The Judicial System May Be Bad, But The Privatized Judicial System Of Arbitration Is Worse

from the bad-news-all-around dept

Back in 2011, we wrote about a troubling ruling in the Supreme Court in AT&T Mobility v. Concepcion, the case which basically said that it's perfectly fine for businesses to put in place "binding arbitration" clauses, that take away people's rights to take a company to court over some sort of wrongdoing. As I noted at the time, ever since taking a series of classes on arbitration in college, I've been fascinated with the process, which sounds like a good idea. But it's yet another case where theory and reality don't necessarily match up.

The theory is that arbitration is a cheaper and more efficient way to deal with disputes between two private parties. Rather than submitting yourself to an overburdened, slow court system, with tons of rules and limtiations, you bring in a "neutral" arbitrator who can help go through both sides of the story and decide who is right. The problem is in the reality. In cases between businesses and individuals, businesses win nearly 97% of the time. Think about that for a second. It's not hard to see why: arbitrators are usually chosen jointly by both parties, but the companies are the ones who are going to be going back for more arbitration over and over again, and if an arbitrator rules against them, they won't even be on future lists at all. It doesn't take a genius in game theory to recognize that the arbitrator will be under tremendous pressure to side with the company, and the stats support that.

This weekend, the NY Times took a deep dive into the mess that has become this private judicial system known as binding arbitration, demonstrating horror story after horror story of how the system has failed ordinary people to the benefit of large corporations. Basically, the fears I wrote about four and a half years ago have become true. As we noted at the time, we agree that the class action judicial system in the US is broken, but replacing it with private arbitration is quite clearly a much worse solution that would certainly lead to companies regularly being able to get away with horrific behavior, leaving individuals with basically no recourse.

The Times story further supports the idea that arbitrators are under pressure to side with companies, even getting a few to admit that:

But in interviews with The Times, more than three dozen arbitrators described how they felt beholden to companies. Beneath every decision, the arbitrators said, was the threat of losing business.

Victoria Pynchon, an arbitrator in Los Angeles, said plaintiffs had an inherent disadvantage. “Why would an arbitrator cater to a person they will never see again?” she said.

The article is full of story after story after story of crazy things happening in arbitration situations that would never be allowed in real courts.

Behind closed doors, proceedings can devolve into legal free-for-alls. Companies have paid employees to testify in their favor. A hearing that lasted six hours cost the plaintiff $150,000. Arbitrations have been conducted in the conference rooms of lawyers representing the companies accused of wrongdoing.

Winners and losers are decided by a single arbitrator who is largely at liberty to determine how much evidence a plaintiff can present and how much the defense can withhold. To deliver favorable outcomes to companies, some arbitrators have twisted or outright disregarded the law, interviews and records show.

In one of the key examples (though there are many) in the article, this story is revealed:

For Ms. Pierce, the most astounding moment came when her lawyers asked Mr. Kalogredis to impose sanctions on the defense for breaking the rules of discovery and destroying evidence. He fined the defense $1,000 after investigating the matter, then billed Ms. Pierce $2,000 for the time it took him to look into it.

There's a lot more craziness as you read through the article. Again, I'm no fan of class action lawsuits, generally speaking. The vast majority of them tend to be boondoggles to help lawyers cash out, rather than actually help the members of the class. But that problem can be dealt with in other ways rather than forcing people to give up their right to petition a court in a dispute through a "binding arbitration agreement" in a clickthrough terms of service no one actually reads.

As one lawyer in the article notes, the whole arbitration process is corrupt because it's forced on people. If two parties willingly agree to go to arbitration, that's one thing. But that's not what's happening.

And this is a problem that isn't just about companies and individuals. As we've been discussing, trade agreements like the TPP and TTIP have a thing we've been calling corporate sovereignty, and which is officially called "Investor State Dispute Settlement" (ISDS). In reality, it's just an "arbitration" system for disputes between companies and countries -- where the arbitrators will often face the same pressures to side with the companies over the countries (at least one hopes that countries will have slightly more bargaining power). As the NY Times article details, companies have learned to play this game pretty well over the last few years, and they must be excited about the possibilities to do it on a wider scale:

Unfettered by strict judicial rules against conflicts of interest, companies can steer cases to friendly arbitrators. In turn, interviews and records show, some arbitrators cultivate close ties with companies to get business.

Some of the chumminess is subtler, as in the case of the arbitrator who went to a basketball game with the company’s lawyers the night before the proceedings began. (The company won.) Or that of the man overseeing an insurance case brought by Stephen R. Syson in Santa Barbara, Calif. During a break in proceedings, a dismayed Mr. Syson said he watched the arbitrator and defense lawyer return in matching silver sports cars after going to lunch together. (He lost.)

Other potential conflicts are more explicit. Arbitration records obtained by The Times showed that 41 arbitrators each handled 10 or more cases for one company between 2010 and 2014.

The court system is far, far, far from perfect. But a secretive, private judicial system that is rigged to companies? That's much, much worse.

Filed Under: arbitration, binding arbitration, private judicial system, tilted scales