Important New Book Proves Federal Arbitration Act Badly Distorted by Supreme Court

Important New Book Proves Federal Arbitration Act Badly Distorted by Supreme Court

By Paul Bland, Senior Attorney

Professor Imre Szalai of Loyola law school is a friendly, well spoken and thoughtful scholar. And, it turns out, having taken an extremely detailed look deep into the discussions and advocacy that led to the passage of a 1925 statute, he’s uncovered a good deal of evidence that explodes the legitimacy of a series of US Supreme Court decisions. In recent decades, and in the most important cases by the usual 5-4 vote, the Supreme Court has taken this law, the Federal Arbitration Act, and expanded it. 


Prof. Szalai’s new book, “Outsourcing Justice,” conclusively establishes — through painstaking day-by-day reviews of the papers and words of the handful of people who conceived of, drafted, pushed and cared about the bill — that the Congress that passed the Act and the fathers of the bill would never have agreed with the way that 50+ years later, the Supreme Court dramatically expanded the use of forced arbitration in employment and take-it-or-leave-it consumer cases in the U.S.

What are the stakes here? Well, if one goes back 25 years, hardly any U.S. employers required non-unionized workers to submit claims under the nation’s civil rights or wage and hours laws to mandatory arbitration — a secretive system where these cases will be decided by a private arbitrator selected by an arbitration company which is selected by the employer. Today, by contrast, there are tens of millions of workers, widely estimated to constitute more than 30 percent of the workforce, who can only get a job — or keep their current job — if they sign away their constitutional rights to a trial by jury, their rights to a day in public court and agree to submit all disputes to arbitration. As a result, workers win fewer cases on average and much smaller awards, on average, than they did back when they could go to court.

If one goes back more than 15 years, only a tiny number of U.S. consumers were subject to forced arbitration clauses. As late as 1998, a handful of early corporate pioneers were experimenting with opting out of our legal system — a few pest control companies, two credit card issuers, some car dealers in Alabama – but that was about it. Today, more than 90 percent of cell phone users, the holders of 96 percent of credit card debt, nearly all cars, nearly anyone who goes to a nursing home, nearly anyone buys something over the internet (note: for purposes of brevity, I’ll just skip over dozens of additional easy examples), has to sign or click away their constitutional rights to get products or services.

How did this change come about in employment and consumer law in the 1990s and since? Congress didn’t do anything. The public didn’t notice it. What happened was the offspring of a barely noticed love affair between corporate lawyers who want and wanted their clients not to be hassled by things like consumer protection, antitrust and civil rights laws, and leading conservative justices on the Supreme Court.

This raises an important issue of legitimacy in a democracy. The Supreme Court is supposed to interpret statutes, not write them. But what is clear from this new book is that the Court’s decisions “interpreting” the Act have gone so far beyond what the authors and fathers of the statute intended in 1925, that there is a very real question as to whether those decisions are legitimate.

To a degree, the conclusion that the Court has invented a lot of the “law” it’s announced in the name of the FAA is not really breaking news. If the Court was legitimately deriving all of the rules of law it’s found in the FAA from the statute, it should be able to find those rules in either the language of the Act or in the records of what the Congress intended. Neither of these propositions has much to be said for it.

First, the main provision of the FAA, the sponge from which the Court has squeezed this ocean of pro-corporate immunity law, is a single deeply muddled sentence, and tons of Supreme Court decisions “interpreting” it cannot even arguably be based on the actual words used in that sentence. 

And second, it’s not like the Court’s conservatives have ever acted like they cared much about the 1925 Congress actually thought. (Special bonus Nerd Joke: Q: Where can you find the legislative history of the FAA? A: In Supreme Court dissents.) So, long before Prof. Szalai wrote his powerful new book, back in 1995 Justice O’Connor wryly remarked that the FAA is an “edifice of our own making.” And previous academics have quoted numerous passages from the bill’s framers about how the FAA was never intended to address statutory disputes, but instead contract and commercial ones.

But with Prof. Szalai’s deep, deep dive into history, the veil has been completely stripped away. There were essentially three guys in New York who conceived of, wrote, and did 99 percent of the lifting in lobbying for the FAA. They were enormously taken with arbitration, just loving the idea of getting commercial disputes (the example of a dispute used again and again throughout the legislative debates is if some business orders goods and then wants to cancel the order) out of the slow and broken court system (particularly in New York) and in front of private arbitrators who would decide them quickly. The three key guys were Charles Bernheimer, Julius Cohen, and William H.H. Piatt. The book is a bit of a biography of several years in the lives of these men — a cotton-goods merchant, a law professor, and a lawyer who was active in the ABA. Prof. Szalai tries to get us to share his enormous interest in their lives and personalities. I have to admit, Bernheimer (the cotton-goods seller) was actually somewhat interesting, particularly when he was hiking across the Southwest and doing things unrelated to arbitration, although I don’t see anyone casting George Clooney for any of them.

Anyhow, with a love of detail that promises a joyous career of writing law review articles with many thousands of lengthy footnotes, Prof. Szalai digs into the daily schedules and nearly everything written or said by these three guys relating to arbitration. They started first in the New York state legislature just after World War I, and then pushed it in Washington for several more years. What becomes clear is that not all that many people who were not commercial lawyers from New York were all that jazzed up about arbitration, but these guys tirelessly made their case to anyone who would listen, and with the support of some trade associations and enlisting some politicians, they eventually made headway and then history.  Unfortunately, the later history of the statute they drafted would bear little relationship to what they had in mind at the outset.

What’s telling, though, is what happened on the very few occasions when someone really focused in on the proposed FAA enough to object. So at a couple of junctures, either major employers (like a lawyer in South Dakota who carried a lot of water for railroads) or major unions, expressed a lot of concern about this bill – was it going to change the way employment disputes were handled. The Act’s three founders repeatedly beat back concerns by explaining that that the bill’s purpose was not “of a labor character,” and was not meant to address “industrial” contracts, when that was being used as terminology for employment relations.  The upshot of this history is plainly that the FAA was intended to have NOTHING to do with employment. 

At another point, a key Senator, with the probably power to gum up everything and kill the bill, raised the issue of the then-emerging practice of some commercial actors using adhesive, “take-it-or-leave-it” contracts.  Once again, the sponsors (and particularly Mr. Piatt) explained that this was not the kind of dispute that the proposed FAA was supposed to be addressing, and this was crucial towards removing opposition to the bill. (In retrospect, this theme from the legislative history makes the last 25 years of Supreme Court decisions feel like a big bait and switch on the ghosts of the FAA’s framers.)  They were talking about commercial contracts agreed upon by commercial entities. The bill was not supposed to be about powerful parties dictating terms to weaker ones about how to avoid the law.

Let’s give the Professor the final word: “the Supreme Court of the United States has been erroneously interpreting the Arbitration Act and unjustifiably binding millions of Americans to arbitration agreements.”

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