lawmaking. A private entity, through contractual arbitration provisions, can now significantly reduce or even remove its substantive legal obligations by eliminating claiming. That private contract drafter can, in effect, wield quasi-lawmaking power by rendering substantive law inapplicable to a great deal of its primary conduct. Given the central role of private enforcement to the achievement of legislative directives,2 private entities can therefore use contractual arbitration provisions effectively to erode substantive law from the books, with the consequent erosion of both the private compensatory goals and public deterrent objectives of that law.

As an initial matter, one can situate the trend toward privatizing dispute resolution within a broader narrative about the erosion of the public realm in the world of litigation writ large. For years, scholars have traced, and alternatively lamented and lauded, the near-total disappearance of the trial, the most public feature of our civil litigation system.3 There are myriad explanations for the decline in trial rates,4 but an undoubted descriptive consequence of the vanishing trial—and the corresponding rise of settlement as the dominant endgame in litigation—has been a decline in the transparency of case outcomes and often of the judicial and litigation processes behind those outcomes. Normatively, scholars have argued that the large-scale shift from trial to settlement has resulted in significant losses to the values of democratic participation,5 legitimacy,6 deterrence,7 accuracy,8 judicial independence,9 egalitarianism,10 transparency,11 and peacekeeping.12Moreover, the confidentiality of private settlements frustrates public access and deprives future litigants of the benefits of precedential decision-making.13 As I have discussed in prior work, the rise of settlement, unaccompanied by procedural change that would provide for robust pre-trial judicial assessment of the merits of claims, has resulted in fewer judicial pronouncements of law and judicial applications of law to facts.14 Moreover, some have argued that this state of affairs diminishes public confidence in public institutions and leads to stagnation in public law.15

Similar arguments have been raised about the values lost when public proceedings and transparency are traded for the arguable convenience and efficiency of private dispute resolution through arbitration. First, privatizing disputes that would otherwise be public may well erode public confidence in public institutions and the judicial process by removing disputes from the public realm. Litigation proceedings in court enable public discussion of governmental and other public affairs; they provide checks against both unfairness to some litigants that may flourish behind closed doors16 and potentially corrupt practices by attorneys, judicial officers, and litigants.17 Second, and relatedly, privatizing dispute resolution may undermine the functioning of judicial institutions themselves by decreasing public and private investment in the courts.18 Third, privatization threatens to impede public awareness of the substantive law, inasmuch as private proceedings frustrate the public’s ability to understand the state of the law, how particular laws are interpreted, and how claims are pursued.19

There is, however, an additional consequence of the Supreme Court’s recent arbitration jurisprudence: it threatens to diminish not just the public realm, but also the public law itself. Whereas the shift from dispute resolution in courts, the public realm, to dispute resolution in arbitration, the private realm, initially undermined the transparency and mechanisms of adjudication, the shift from public lawsuits to private arbitration now also threatens both the transparency and mechanisms of lawmaking. These newer threats to the lawmaking function were cemented in the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant.20 In that case, the Court subtly, but definitively, made a fundamental theoretical shift in its conception of arbitration as a contract for procedures to achieve the efficient resolution of disputes to one of a contract for any set of procedures, no matter how onerous to the arbitration of claims. It thereby authorized private parties to use mandatory private arbitration clauses to construct procedural rules that have the foreseeable, indeed possibly intended, consequence of preventing certain claims from being asserted at all,21 rendering those claims mere nullities. And the disappearance of claims will not be limited to individual would-be litigants, inasmuch as many of the legal claims that arise out of these contractual relationships inure not to a single individual, but to many or all of the various individual signers of the agreements. In other words, this jurisprudence does not merely affect the private disputes of two contracting parties; it diminishes the impact of substantive law on the conduct of contract drafters across wide swaths of the legal landscape. The Court’s recent arbitration jurisprudence—one might say its recent arbitration revolution—thus threatens the values of public dispute resolution in a fundamentally new and more dramatic way. Through the procedural device of private arbitration, private parties have the quasi-lawmaking power to write substantive law largely off the books by precluding or severely impeding the assertion of various civil claims. And they can do so almost entirely outside of public view, through commercial (and sometimes confidential) contracts subject to virtually no public scrutiny or regulatory oversight.

This paper unfolds in three parts. Part I explains how the Supreme Court’s recent arbitration jurisprudence constitutes a fundamental theoretical shift. In contrast to the Court’s long-held vision of arbitration as a mechanism for achieving a cost-effective means of claim resolution outside of judicial fora, the Court has recast arbitration as a purely contractual mechanism through which private parties may craft provisions that provide them with effective immunity from substantive legal obligations. Indeed, given our regulatory system’s heavy reliance upon private enforcement of substantive law,22 arbitration agreements can be used to render substantive law virtually inapplicable to the primary conduct of the drafter of that arbitration agreement. Part II analyzes the ways in which the Court’s recent jurisprudence threatens conceptions of both the lawmaking function and the substantive law itself, raising fundamental questions about what private parties may do, and what publicly accountable bodies alone should do. Part II also explains how this method of legal reform is largely hidden from public view and, partly because of that lack of transparency, why the effects of the Court’s recent arbitration jurisprudence are unlikely to be undone. Part III concludes that, currently, the power of private parties to control substantive legal obligations stands largely unchecked, leaving little to stop the erosion of substantive law.

I. disappearing claims: the supreme court’s new arbitration revolution

The Court’s early arbitration jurisprudence ushered in a sea change in dispute resolution, moving vast swaths of cases from the public realm—the courts—to a private one—arbitration.Part I.A briefly traces this early rise of binding arbitration agreements, as sanctioned by the Supreme Court beginning in the 1980s. The vast expansion of privatized dispute resolution that came in the wake of this jurisprudence was revolutionary, particularly insofar as it led to a significant erosion of the public realm at the behest of private arbitration contracts. This change, however, was justified by two related and critical premises: first, that freedom of contract facilitated arbitration proceedings, and second, that arbitration proceedings constituted an efficient, cost-effective means for enforcing federal substantive law. Indeed, the Court had long suggested, if not expressly held, that this freedom of contract over the locus and mechanisms of adjudication did not stretch so far as to supersede substantive law.23 In other words, if freedom of contract and the enforcement of substantive rights through arbitration came into tension, then freedom of contract would yield. An arbitration contract that eliminated the enforcement of substantive law would not stand.24

As Part I.B describes, however, when freedom of contract and the enforcement of substantive rights through arbitration did come into inevitable tension, the Court resolved that tension in precisely the opposite way. In American Express v. Italian Colors, the Court essentially permitted, even incentivized, private parties drafting arbitration contracts to do so in a way that allowed them to reduce or even eliminate their obligations under substantive law.25 In so doing, the Court has effectuated what one might call a second arbitration revolution: by handing this quasi-lawmaking power to private parties and by reducing substantive statutory rights to mere formalities—to little more than empty rights26—the Court has eroded the substantive law itself.

A. The Rise of Arbitration Agreements To Facilitate the Resolution of Disputes in Private Fora

The rise of binding arbitration clauses in private contracts has been well traced.27 To summarize briefly, in response to a period of “hostility” by the federal courts28 toward private arbitration agreements, Congress passed the Federal Arbitration Act (FAA) in 1925, providing that written arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”29 Corporations and businesses in the United States did not initially use arbitration agreements to require employees, consumers, franchisees, or other parties typically understood to stand in weaker bargaining positions to resolve disputes through private arbitration, and the legislative history of the FAA indicates that the bill’s supporters likely did not intend for it to cover such agreements, but rather to cover negotiated agreements between merchants.30 Early Supreme Court jurisprudence on the issue likewise indicated that the Court would not apply arbitration clauses in contracts of adhesion against consumers and employees31—in other words, where parties to a given contract were differently and unequally situated vis-à-vis bargaining power.32 In addition, the Court expressed hesitation about applying arbitration agreements when federal statutory rights were at issue.33

The Court changed its views quite dramatically in the 1980s, when it first issued its now oft-quoted proclamation that the FAA evidences a “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.”34 In a series of cases, the Supreme Court abandoned its prior skepticism regarding arbitration of federal claims and held that arbitration agreements could be enforced with respect to a broad range of federal statutes: against consumers seeking to vindicate federal antitrust laws,35 investors seeking to vindicate the securities laws,36 and employees seeking to vindicate federal anti-discrimination laws.37 Since then, the Court has further expanded the FAA, holding that all federal statutory claims are arbitrable unless Congress has expressly provided to the contrary, which it has done in only the rarest of circumstances.38 As a result of the Court’s expansion of the FAA, arbitration agreements proliferated,39 appearing in form contracts, mail inserts, shrink-wrap licenses,40 and the like, and requiring consumers, employees, patients, and others to resolve any potential claims through private arbitration rather than through the courts.41

The Court’s expansion of arbitrability rested on a particular conception of private arbitration as a cost-efficient, expeditious, and therefore effective procedural means of determining whether federal law had been violated. This critical premise—that arbitration served merely as an alternative mechanism for dispute proceedings and claim resolution, and thus that the freedom to craft arbitration contracts was simply a freedom to streamline adjudicativemechanisms—allowed the Court to justify arbitration of federal statutory claims as fully consistent with the enforcement of federal law.42This core concept of arbitration as an alternative forum for the resolution of claims appears in some form in virtually all of the Court’s early cases expanding the scope of arbitrability. An illustrative case is Mitsubishi Motors, which held federal antitrust laws to be arbitrable by emphasizing that the “hallmarks of arbitration” included “streamlined proceedings and expeditious results” and “access to expertise” in the selection of arbitrators.43Parties “trade[] the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.”44 In fact, the Court observed, it is the informality of arbitral procedure that enables it to function as an efficient, inexpensive, and expeditious means for dispute resolution.45 It suggested that a forum-selection clause may be set aside if a party can show that proceedings in the contractual forum will be so gravely difficult and inconvenient that [the resisting party] will for all practical purposes be deprived of his day in court.46 Likewise, Shearson/American Express, Inc. v. McMahon, which expanded arbitration to the securities laws, justified the expansion on the ground that “the streamlined procedures of arbitration do not entail any consequential restriction on substantive rights.”47 Indeed, the Court rejected its prior skepticism of arbitration on the grounds that it had underestimated the efficacy of arbitration.

However, in these same cases, the Court emphasized not only the simplicity, expeditiousness, and cost-effectiveness of arbitration, but also the point that parties are “generally free to structure their arbitration agreements as they see fit.”48 As the Court put it repeatedly, arbitration “is a matter of contract,” and courts must therefore give effect to the parties’ intent.49 Critical, though, is that in the view of these cases, there was no contradiction or tension whatsoever between both efficient and resolution-facilitative procedures, on the one hand, and freedom of contract, on the other. Rather, the Court embraced freedom of contract as fostering claim-facilitative procedures, both as a descriptive matter and as a normative one. Descriptively, the Court believed that “it is often a judgment that streamlined proceedings and expeditious results will best serve their needs that causes parties to agree to arbitrate their disputes; it is typically a desire to keep the effort and expense required to resolve a dispute within manageable bounds that prompts them mutually to forgo access to judicial remedies.”50 In other words, the Court believed that parties would contract for procedures that streamlined their disputes and resulted in more expeditious proceedings.

Normatively, the Court also believed that freedom of contract was essential for arbitration to realize its promise as an efficient dispute resolution mechanism because of the parties’ need for procedural “adaptability.”51 As the Court noted in Mitsubishi,for example, competitors in the same industry could, if they thought it expeditious, agree to select an industry expert to arbitrate their claims.52 More generally, parties could adopt procedural rules that were tailored to the nature, stakes, and substance of likely disputes.

The Court’s willingness to subject federal statutory claims to private arbitral dispute resolution thus depended on two mutually reinforcing principles: first, that arbitration facilitated claim resolution and therefore was fully consistent with the effective enforcement of federal substantive law, and second, that parties’ freedom to tailor procedures to their specific needs was consistent with—indeed, a necessary condition of—arbitration’s effectiveness. As the Court put it in Mitsubishi, if parties used arbitration as a way to effectuate a “prospective waiver” of federal statutory rights, then the Court “would have little hesitation in condemning the agreement as against public policy.”53 In short, while the Court was comfortable with the notion that private arbitration would usher in an erosion of the public realm, it was unwilling to empower private parties with the ability to recalibrate the substantive law itself. The Court considered the freedom of contract that parties possessed vis-à-vis arbitration to extend only so far as was necessary to facilitate the resolution of federal claims, not so far as to effectively bar them.

B. The Rise of Arbitration Agreements that Frustrate or Eliminate the Resolution of Claims in Any Forum

These two underpinnings of the Court’s arbitration jurisprudence—one, that arbitration is a matter of contract, and two, that arbitration contracts provide a means of efficiently determining whether substantive law has been violated—quickly came under strain. As the Court held arbitration to be permissible across a wide swath of claims, U.S. companies not only increased their usage of arbitration agreements to compel arbitration, but also began using these agreements to tilt the rules of the arbitral forum in their own favor.54 This shift has meant establishing procedural rules that do not streamline arbitration, but, if anything, have made it more burdensome and difficult for parties to resolve their claims. For example, businesses have used arbitration agreements in (sometimes successful) efforts to shorten statutes of limitations,55restrict discovery,56require a claimant to file in a particular and perhaps distant forum,57 bar consumers or employees from recovering particular forms of relief,58and, most prominently, to preclude plaintiffs from joining together in aggregate litigation through class action waivers.59This last restriction on the use of aggregate proceedings in arbitration has consumed the bulk of the Supreme Court’s attention in recent years, and through those cases the Court has revolutionized its approach to arbitration in a way that goes well beyond removing claims from public fora. Its new approach erodes substantive law itself by empowering private parties, through contract, to frustrate or altogether eliminate claiming in any forum, and thereby to rewrite the scope of their obligations under substantive law.

The Court’s resolution of the particular issue of the enforceability of class action waivers is now well known. To summarize briefly, in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.,60 the Court took its first step by holding that arbitrators “exceeded their powers” under § 10(a) of the FAA by imposing class arbitration even though the parties’ agreement was “silent” on the issue – a silence the Court interpreted as an absence of agreement on the availability of class arbitration procedures.61 Then, two years later, in AT&T Mobility LLC v. Concepcion,62 the Court held that the FAA preempts state laws that “condition[] the enforceability of arbitration agreements on the availability of classwide arbitration procedures.” The Court specifically ruled that the FAA preempted California’s Discover Bank rule, which prohibited class arbitration waivers in consumer contracts of adhesion, where likely disputes involved small amounts of damages and a party of superior bargaining power schemed to deliberately cheat consumers out of small sums of money.63 The coup de grace was the Court’s decision two terms ago in American Express Co. v. Italian Colors Restaurant.64 In that case, the Court held that the parties’ waiver of class arbitration procedures was enforceable under the FAA even though the plaintiffs’ claims would be prohibitively expensive to bring on an individual basis.65

While the Court’s anti-class arbitration stance is by now well understood and fiercely debated by scholars,66 less well appreciated is the fundamental theoretical shift—one that extends well beyond the class action mechanism itself—that these more recent arbitration decisions reflect. This latest shift can be thought of as having two interrelated parts. First, the Court’s substantive conception of arbitration as an expeditious, streamlined, and cost-effective dispute resolution process yielded to a reductionist view of arbitration as a contract for any form of private dispute resolution, whose procedures are entirely subject to the parties’ bargaining, no matter how ineffective in resolving the parties’ disputes those procedures may be and (virtually67) no matter what burdens they may impose on one party or the other. Second, the Court’s recent arbitration jurisprudence ushered in a fundamental shift in the normative prerogatives that had long underlain its freedom-of-contract conception of arbitration, namely, that such freedom enabled private parties to change the mechanisms of adjudication, but not to change the scope of obligations under substantive law.68 Specifically, over the last five years, the Court jettisoned the notion, expressed in a number of prior opinions,69 that arbitration contracts would be struck down if they impaired parties’ ability to bring federal statutory claims. In so doing, the Court reduced federal substantive causes of action to mere formalities.

1. The Shift from Arbitration as a Form of Streamlined Proceedings for Dispute Resolution to Solely a Matter of Contract

Regarding the Court’s substantive conception of arbitration, the Court’s shift away from arbitration as a resolution-facilitative form of dispute resolution to arbitration as pure freedom of contract—freedom of contract divorced from the claim-facilitative function critical to the Court’s earlier arbitration jurisprudence70—has its seeds in Stolt-Nielsen and Concepcion, but it culminated in Italian Colors. In Stolt-Nielsen, the Court interpreted the parties’ stipulation that the agreement was “silent” as an acknowledgement that the parties had not agreed to class arbitration procedures and then went on to hold that, absent explicit agreement to arbitrate on a classwide basis, parties could not be compelled to do so.71 The Court’s strained interpretation of the stipulation gave it a platform to reaffirm the contractual nature of arbitration as “a matter of consent, not coercion.”72 It also gave the Court an opportunity, in the guise of discussing the arbitrator’s imposition of “policy choice[s]”73 on unwilling parties, to set out the Court’s own policy objections against class arbitration procedures.74 Indeed, the Court suggested in a somewhat cryptic footnote that class arbitration was objectionable even in the context of “negative value” claims that would not be economical to bring without the benefit of a class procedure.75 However, the uncoupling of freedom of contract and claim facilitation was not fully achieved in Stolt-Nielsen: it was a narrow decision that hinged on the parties’ stipulation,76 and the Court appeared to leave open the possibility that class procedures could be presumed in arbitration pursuant to a background principle of state contract law.77

The Court took a further step toward a vision of arbitration as purefreedom of contract, regardless of whether arbitration served as an efficient mechanism for resolving claims, in AT&T Mobility LLC v. Concepcion.78 Nonetheless, as a rhetorical matter, the Court continued to view freedom of contract and streamlined, efficient proceedings for resolving claims as mutually reinforcing, stating that “[t]he overarching purpose of the FAA . . . is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”79 And it reiterated that “[t]he point of affording parties discretion in designing arbitration processes is to allow for efficient, streamlined procedures tailored to the type of dispute.”80 Indeed, the Court continued to suggest that it was operating under a baseline presumption that the occurrence of some form of proceedings—even if these proceedings took place in the private realm of arbitration—was the purpose that private arbitration was intended to serve. But in holding that California’s Discover Bank rule was preempted,81 the Court suggested through its reasoning that freedom of contract would trump any interest that the parties had in facilitating streamlined proceedings, or any interest that the parties had in having any proceedings whatsoever. In response to the dissent’s concern that the holding in Concepcion would prevent many plaintiffs from pursuing small-value claims,82 the Court responded that “[s]tates cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons.”83 By dismissing as “unrelated” to the FAA the interest in facilitating the pursuit of small-value claims, the Court’s dicta augured a shift in the Court’s view of the FAA’s policies as enforcing the parties’ contractual choices, regardless of whether they resulted in “efficient, streamlined procedures” or, quite to the contrary, procedures that were onerous to the point of effectively extinguishing claims.

In Italian Colors, the tension between freedom of contract and efficient claim-facilitating procedures reached its breaking point, and the Court resolved it squarely in favor of pure freedom of contract. The case came to the Court with a factual record demonstrating that because the parties had waived class arbitration procedures, it would be uneconomical for the vast majority of American Express’s merchants to assert an individual antitrust claim.84 The maximum value of the merchants’ claims was approximately $12,850, or $38,500 after trebling, while the estimated cost of an antitrust economist’s expert report was many times that amount—up to $1 million.85 Consequently, far from being an “efficient, streamlined” arbitration procedure that facilitated the efficient resolution of disputes, the parties’ arbitration made those claims wholly uneconomical to bring.86 There would, under the arbitration contract at issue, be no proceedings.87

The Court’s answer was that the FAA mandates that courts “rigorously enforce”88 the parties’ agreement as written, pure and simple, and that it was “[t]oo darn bad”89 (in the words of Justice Kagan’s dissent) that the procedures under that contract would, instead of facilitating the efficient resolution of claims, effectively preclude plaintiffs from bringing their claims. There was no mention—as there had been as recently as two years earlier in Concepcion—of the point that the FAA’s purpose was to enforce the parties’ agreement “so as to facilitate streamlined proceedings.”90 Nor was there any reprise of Concepcion’s statement that the “point” of contractual freedom “is to allow for efficient, streamlined procedures tailored to the type of dispute.”91 The Court in Italian Colors thus subtly but definitively abandoned its descriptive and normative premise that freedom of contract was justified in the arbitration context because it would result in more cost-effective procedures for “settling” disputes92 and, accordingly, effective enforcement of the federal statutory regime. In its place, the Court adopted a reductionist vision of arbitration as any set of private dispute resolution procedures chosen by the parties, no matter how onerous or inefficient, and it held that the FAA required courts to enforce whatever terms the parties chose. The Court’s decision therefore marked the end of arbitration as we know it. Its jurisprudence had fully evolved from one that had eroded the public realm to one that now also eroded the substantive law.

2. The Supreme Court’s Rejection of the “Effective Vindication” of Rights Principle

The Supreme Court’s decision in Italian Colors also effectuated a second, concomitant shift in its arbitration jurisprudence. In expanding the FAA to federal statutory claims, the Court had strongly suggested, if not squarely held, that the FAA’s pro-arbitration policies would yield if they frustrated the “effective vindication”93 of federal statutory rights. This was not stray dicta. The Court reiterated the point repeatedly in cases as recently as 2009.94 Implicit in the Court’s suggestion was that private dispute resolution procedures making it effectively impracticable for plaintiffs to bring federal statutory claims would offend the underlying federal statutory regime.95 Under the “effective vindication” view, a federal statutory cause of action is not merely a formal right, but rather a right that calls for resolution and, if appropriate, a remedy.96 Because of the public interest in the enforcement of federal statutes, federal substantive law implicitly forbids private agreements that frustrate claims. As a result, harmonization of federal substantive law and the FAA requires that the FAA yield when the parties’ arbitration agreement effectively prevents the vindication of federal statutory rights.

In Italian Colors, the Court all but eliminated this “effective vindication” principle. That principle, the Court said, had nothing to do with whether the parties’ arbitration agreement left the plaintiff with a practical means to pursue a federal statutory claim. Rather, the Court emphasized, that principle forbids only “prospective waiver[s] of a party’s right to pursue statutory remedies.”97 In practical terms, then, the only type of provision the Court would acknowledge as being covered by this prohibition was a naked exculpatory clause, which is a provision “forbidding the assertion of certain statutory rights.”98 The Court also said that the principle “would perhaps” cover filing and administrative fees that are so high as to make access to the arbitral forum impracticable.99 But its equivocation on the latter point appeared to reflect at most a grudging acceptance of the Court’s prior dictum to that effect in Green Tree Financial Corp. v. Randolph,100 and possibly even a willingness to retreat from that dictum in the future.

The Court’s evisceration of the “effective vindication” principle reflects a critical conceptual move. In abandoning the idea that arbitration agreements cannot impair parties’ practical ability to bring federal statutory claims, the Court effectively reduced federal substantive causes of action to mere formalities. In the Court’s words, federal statutes “do not guarantee an affordable procedural path to the vindication of every claim.”101 “[T]he fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”102 Here, the Court effectuated a subtle, but quite significant shift in lawmaking power. Specifically, in Italian Colors, the Court placed the power to craft potential plaintiffs’ path to vindication of substantive rights, and by extension, power over the substantive law itself, not in the hands of public lawmaking bodies, but in the hands of private, would-be defendants.

Thus, in one fell swoop, Italian Colors obliterated the twin conceptual pillars that had served to justify the Court’s expansion of the FAA to federal statutory rights over the preceding three decades. The FAA’s policy of enforcing arbitration agreements “according to their terms” is no longer limited by the overriding purpose of facilitating more cost-efficient and streamlined proceedings, and hence more expeditious private enforcement of federal law.103 Rather, the FAA now stands for pure procedural freedom of contract. And because the Court has now held that federal law provides mere formal rights, not procedural guarantees, the parties’ arbitration procedures must be enforced even when they have the purpose and predictable effect of depriving a party of the realistic means to enforce federal law.

II. the supreme court’s arbitration revolution and the erosion of the substantive law

The Supreme Court’s three-decade-long expansion of private arbitration has long been criticized for achieving what might be called an erosion in the public realm.104 However, the Supreme Court’s recent arbitration jurisprudence goes well beyond the oft-lamented transfer of the enforcement and development of substantive law from a public to a private forum. In fact, this jurisprudence stretches further than achieving what some have described as the near-total disappearance of the class action device.105 Although the Court’s jurisprudence has long been providing private entities with increased discretion to choose the means of enforcing substantive law, the decision in Italian Colors signaled a fundamental change. It gave these private entities a power antecedent to enforcement of substantive law—a power more akin to lawmaking itself: Corporations, through arbitration provisions in contracts, can render legal obligations virtually inapplicable to any of the primary conduct associated with those contractual arrangements. In short, corporations now have the power, through contract, effectively to negate substantive law.106

As the first part of this Section explains, the power of private parties to calibrate substantive legal obligations, now recognized by the Court, constitutes a significant step toward a largely unobserved and unobservable erosion of substantive law. Private parties can now use provisions in arbitration contracts to severely hinder or eliminate any claims against them under any number of federal statutes.107 Particularly given the crucial role of private enforcement in the effectuation of substantive legislative directives,108 the potential—and even the intent—of these contractual provisions is to erode these substantive laws from the books, with neither legislative repeal nor judicial imprimatur via statutory interpretation. Because this erosion of substantive law is frequently achieved through trans-substantive, poorly understood provisions in private contracts of adhesion, it is a particularly unobservable and politically unaccountable method of achieving legal reform.

Given the consequences of this jurisprudence for substantive law, the non-transparent way in which private entities can erode substantive law is troubling for an additional reason. As the second part of this Section explains, though one might expect a great deal of public outcry in response to this jurisprudence, there are a number of obstacles standing in the way of either meaningful public response or meaningful reform. As a result, the Supreme Court’s recent arbitration revolution, and the erosion of the substantive law it enabled, is likely here to stay.

A. How the Court’s Recent Arbitration Revolution Threatens Substantive Law

In the wake of the Supreme Court’s recent arbitration jurisprudence, private parties have significant power to control the scope of their legal obligations, with the effect (and likely intent) of using arbitration agreements to eliminate claims against them. As a consequence, these private arbitration contracts, once understood as mechanisms for efficient resolution of disputes under substantive law, are now instruments in the erosion of that law. Moreover, because these ends are achieved through the use of little-noticed and little-understood procedural provisions in arbitration contracts, these private entities are largely able to hide the exercise of their significant power from the public.

Indeed, the Court’s decision in Italian Colors dramatically undercuts two related principles: one, that the reworking of substantive law should be achieved by publicly accountable bodies, and two, that public disclosure and concomitant public scrutiny should accompany attempts to effectuate changes in substantive legal obligations. Regarding the former, the wholesale freedom-of-contract view cemented in Italian Colors means that companies or other potential defendants interested in limiting their obligations under various consumer protection laws, employment discrimination laws, antitrust laws, and securities laws, for instance, can effectively do so without lobbying Congress or relevant state legislatures for changes to those laws. They can do so even without achieving narrower interpretations of those laws in the courts. Instead, those entities can substantially alter, if not avoid, their legal obligations under any substantive legal regime109 through contracts containing arbitration clauses that make it extraordinarily unlikely, if not nearly impossible, for the private enforcement apparatus established by those statutes to function.110 As the Court’s opinion in Italian Colors makes clear, such provisions are enforceable, period, and the fact that they may make it wholly impracticable for a plaintiff to vindicate its substantive rights is, as Justice Kagan put it in dissent, “too darn bad.”111

Combine the broad freedom that private entities have been given to craft arbitration contracts as they see fit—regardless of whether the chosen provisions are consistent with the formerly stated arbitration goals of efficient, cost-effective dispute resolution—with the Court’s effective reduction of substantive legal obligations to purely formal rights. The troubling reality created by this combination is one in which private corporations are able to achieve, through contract, a nearly silent reworking112 of obligations under substantive law, wholly divorced from public, democratic processes typically associated with public lawmaking and changing.113 Corporations with the know-how to draft sophisticated arbitration clauses can limit liability without fundraising, political contributions, advertising, petitioning Congress, or any of the normal activities of direct democratic reform. Moreover, because these private arbitration contracts are now subject to only the most superficial judicial review,114 the effect of these clauses in many cases—namely, to recalibrate the extent of a contract drafter’s substantive legal obligations under various federal statutes—will not be revealed to the public through judicial opinions. Italian Colors is therefore nothing less than a recipe for self-deregulation—a Do-It-Yourself guide for private parties to achieve legal reform through private contracts115 wholly outside the democratic process. Insofar as many of the chosen contractual provisions have the effect—and, as one would expect from a rational drafting party, the intention—of recalibrating the scope of potential liability under particular substantive statutes, that effect is now achievable with nary a ripple in the water of public consciousness.

Regarding the second principle—that public disclosure and concomitant public scrutiny should accompany attempts to effectuate changes in substantive legal obligations—the decision in Italian Colors is equally troubling. In a traditional democratic government, a citizen wanting to reduce or eliminate his or her legal obligations is usually required to do so both in a transparent way, and with the approval of governmental bodies tasked with writing or interpreting substantive laws. The most obvious way to do so is to lobby the legislature to amend or repeal the law that creates the obligation. For instance, many entities have successfully convinced state legislatures to repeal or to refrain from enacting substantive statutes viewed as unfriendly to business,116 or to amend existing statutes to limit the extent of liability under them by adding, for instance, damages caps and the like.117 However normatively troubling (or not) one finds such legal changes, they were ultimately brought about by traditional lawmaking bodies and achieved through processes that yielded public information both about these changes and about the parties responsible for effectuating them. Such transparency at least theoretically invites public scrutiny at the ballot box.

Alternatively, persons or entities dissatisfied with the contours of their obligations under substantive law, particularly insofar as those obligations arise from judge-made rules or judicial interpretations of a given statute or provision, have typically found potential recourse through the courts. Indeed, litigants may argue for any number of things that would decrease their exposure to liability: for narrower interpretations of their obligations under particular statutes, interpretations of statutes that exclude particular enforcers from the litigation landscape,118 and heightened standards of proof,119 just to name a few.

Both of these avenues for recalibrating one’s obligations under the substantive law—through either the legislative or judicial processes—occur openly, in terms of both public visibility and some measure of democratic accountability. Indeed, the Supreme Court recently highlighted the importance of transparency and public scrutiny in the democratic lawmaking process. Even in what is one of the (arguably) most pro-corporate decisions regarding the democratic process in years, the Court emphasized the importance of subjecting to public scrutiny attempts to effectuate substantive legal change through support of political candidates. In Citizens United v. Federal Election Commission,120 the Court held that bans on independent corporate expenditures on political campaigns are unconstitutional, insofar as such spending is a form of protected speech under the First Amendment. The Court nevertheless made clear that public disclosures were crucial to such an unregulated campaign finance system. First, the Court noted, restricting corporate donations to political campaigns was a relic of a bygone age, of a pre-internet “system without adequate disclosure.”121 Since the informational world had changed, the Court reasoned, bans on contributions were no longer justifiable on such grounds. Second, the Court went on to discuss the importance of public disclosure of campaign contributions by corporate entities, emphasizing that “disclosure permits citizens . . . to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and give proper weight to different speakers and messages.”122 Indeed, since such transparency, at least when present,123 helps enable the public to connect the dots between the legislative interests of given donors with particular legislators—in other words, to discern various entities’ interests in effectuating particular legislative goals and/or legal change—the Court satisfied itself that any potential undue influence of such financial contributions on lawmakers or the lawmaking process would be blunted.124

The decision in Italian Colors, however,created a regime that enables and even incentivizes companies and other defendants to shroud in relative secrecy the reform of substantive law by using “merely” procedural provisions. Indeed, the only sort of provision that the Court in Italian Colors reaffirmed as unenforceable under the FAA was an explicit exculpatory clause. For instance, an arbitration contract would not survive judicial scrutiny were it to proclaim that “[X Corporation] shall not be liable under [federal statute].” Although such an explicit provision is not included, corporations may be able to achieve virtually the same effect through the procedural back door. Any procedural limitation, no matter how draconian, apparently is fair game under the FAA after Italian Colors. Indeed, after Italian Colors, it would be irrational for legal advisors not to insulate their corporate clients from private enforcement of substantive laws in the ways permitted under the Supreme Court’s arbitration jurisprudence. And while there may still be limited room for states to limit procedural gamesmanship under unconscionability doctrine, unconscionability law is a highly imperfect tool, as I have explained elsewhere125–and it is even more so now in light of the constraints placed on it by the Court in Concepcion.126

One striking consequence of the Court’s decision in Italian Colors is therefore that it not only facilitates legal reform through private contracts, but also encourages the reform to take place in such a way as to avoid the public and political spotlight. At least an express exculpatory provision might capture the public’s attention were it to appear in an arbitration contract. Ironically, then, from a transparency perspective, precisely such an explicit exculpatory provision could capture the attention of someone signing an arbitration agreement and reveal a company’s underlying strategic gambit—that the idea behind these arbitration clauses is not just to move dispute resolution to private fora, but in some instances, to eliminate the possibility of dispute resolution entirely. But if exculpation is buried in the fine print of a maze of difficult-to-understand procedural provisions, then the result is private legal reform largely removed from public scrutiny as well as judicial scrutiny.

Imagine what would have to occur if drafters of arbitration agreements that eliminate class actions for employment discrimination lawsuits were to pursue that reform through the democratic process. They would have to lobby Congress or promote relief in court or—less obviously, but still quite saliently—seek a change in Rule 23 of the Federal Rules of Civil Procedure. Because of the Court’s recent arbitration revolution, none of that is necessary. The only paper trail that corporations leave in their efforts to reduce or eliminate their legal obligations are fine-print contracts of adhesion, which are rarely read by the average consumer or employee, let alone understood as effectively exculpatory for the drafter. The provisions themselves hardly raise a specter of suspicion regarding the corporation’s underlying strategic gambit to recalibrate the extent of liability and obligation under various substantive laws. Indeed, had Italian Colors allowed corporations to include contractual clauses that explicitly exculpated them from liability under particular laws, at least the public’s attention might have been captured. To put the point slightly differently, the Supreme Court’s prohibition on blatant exculpatory clauses does little good on this score: were contract drafters to include such explicit provisions, the strategic gambit of recalibrating substantive obligations would be quite obvious, and as such, more likely to incite public backlash. As it stands now, corporations can whittle down their potential liability almost as well with contractual arbitration clauses, and very few contract signers will be the wiser.

B. Why the Supreme Court’s Recent Arbitration Revolution and the Erosion of Substantive Law Are Likely Here To Stay

If the Court’s arbitration jurisprudence is, as I have contended, a recipe for self-deregulation, largely unchecked by democratic processes, then surely there would be public outcry at the Court’s decisions and sustained efforts to undo the damage through statutory amendment.127 After all, Stolt-Nielsen, Concepcion, and Italian Colors are not constitutional decisions;128 they interpret the FAA, which Congress is free to change. But the public outcry over these decisions has been muted at best. Yes, there have been some congressional hearings. Yes, Senator Franken reintroduced (yet again) the Arbitration Fairness Act (this time, of 2013).129 And yes, Congress did discuss the issue seriously during its debates on the Dodd-Frank Act, ultimately deciding to direct the Consumer Financial Protection Bureau (CFPB) to study the issue and to submit a report to back to Congress.130 But by and large, there has been no serious legislative push to overturn the Court’s arbitration jurisprudence. Why?

Divided government is, of course, part of the answer. With the Republicans in control of the House of Representatives, the odds of congressional passage of an amendment to the FAA are slim.131 But part of the answer also lies in the brilliance of pursuing deregulatory reform through the interpretation of the FAA. As William Eskridge found in a landmark study, overriding the Court’s statutory decisions is always a difficult business. Even “[t]he Supreme Court’s most controversial statutory decisions are usually not overridden because there are strong interest group alignments on both sides of the issues, leaving the Court’s decisions firmly intact.”132 But such overrides are virtually impossible if those critical of the Court’s decision lack a concentrated political constituency ready to use its clout in the political process. This finding is wholly consistent with a longstanding political science literature recognizing that interest groups with a narrow focus are more politically influential than diffuse groups organized for the achievement of broad goals.133 Interest groups with an expansive membership and a nebulous focus run the risk that potential members will decide to let someone else advocate for them, hoping to free ride on the efforts of more involved patrons of the group.134 On the other hand, members of groups with fewer participants and a narrower focus have a greater individual stake in advocating for their goals, meaning that efficacy increases as focus narrows.135

These political realities mean that amending the FAA is an extremely difficult political task.136 To begin with, arbitration is not the kind of thing that the American public gets worked up about. Its political salience is extremely low. As the Court is fond of saying, arbitration is merely a shift in forum, from the courts to private arbitrators. In theory, it does not affect one’s substantive rights; it merely dictates how and by whom those rights will be resolved. Moreover, the FAA is trans-substantive; it does not mention a single, specific substantive statute. And ever since the Court’s expansion of the FAA to all federal and state-law claims, it does not relate specifically to any particular political constituency: it covers employees, consumers, and businesses alike, and it covers virtually all substantive legal claims. The fact that the FAA does not, on its face, target any particular group or substantive right means that the Court’s arbitration cases were largely shunted to the less salient realm of “procedural” cases, which may have an enormous impact on substantive rights but do not garner the public attention that cases directly involving such rights often do.

The Court’s pleading decisions (Twombly137and Iqbal138) and its more recent class-action decisions in Wal-Mart v. Dukes139and Comcast v. Behrend140 are good examples of this phenomenon.As with the Court’s arbitration jurisprudence, those decisions were met with hue and cry from some quarters,141 but they ultimately encountered limited resistance in the democratically elected branches of government. Compare those cases, on the one hand, to cases that directly implicate the substantive rights of a specific group, on the other. In the wake of Ledbetter v. Goodyear Tire & Rubber Co.,142 for example, which explicitly involved employment discrimination law—in particular, the equal pay provisions of the Civil Rights Act of 1964—public outcry over the decision was so great143 that Congress enacted the Lilly Ledbetter Fair Pay Act of 2009 to provide that the statute of limitations for filing equal pay claims resets with each new paycheck affected by the employer’s discriminatory action.144 Likewise, the Supreme Court’s recent decision in Burwell v. Hobby Lobby Stores, Inc.,145 which allows closely held for-profit corporations to obtain religious exemption from providing employees with contraceptives, as mandated by the Affordable Care Act, has led to extraordinary public outcry.146 It has even led to the introduction of Senate Bill 2578, the Protect Women’s Health From Corporate Interference Act.147

In fact, the Court’s FAA jurisprudence creates a political dynamic that systematically favors large corporations, the “winners” in the Court’s arbitration jurisprudence, over those who enter into arbitration agreements (the “losers”).148 On the one hand, repeat-player large corporations and other commercial contract drafters with substantial market power have a vested interest in drafting self-deregulatory clauses and in protecting the interpretation of the FAA that enables them to do so. On the other hand, the impact of those contracts is felt by many members of the public on a wide swath of issues, which actually renders any action by the public against these decisions difficult and unlikely.149

The testimony before Congress in hearings on the un-enacted Arbitration Fairness Act of 2007 (AFA) bears out this point. In their testimony, AFA opponents generally expressed blanket support for pre-dispute arbitration clauses. Specifically, their arguments coalesced around the following concentrated arguments and principles: (1) arbitration agreements are voluntary consumer contracts;150 (2) arbitration is more efficient, flexible, and accessible than litigation;151 (3) the “little-guy” more often than not prevails, be it through voluntary settlement or arbitration;152 (4) the AFA would functionally abolish arbitration, imposing substantial costs on consumers, employers, employees, and businesses;153 and (5) post-dispute arbitration agreements are an illusory alternative.154 At bottom, this anti-AFA cohesion sprung from near-total support for the FAA’s broad scope. As Richard Naimark of the American Arbitration Association testified, “[t]he FAA is a piece of omnibus [legislation] serving a very broad sphere of arbitration activity . . . . Modification would unnecessarily send a message of ambiguity and policy hostility to arbitration . . . .”155

In contrast, while some AFA supporters offered testimony opposing the use of mandatory, pre-dispute arbitration clauses across the board,156 more often, reform advocacy splintered. For example, when the AFA died in committee,157 subsequent efforts to amend the FAA contracted in scope—the Automobile Arbitration Fairness Act of 2008 sought only to prohibit mandatory arbitration provisions in leasing agreements between consumers and car dealerships,158 and the Fairness in Nursing Home Arbitration Act of 2008 aimed to restrict only certain pre-dispute agreements between nursing homes and their residents.159 Even those who testified in support of the AFA fractured into interest groups. For example, multiple witnesses limited their testimony to discrete subject areas—Tanya Solov of the North American Securities Administrators to securities;160 Richard M. Alderman to automobile dealers and consumers;161 and Michael Foreman to employment discrimination.162 Each witness, it seemed, sought to obtain specific exclusion from arbitration proceedings for his or her particular group, but not to address the larger problem that contract drafters were being given the ability to control closely the scope of their legal obligations under substantive law.

In conclusion, with very few exceptions, the FAA has remained unchanged by Congress since its introduction in 1925,163 and recent efforts at legislative amendment show little promise. That fact renders the historical arc of the FAA somewhat astonishing, given that the scope of the FAA has nonetheless expanded significantly since its enactment. These dramatic and repeated changes to the FAA, however, have been rendered not by Congress, but by the Supreme Court.164 As a consequence, any changes to the Court’s recent arbitration jurisprudence, and its far-reaching implications for the substantive law, are unlikely to emanate from anywhere except perhaps a future—and different—Court. Until such time, it is likely that this erosion of substantive law will continue unabated.

Conclusion

The Supreme Court’s recent arbitration revolution, and its decision in Italian Colors in particular, is troubling insofar as it permits and creates an incentive for entities to self-deregulate through private contract. The one remaining check on the power of these entities to self-deregulate, one would think, is the contractual counter-party. But this leaves a vast swath of the commercial landscape subject to this new deregulatory authority. Indeed, to suggest as a panacea an increase in public awareness of the effects of the Supreme Court’s arbitration jurisprudence is likely folly. Even if the various potential signers of these contracts—consumers, employees, and the like—became aware of the larger deregulatory gambit, the very features of the arbitration cases and of the AFA that stymied public outcry and action remain in play. For one, these contracts run the gamut, from cell phone, credit card, and shareholder agreements to employment contracts in all sorts of industries, and thus, again, would at best gain the ire of extraordinarily diffuse segments of the population.165 Along these lines, the signers of these contracts are comprised of individuals (and groups of individuals) who are at a relative disadvantage as a matter of financial or political power for purposes of effectuating change.

Further, potential signers of these sorts of agreements will often lack the incentive, or even the option, to reject these contracts. Any individual signer of any individual agreement has not just an interest in signing that contract—be it to get a job, to establish a credit history, or even to get a good deal on a cell phone—regardless of its terms, but also often has no other choice. In any given instance, for any particular person, the trade might, on a micro level, be a “good” one. By allowing the exercise of private power over legal obligations to occur this way, contract drafters are able to retain a concentrated, nearly singular focus on hassle-free reduction of legal obligations, while contract signers are presented not with a question about whether corporations should be permitted to do this, but whether they need to take a particular job, to obtain a cell phone, or to open a credit card.

Indeed, the Supreme Court’s arbitration revolution is even more troubling when one considers its distributional effects. Who is most at risk of corporations re-ordering their substantive legal obligations? It is the people with the least comparative leverage, the contractual counter-parties, who arguably should, but will not as a practical matter, serve as a check on this erosion of substantive law. Moreover, both the check of judicial supervision on arbitration agreements that erode substantive law, and the check on misconduct provided by substantive law itself, have been removed or eroded by the Court’s recent arbitration revolution. In allowing arbitration to expand with so few restraints, we have arguably privatized both the public realm and the substantive law into oblivion.