Corporate Hostility to Arbitration

Abstract

In the last 30 years, corporations have aggressively and successfully pushed the Supreme Court to invalidate virtually all state regulation of mandatory arbitration clauses on the ground that the Federal Arbitration Act (FAA) preempts any state law that expresses “hostility” to arbitration. Under current doctrine, the FAA preempts any state law that is premised on the idea that arbitration is inferior to litigation for resolving disputes, or that treats arbitration clauses less favorably than other contracts.

Yet, at the same time corporations decry state-law hostility to arbitration, they frequently express their own hostility to arbitration in the way they draft their own arbitration provisions. By carving out specific claims from arbitration, adopting procedural rules that approximate litigation, or imposing restraints that make it difficult for their consumers and employees to bring disputes in arbitration, corporations have shown that they believe arbitration to be inferior to litigation in multiple ways.

Although scholars have widely debated the Supreme Court’s arbitration jurisprudence, “corporate hostility” to arbitration has gone largely unnoticed. This article examines the various methods by which corporations express hostility to arbitration and argues that this hostility carries significant implications for FAA preemption doctrine. Currently, contract drafters can exempt claims from arbitration because they believe that arbitration is inferior to litigation. But when states seek to regulate arbitration for those same reasons, they are barred from doing so by the FAA. Thus, corporations can exempt claims from arbitration to maximize their self interest, but states cannot exempt claims from arbitration to protect the public interest.

This dichotomy is anti-democratic and results in bad policy. This article proposes that corporate hostility to arbitration shows that not all hostility to arbitration is improper, and that states should have greater freedom to regulate arbitration clauses without violating the FAA.

Keywords: arbitration, dispute resolution, corporations, civil procedure, litigation

JEL Classification: K1, K10, K22