Recommended Reading: Outsourcing Justice – The Rise of Modern Arbitration Laws in America

Arbitration Is The Product Of The Reform Era – And The Need For Reform Is Not Over

     The book cover of Outsourcing Justice, Professor Imre Szalai’s history of arbitration in the United States, might lead one to believe that the author will fire a broadside against arbitration today. First, there is the red, white, and blue carton of French fries, with fine print at the bottom: "BY READING THIS LABEL YOU AGREE TO ARBITRATION." That’s just enough to recall and conjure up James v. McDonald’s Corporation, 417 F.3d 672 (7^th Cir. 2003), in which the plaintiff, disappointed purchaser of a game ticket, discovered after-the-fact that she was bound by an arbitration clause. That clause was contained in the rules for the "Who Wants to be a Millionaire" game ("Official Rules"); and, the French fry cartons to which game cards were affixed had language directing participants to see the Official Rules for details. Second, the title, Outsourcing Justice, has a somewhat pejorative ring to it, in a world where “outsourcing” connotes heartless cost cutting.

     In fact, Outsourcing Justice is clearheaded, well written, balanced, and scholarly. Prof. Szalai places the development of arbitration within its historical and social context, while also looking at the important role played by individuals who lobbied to expand the role of arbitration in the 20^th century.

     Before the passage of modern arbitration statutes, arbitration was severely encumbered in the United States, because arbitration agreements could be disavowed before judgment was entered. But the increasing development of interstate and global commerce required that merchants be able to rely with certainty on the validity, irrevocability, and enforceability of arbitration agreements. Also, the sudden end of World War I resulted in a spate of government contract cancellations, making it necessary to find fast and efficient means to resolve contract disputes.

     In particular, Prof. Szalai explores the remarkable role played by Charles Bernheimer, the "Father of Commercial Arbitration." Deeply disturbed by the unethical practice of merchants during the Panic of 1907, a time of economic shock in the country, Bernheimer made it his life’s passion to promote arbitration as an alternative to burdensome litigation. A successful cotton merchant himself, Bernheimer gave generously of his own time and money to promote arbitration. He appears to have pushed for reform out of altruistic motives, rather than for "any selfish or evil motives to strip away rights from unknowing individuals." (p. 91). Bernheimer was a pragmatic idealist.

     Bernheimer’s efforts to promote arbitration, beginning in 1907, encountering a major victory with the passage of New York’s arbitration statute in 1920, and culminating with the creation of the Federal Arbitration Act in 1925, belong to the Progressive Era. Prof. Szalai tells the story of Bernheimer’s intensive lobbying efforts, in the Chamber of Commerce, the New York State Legislature, the American Bar Association, and the United States Congress. While the narrative of lobbying efforts may be a bit of a slog at times, it is also very revealing in its details about how lobbying could once, at its best, be a constructive source of reform, and about how, once upon a time, lawyers and politicians with different opinions could listen to one another’s arguments, and cooperate to produce useful legislation. It is also a story about how one dedicated man, Bernheimer, could make a difference by being persistent, passionate, knowledgeable, and responsive to the concerns of others who would today be called “stakeholders.” For two decades, the resourceful Bernheimer was indefatigable in his commitment, yet found time for summer archeological expeditions, exploring the Southwest.

     Placing the development of arbitration in the context of the Progressive Era, Prof. Szalai notes that consent, efficiency, and faith in a bureaucratic approach were all hallmarks of the Progressive Era – as well as of the movement to spread arbitration. The Federal Arbitration Act created a loose, malleable framework, intended to be a work in progress, and an exemplar of consent, efficiency, and bureaucratic expertise.

     Prof. Szalai argues, however, that the "work in progress" is not yet complete. In the case of arbitration, consent, especially in consumer transactions, is usually a legal fiction. Efficiency is often an elusive goal. And blind faith in a loose procedure may be misplaced – is the system neutral, or does it disadvantage the consumer, the employee, and the class member? Arbitration is not defined in the Federal Arbitration Act. Congress or perhaps the judiciary "should clearly define what is meant by arbitration covered by the law, and address several minimum procedural guarantees in arbitration, and what types of parties or claims should be covered by an arbitration law." (p. 201).

     Outsourcing Justice shows that the development of arbitration case law has strayed from the intent of some of arbitration’s Progressive Era proponents. In the congressional history of the Federal Arbitration Act, early proponents of arbitration intended that it apply to arms-length agreements between merchants, and that small disputes with consumers and employment disputes might not be covered. As case law has developed, however, arbitration has increasingly colonized the areas of consumer and employment law.

     Of course, judges will always look first to the plain language of the Federal Arbitration Act and state statutes, and will only delve deeper into legislative history if they cannot find the answers they want in the language of the statutes. While the legislative history is very interesting, it is often ambiguous, with its meaning contested and elusive.

     Outsourcing Justice also argues that "progressive measures often failed to provide clarity or guidance regarding how to balance [consent and efficiency]." (p. 200). However, on calibrating the balance, Prof. Szalai does not offer much guidance.

     Andrew J. Pincus, the lead attorney for AT&T in AT&T v. Concepcion, 563 U.S. 321 (2011) has said, “Our courts are expensive, overburdened and virtually impossible for nonlawyers to navigate. For these claims, it is arbitration or nothing.” See my June 4, 2012 post. Prof. Szalai has not written a book to engage with this argument, because the province of his book is law and history, not law and economics.

     On a note of optimism – or at least hope – Prof. Szalai concludes, “I hope America’s arbitration laws are about to go through anoth
er period of reform.”  (p. 202). That’s the progressive spirit of Charles Leopold Bernheimer, from a time long ago, channeled through the medium of Prof. Imre Szalai.