How do institutions develop? Why do they take particular forms and roles in the political economy? The emergence of mandatory arbitration of employment and consumer disputes in recent decades is a strong manifestation of institutional change, but also one that poses puzzles to understand its development. There was no major legislative initiative leading to the development of mandatory arbitration. No political figures included it in their policy platforms. The statutory basis for this new institution was an act passed in the 1920s. So why did it emerge? In Privatizing Justice: Arbitration and the Decline of Public Governance in the U.S., Sarah Staszak takes on this puzzle. Her rich historical and legal analysis of the development of the institution of mandatory arbitration provides an account of the dynamics that transformed an institution built around consensus and comity into a controversial practice that divides along political and interest group lines.
Staszak argues that the key to understanding the trajectory of institutional change leading to the development of mandatory arbitration is the concept of institutional conversion. In this process, key actors take an existing institution and convert it to a new role and function that can be starkly at odds with its origin. Conversion helps explain why we see common forms and lineages of institutions even as change is occurring.
Why Conversion in Arbitration?
Arbitration is an institutional order particularly amenable to conversion due to its generality and its flexibility. At its most basic, arbitration refers to any dispute resolution procedure where a third-party neutral resolves a dispute by deciding the outcome. This general definition can encompass a wide range of types of procedures and contexts in which they are used. Staszak illustrates this with her discussion of two domains where arbitration came into widespread use in the mid-twentieth century: 1) labor arbitration and collective bargaining; and 2) commercial and securities arbitration. Although these two systems developed separately and had many different characteristics, they both fall comfortably within the breadth of the arbitration category.
In the labor context, arbitration gained prominence as a response to growing labor unrest in the early 20th century. In particular, interest arbitration panels were proposed as an alternative to strikes to determine the terms of labor contracts between unions and employers. Interestingly, the arbitration boards proposed were often quasi-public in nature, with boards being established under statutory authority with governmentally appointed members. Although this type of arbitration became the foundation of labor relations systems in other countries, notably in Australia and New Zealand, it was not adopted in the United States. However, in the 1940s and 50s, labor arbitration did emerge in the U.S. as the primary institutional response to the different but related problem of how to deal with disputes over the application of collective agreements during the term of the contract.
The system of labor arbitration that developed in the U.S. was a classically American private solution to a widespread public problem. How were labor contracts to be enforced and disputes over them resolved without industrial conflict disrupting business and the economy? The solution arrived at was for the parties to accept arbitration of disputes arising during the term of the contract, limiting the focus of strike action to disputes over the renewal of a contract at the end of its term. A key to the system was that it was established by contract and jointly administered by the parties, without governmental involvement. Essential to its success was the development of a cadre of well-respected neutral arbitrators to decide grievances under the system. The development by the parties of a private, mutually acceptable and consensual process for resolving disputes that avoided the disruptions of industrial conflict was the trigger for the Supreme Court to bestow its blessing and legal support for labor arbitration.
When employment arbitration arose in the 1980s and 90s as a new institutional order, it was against this backdrop of a well-established system of labor arbitration that was widely accepted and supported by both labor and management. With arbitration as a concept being both entrenched and flexible, the field was ripe for its conversion to a very different institutional order, one in which arbitration was adopted at the initiative of only one party, by business, as a tool for litigation avoidance.
Progressive support for arbitration facilitating conversion
Structural factors like the generality and flexibility of arbitration provide one explanation for why it was particularly susceptible to institutional conversion processes. But Staszak also puts forward an agency argument, suggesting that the nature of support from a broad coalition of actors facilitated the conversion process. In particular, she argues that the emergence of pre-dispute arbitration agreements (PDAAs) was aided by the support for arbitration by key progressive actors. The cross-aisle support for arbitration was important in the initial period of conversion, as evidenced by the mixed conservative-liberal coalitions of Supreme Court Justices forming the majorities in the critical 1980s decisions laying the foundation for the expanded use of arbitration.
As the modern system of PDAAs for employment and consumer disputes emerged in its fuller form in the 1990s, openness to employment arbitration from some labor arbitration advocates played an important role in suggesting that this practice had a legitimate role to play in dispute resolution. This was manifested in debates that focused on ways to ensure that employment arbitration met due process standards. The most prominent example of this was the discussions among many key actors in the field that led to the development of the Due Process Protocol in 1995. The Protocol set out due process standards that its signatories proposed as essential to be included in fair arbitration procedures, including items like the right to counsel and neutral third-party arbitrators with expertise in the field. Where consensus broke down in the Due Process Protocol was over the core question of whether arbitration could be a result of mandatory pre-dispute agreements or should only be enforceable where based on voluntary post-dispute or jointly negotiated agreements.
The Protocol included many important due process protections that were influential in the development of procedural rules by major arbitration service providers and in review of them by the courts. However, the eluding of the core question of enforceability of PDAAs had a pernicious effect in suggesting that so long as arbitration incorporated due process protections it could be an effective and acceptable mechanism for resolving disputes over employee and consumer rights. This allowed the strong support for arbitration that had developed in the context of collective bargaining and labor arbitration to be transferred over to the very different setting of mandatory arbitration under PDAAs. The problem was that while mandatory arbitration adopted many of the forms and procedures of labor arbitration, it remained a fundamentally different institutional structure that was unilaterally imposed by businesses on employees and consumers rather than being bilaterally developed and administered like labor arbitration.
If we look at the system of employment and consumer arbitration based on PDAAs that has emerged in the 2000s, a core feature of it is the structural advantages accruing to the business side in resolving disputes. My own research and that of other scholars looking at the outcomes of PDAA arbitrations find that businesses win more often and, crucially, receive lower damages in arbitration. This feeds into the core litigation avoidance imperative that Staszak describes as motivating business support for and utilization of PDAAs. The extent to which the corporate advantage in arbitration is being driven by the unilateral design and implementation of PDAAs by management is illustrated by the evidence we find for a repeat player advantage where an employer does increasing well when it has multiple cases before the same arbitrator. A notable feature of these research findings is that they are based on arbitration cases administered by the American Arbitration Association (AAA), the largest service provider in the field. The AAA has adopted the key recommendations of the Due Process Protocol in its own procedures. It requires practices in its own rules like the employer paying the costs of arbitration under an employment PDAA, which some employers have been reluctant to do, but serves as a crucial feature allowing access to arbitration for employee. Based on my own research, I would observe that the AAA has been rigorous in enforcing its procedures and trying to protect due process. Yet even in what is in many ways a best case scenario for employment PDAAs, we still see evidence of a systematic employer advantage and strong indicators that PDAAs effectively allow businesses to fulfill their litigation avoidance agenda.
Today, progressive and centrist voices trying to maintain a path forward for PDAAs have become rarer and more isolated in the face of the mounting evidence of their deficiencies. The growing use of class action waivers in PDAAs is a practice that few defend given the lack of any policy justification beyond eliminating the right to bring class actions. The problematic role of PDAAs have also been particularly highlighted in the context of sexual harassment cases brought to the fore by the #MeToo movement. Shunting sexual harassment and assault cases into an employer mandated PDAA system is something that even many defenders of arbitration have been unwilling to include in their support of the institution. The breakdown in this area of the earlier bipartisan coalition is illustrated by the passage of the Ending Forced Arbitration of Sexual Harassment and Sexual Assault Act of 2021, the first broad exemption of a category of cases from the FAA, which notably passed the US Senate on a voice vote with even defenders of PDAAs reluctant to go on the record in support of it in this context.
Alternative paths for conversion?
The history of PDAAs that Staszak ably lays out shows the dangers of institutional conversion. A practice that had been successfully used in the labor and securities settings with broad support of the relevant parties was converted into a contentious and one-sided practice that advanced business interests at the expense of employees and consumers. But it is worth considering whether the institutional flexibility and adaptability of arbitration could allow alternative paths of institutional conversion. Is it possible to imagine a progressive path of conversion that would build on the strengths of arbitration as a dispute resolution procedure?
One opening for an alternative path of institutional conversion of arbitration can be seen if we look cross-nationally at how arbitration-like procedures are used to resolve employment disputes in other countries. In Canadian provinces, employment discrimination disputes are resolved through a system of human rights tribunals. The human rights tribunals have arbitration-like features, with more informal settings and procedures. The tribunal members are appointed based on relevant expertise and have specific jurisdiction to resolve discrimination cases, in contrast to the general authority and legal expertise of judges. Procedures and conduct of tribunal hearings bear close resemblance to labor arbitration hearings. The major difference is that this a publicly established system and the tribunal members are publicly appointed. This diverges from the bilateral control and appointment of arbitrators, but thereby avoids the problem of PDAA arbitration where the system is unilaterally designed and implemented by one of the parties. The human rights tribunal system can be effectively accessed and used by nonunion employees who lack the institutional support of a union that could co-administer a bilateral system. In effect, the government, representing the public interest, steps in to establish a public arbitration-like system.
Similar public arbitration-like systems for resolving employment exist in other countries. In the United Kingdom, a system of employment tribunals fill this function, providing a less formal, lower cost, and more accessible way for individual employees to have employment disputes resolved. The UK employment tribunals have limited jurisdiction in the damages they can observe, but crucially employees retain the ability to choose to file larger cases in the courts with their broader remedial jurisdiction.
Staszak begins her historical narrative of the evolution of arbitration in the United States with an examination of early 20th Century efforts to use arbitration boards as a mechanism to resole labor disputes. Significantly, the proposals of that era were for arbitration boards to be established by statute with publicly appointed members representing a range of interests. Could it be that an alternative path for 21st century dispute resolution in the U.S. is to revive this old idea of a publicly established and administered system that takes the strengths of arbitration and adapts it for new uses?
In the employment setting a public arbitration system could build off the lessons of both U.S. labor arbitration and the arbitration-like systems that exist in other countries. These could include: publicly appointed arbitrators who are broadly representative of both labor and management sides; broad jurisdiction to resolve discrimination and other statutory claims, including the good cause cases which make up the unseen bulk of workplace disputes; strong due process protections guaranteed by statute; and the ability of claimants to choose to bring cases in either this more informal and expeditious arbitration system or to proceed through the courts for the larger and more impactful cases that the judicial system is well designed to handle. This would chart out a new path of institutional conversion for arbitration that would serve the interests of employees and consumers as well as those of business that have dominated the existing system of PDAAs. To build on an analogy from health care reform policy debates, it is time to think about advancing a public option for arbitration.
