Unfair by Default: Arbitration's Reverse Default Judgment Problem

Abstract

It is a foundational principle of civil law that a defendant who fails to respond to claims against it is deemed to have admitted those claims and can be subjected to default judgment liability. This threat of default judgment incentivizes defendants to respond to claims, thereby preventing delay tactics and helping ensure cases are resolved efficiently and on the merits.

In consumer and employment arbitration, though, the fairness and efficiency incentives of traditional default judgment are flipped on their head, rewarding rather than punishing unresponsive defendants. This difference from civil litigation arises from arbitration’s fee structures: if a defendant-company fails to pay its share of the fees required to initiate arbitration, the financial burden shifts back to the plaintiff to pick up the defendant’s tab—which can exceed $3,000—on top of the plaintiff’s own required fees of $200–$ 400. Failure to pay this extra fee means seeing the claim dismissed with the defendant getting off scot-free. By ignoring claims, then, defendant-companies massively increase the financial burden on plaintiffs while improving their own odds of escaping liability.

This Article presents the first scholarly analysis of arbitration’s problematic default rule, which I term the “Reverse Default Judgment Rule.” Drawing on original historical research into the development of arbitration’s modern rules, the Article shows how the Reverse Default Judgment Rule came to be. It then reveals the potentially insurmountable roadblocks that the Reverse Default Judgment Rule puts in the path of individual employees and consumers seeking to vindicate their rights, as well as the way these plaintiffs have recently begun using the Rule to bring coordinated “mass arbitration” claims against defendant-companies.

Understanding and confronting the Reverse Default Judgment Rule will ultimately help make arbitration a more efficient, economical, and fair means of resolving consumer and employment disputes.

Keywords: civil procedure, arbitration, employment, consumer, contracts, alternative dispute resolution