Mandatory Binding Arbitration

In looking for something which I have now forgotten I came across this editorial in the Washington Post on the topic of private arbitration. In truth, I came across the the response from Kia C. Franklin first, then found the original editorial. Since DROs and other methods of stateless conflict resolution rely upon third party arbitration, I though it might be of value to see what the current non-free model is and if it has anything to teach about how it could or would work in a voluntary society.

I suppose the first sticking point I have is with the term mandatory. I'm already halfway out the door when I hear that.

As the editorialist said...

Most consumers aren't aware that many of the contracts they sign include these provisions. Even those aware of the provisions are helpless to do anything about them because consumers generally must accept contracts in their entirety. And some provisions -- such as those that force consumers to travel cross-country to attend arbitration hearings -- can be unfair.

I suppose the caveat of freely entered into could apply. If you signed a contract a contract knowing the provisions contained in it, well, what can I say?

Courts from time to time have struck down extreme provisions, but there are no uniform national standards. Several bills pending in Congress attempt to address these inequities.

As Stefan Molyneux would say, "More guns will solve everything!"

The typical unreasoned response to the suggestion that if you remove coercive monopoly violence from the social equation is to protest that without the restraining hand of the state there would be no rules or order, people would just run around doing whatever they wanted. It would be a chaotic nightmare.

But what is more chaotic, abiding by the terms of a signed contract or facing the agreed upon sanctions or not knowing if the terms will be upheld because a judge or legislator can set them aside later in favor of one party or the other?

The state creates the very uncertainty and doubt it claims to be protecting us from.

Services that require you to accept onerous terms are not monsters of exploitation--well, maybe they are, but that's a different discussion. In this context they represent an opportunity for enterprising entrepreneurs. Offer the same service on better terms if you can. If you can't then don't turn to the someone with a gun to solve your problem for you.

The Washington Post

A Good Arbiter

Congress considers new laws regulating the resolution of disputes between businesses and consumers.

Saturday, April 12, 2008; Page A14

VIRTUALLY everyone who carries a credit card is subject to something called a binding mandatory arbitration agreement. So is almost anyone who owns a cellphone or who recently purchased a car from a dealer.

These agreements are often buried deep in the fine print of consumer contracts; they mandate that any dispute between the consumer and the company be resolved through private arbitration. That means a neutral third party -- often a former judge -- rules on the issue, and both sides are bound by the decision. Arbitration is generally cheaper and speedier than litigation. Surveys show that business strongly favors it, while consumers are also generally approving.

Still, binding mandatory arbitration provisions in consumer contracts have come under attack recently, and for some good reasons. Most consumers aren't aware that many of the contracts they sign include these provisions. Even those aware of the provisions are helpless to do anything about them because consumers generally must accept contracts in their entirety. And some provisions -- such as those that force consumers to travel cross-country to attend arbitration hearings -- can be unfair. Courts from time to time have struck down extreme provisions, but there are no uniform national standards. Several bills pending in Congress attempt to address these inequities.

Sen. Russell Feingold (D-Wis.) would prohibit binding mandatory arbitration provisions in all consumer and employment contracts; the bill allows arbitration only after a dispute arises and only if both parties agree. This goes too far and risks eliminating arbitration as a serious alternative to litigation for such routine matters as warranty disputes, as even some supporters of the bill acknowledge. Sen. Jeff Sessions (R-Ala.) provides a better framework to improve the system. Mr. Sessions's bill would, among other things, force companies to more prominently display arbitration provisions and provide an explanation of how the costs of the arbitration are to be split between consumer and business. The bill also would allow consumers to opt out of arbitration in favor of small-claims court. Any hearing would have to take place in a location convenient to the consumer, and arbitrators would be required to apply the laws of the state in which the consumer resides.

This week, Sens. Mel Martinez (R-Fla.) and Herb Kohl (D-Wis.) introduced legislation to ban mandatory arbitration clauses in nursing home contracts. This narrow exception may be warranted. Nursing home residents are among the most vulnerable in the country, and decisions to place family members in these facilities are often made under the most stressful of circumstances. Allowing residents or their families to sue may be the only way to prod nursing homes to improve care.

The Injustice of Private Arbitration

Monday, April 21, 2008; Page A14

Your April 12 editorial "A Good Arbiter" completely ignored the high upfront costs, the heavy anti-consumer bias and the gross procedural disadvantages that characterize private arbitration as opposed to our public courts of law.

These features are why consumer groups, patient advocates, employment rights activists -- essentially everyone besides the corporate lobby -- generally oppose mandatory arbitration of disputes between corporations and regular people.

Arbitration creates grave injustices for the up to 20 percent of American workers who, to keep or get jobs, must waive their constitutional right to take lawbreaking employers to court. If their employer underpays, discriminates against, denies workers' compensation to or otherwise illegally mistreats employees, the employer's handpicked private arbitration company will hear the dispute.

Unlike the measure from Sen. Russell Feingold (D-Wis.), the bill by Sen. Jeff Sessions (R-Ala.) does absolutely nothing for the most financially vulnerable Americans, who in this economy must choose between much-needed employment opportunities and much-cherished constitutional rights. More is at stake here than $200 cellphone contract disputes that can be taken to small-claims court.

KIA C. FRANKLIN

Senior Fellow in Civil Justice

Drum Major Institute for Public Policy

New York