These days arbitration seems to be everywhere. Binding pre-dispute arbitration provisions feature in all kinds of contracts; the Supreme Court regularly issues pro-arbitration decisions; and there has never been more discussion about how to employ arbitration fairly and effectively. But these realities underpin and point up twin challenges facing arbitration. First, arbitration has yet to make the most of its role as a valuable choice-based alternative to court adjudication for business disputes. Second, arbitration must be perceived and embraced as a fair method for resolving consumer and employment disputes.

Challenges for B2B Arbitration in the U.S.
For the first time in many years we’ve taken a good look inside many of the world’s largest companies to find out how they handle conflict. Pepperdine’s Straus Institute co-sponsored a just-completed landmark survey of general counsel and senior lawyers at Fortune 1,000 corporations through Cornell’s Survey Research Institute, and the results are generally positive for “ADR.” Mediation appears to be as widely used as in 1997, when a similar survey of the Fortune 1,000 was done. More companies are experimenting with “integrated conflict management systems” and many now report experience with early case assessment. But the most striking aspect of the new study is the apparent fall-off in the use of arbitration in every type of dispute: consumer, employment, commercial, environmental, IP, real estate, construction, and other categories.

Because the 1997 and 2011 survey groups were not identical, it’s possible that the differences account to some degree for the much lower reported usage of arbitration. And given the strong imperatives to use arbitration in cross-border business disputes (including broad international enforceability of awards and avoidance of foreign courts), it is hard to imagine that the data reflect international trends. Arbitration in the U.S. domestic market, however, is another matter.

During America’s “quiet revolution in dispute resolution,” mediation took, and for some time has held, center stage. Because it affords parties and counsel several potential advantages—privacy, informality, flexibility and, above all, control, mediation has become a normal adjunct of litigation—and usually settles or helps settle cases on the way to court. It’s a natural response to the cost, length, perceived risks and loss of control associated with litigation. Anyone who arbitrates frequently knows that as B2B arbitration has tended to take on more of the characteristics of court trial, parties are using mediation in the same way they use it on the way to court. As an arbitrator, I fully expect most cases to be mediated by someone before I hear the case, and I know that at least half the time the case will settle.

That doesn’t fully explain, however, why businesses would go a step further and plan to litigate, not arbitrate, if mediation fails to resolve the dispute. In a recent article, two GE lawyers explain that in ADR, companies tend to seek, above all, “fairness, efficiency (including speed and cost) and certainty in the enforcement of contractual rights and protections.” These same themes and concerns are reflected in the reasons Fortune 1,000 survey respondents gave for not using arbitration: the difficulty of appeal, the concern that arbitrators may not follow the law, the perception that arbitrators tend to compromise, lack of confidence in neutrals, and (not surprisingly) high costs. In a nutshell, it seems that business lawyers are worried, one way or the other, about not having enough control in arbitration. For some, this means turning to litigation.

This state of affairs is truly ironic. In 2009, the American College of Trial Lawyers co-sponsored a published report that concluded that the “one size fits all’ approach of litigation under current federal and many state rules is not working. Arbitration, on the other hand, is inherently a choice-based process. It offers the potential of fitting the process to the problem; the key is better choice-making based on business goals and priorities.

Thus, if a business believes that, at least for major disputes, there is a need to make sure arbitrators follow the law and do not “split the baby,” it’s possible to structure contract provisions and arbitrator selection processes that minimize the likelihood of either. If there is a desire to have a “second look” at the legal or factual underpinnings of an arbitration award, there are options in the form of appellate arbitration processes such as those sponsored by CPR and JAMS. (In California, of course, one can contract for expanded judicial review of arbitration awards, though the author and many experienced arbitrators urge great caution in adopting such an approach.)

For those concerned about cost-effectiveness and efficiency, a variety of options have been developed. The recent College of Commercial Arbitrators Protocols for Cost-Effective, Expeditious Commercial Arbitration offer a host of useful guidelines for business users, advocates, arbitrators and arbitration institutions.

Challenges for Consumer and Employment Arbitration
The other set of challenges confronting arbitration are associated with concerns about binding pre-dispute arbitration provisions in consumer and employment contracts. While properly constructed arbitration programs may in some cases afford consumers or employees a fair—and even an optimum—method of adjudication, there are real concerns about the operation of private arbitration systems and current limits on judicial oversight.

Thanks to a series of expansive interpretations by the Supreme Court, the Federal Arbitration Act, a federal statute designed to promote private, choice-based alternatives to court trial is the basis for enforcing dense boilerplate in mass-produced contracts to which “assent” is often fictional in all but the most formal sense. State statutes and common law are preempted by federal law across the broad swath of issues surrounding enforceability of agreements involving interstate commerce, which means that legislatures and courts have very few tools for the purpose of regulating arbitration agreements in contracts of adhesion. The Supreme Court recently declared dramatic new limits on judicial use of unconscionability defenses with respect to arbitration agreements. These limits were reinforced by the Court’s strong support of “delegation” provisions that take oversight of arbitration agreements away from courts and give it to the arbitrators themselves. Practically speaking, the only time consumers or employees may be able to raise concerns about procedural issues in arbitration is at the conclusion of the arbitration process, through a motion to vacate. This, of course, creates a tremendous barrier for individuals. The Court has also made arbitration agreements a vehicle for undercutting consumers’ and employees’ ability to take collective action through class actions.

In our broadly polarized Congress, there seems to be little room for nuanced responses to these realities. Most Democratic proposals are founded on the belief that binding arbitration under pre-dispute clauses is inherently unfair and should be outlawed in consumer and employment transactions. Currently, Congress is considering different versions of a proposed Arbitration Fairness Act that would effectively outlaw pre-dispute arbitration agreements in consumer, employment and franchise agreements—even including arbitration provisions in brokerage agreements that are already subject to oversight and regulation by the Securities & Exchange Commission. Republicans have sought to undo consumer legislation aimed, among other things, at closer review of the operation of arbitration under consumer financial services contracts and investor/broker contracts.

Meanwhile, binding arbitration agreements continue to be very widely used in consumer contracts and individual employment contracts. Because fundamental fairness hinges on many different characteristics of dispute resolution systems, arbitration programs may or may not provide an appropriate substitute for civil litigation. While, again, it is entirely possible for binding arbitration to effectively serve this role, there are also many ways in which private programs of adjudication may fall short of public expectations about civil justice. A number of potential solutions have been posited, including statutory due process guidelines for consumer and employment arbitration and a public rating system for consumer and employment arbitration programs that would broaden public awareness. There are also efforts to conduct a facilitated conversation among leading scholars, lawyers, advocates and policy makers at a National Roundtable on Consumer and Employment Dispute Resolution.

The inaugural session of the Roundtable will be held at Pepperdine University, and co-sponsored by the Straus Institute and Penn State University Dickinson School of Law.

by Thomas J. Stipanowich

Thomas Stipanowich is William H. Webster Chair, Professor of Law at Pepperdine University School of Law and Academic Director of the Straus Institute for Dispute Resolution. He is also an active arbitrator and mediator. See his writings on the Social Science Research Network (SSRN)