Arbitration in the United States
Arbitration, in the context of the law of the United States, is a form of alternative dispute resolution. Specifically, arbitration is an alternative to litigation through which the parties to a dispute agree to submit their respective evidence and legal arguments to a third party for resolution. In practice, arbitration is generally used as a substitute for litigation. In some contexts, an arbitrator has been described as an umpire. Arbitration is broadly authorized by the Federal Arbitration Act. State regulation of arbitration is significantly limited by federal legislation and judicial decisions applying that law.
The practice of arbitration, especially forced arbitration clauses between workers or consumers and large companies or organizations, has been gaining a growing amount of scrutiny from both the general public and trial lawyers. Arbitration clauses face various challenges to enforcement, and clauses are unenforceable in the United States when a dispute which falls under the scope of an arbitration clause pertains to sexual harassment or assault.
History
Agreements to arbitrate were not enforceable at common law. This rule has been traced back to dictum by Lord Coke in Vynor’s Case, 8 Co. Rep. 81b, 77 Eng. Rep. 597, that agreements to arbitrate were revocable by either party.During the Industrial Revolution, merchants became increasingly opposed to this rule. They argued that too many valuable business relationships were being destroyed through years of expensive adversarial litigation, in courts whose rules differed significantly from the informal norms and conventions of businesspeople. Arbitration was promoted as being faster, less adversarial, and cheaper.
The result was the New York Arbitration Act of 1920, followed by the United States Arbitration Act of 1925. Both made agreements to arbitrate valid and enforceable. Due to the subsequent judicial expansion of the meaning of interstate commerce, the Supreme Court reinterpreted the FAA in a series of cases in the 1980s and 1990s to cover almost the full scope of interstate commerce. In the process, the Court held that the FAA preempted many state laws covering arbitration, some of which had been passed by state legislatures to protect their workers and consumers against powerful business interests. Starting in 1991 with the Gilmer decision arbitration expanded dramatically in the employment context, growing from 2.1 percent of employees subject to mandatory arbitration clauses in 1992 to 53.9% in 2017.
Types of Arbitration
Commercial and contract
Since commercial arbitration is based upon either contract law or the law of treaties, the agreement between the parties to submit their dispute to arbitration is a legally binding contract. All arbitral decisions are considered to be "final and binding". This does not, however, void the requirements of law. Any dispute not excluded from arbitration by virtue of law may be submitted to arbitration.Furthermore, arbitration agreements can only bind parties who have agreed, expressly or implicitly, to arbitrate, and parties cannot be required to submit to an arbitration process if they have not previously agreed so to submit. It is only through the advance agreement of the parties that the arbitrator derives any authority to resolve disputes. Arbitration cannot bind non-signatories to an arbitration contract, even if those non-signatories later become involved with a signatory to a contract by accident. However, third-party non-signatories can be bound by arbitration agreements based on theories of estoppel, agency relationships with a party, assumption of the contract containing the arbitration agreement, third-party beneficiary status under the contract, or piercing the corporate veil.
The question of whether two parties have actually agreed to arbitrate any disputes is one for judicial determination, because if the parties have not agreed to arbitrate then the arbitrator would have no authority. Where there is an arbitration agreement, doubts concerning "the scope of arbitrable issues should be resolved in favor of arbitration", but issues regarding whether a claim falls within the scope of arbitrable issues is a judicial matter, unless the parties have expressly agreed that the arbitrator may decide the scope of his or her own authority. Most courts hold that general arbitration clauses, such as an agreement to refer to arbitration any dispute "arising from" or "related to" a particular contract, do not authorize an arbitrator to determine whether a particular issue arises from or relates to the contract concerned. A minority view embraced by some courts is that this broad language can evidence the parties' clear and unmistakable intention to delegate the resolution of all issues to the arbitrator, including issues regarding arbitrability.
Labor
Arbitration may be used as a means of resolving labor disputes, an alternative to strikes and lockouts. Labor arbitration comes in two varieties:- interest arbitration, which provides a method for resolving disputes about the terms to be included in a new contract when the parties are unable to agree, and
- grievance arbitration, which provides a method for resolving disputes over the interpretation and application of a collective bargaining agreement.
Interest arbitration
Governments have relied on arbitration to resolve particularly large labor disputes, such as the Coal Strike of 1902. This type of arbitration, wherein a neutral arbitrator decides the terms of the collective bargaining agreement, is commonly known as interest arbitration. The United Steelworkers of America adopted an elaborate form of interest arbitration, known as the Experimental Negotiating Agreement, in the 1970s as a means of avoiding the long and costly strikes that had made the industry vulnerable to foreign competition. Major League Baseball uses a variant of interest arbitration, in which an arbitrator chooses between the two sides' final offers, to set the terms for contracts for players who are not eligible for free agency. Interest arbitration is now most frequently used by public employees who have no right to strike.Grievances
Unions and employers have also employed arbitration to resolve employee and union grievances arising under a collective bargaining agreement. The Amalgamated Clothing Workers of America made arbitration a central element of the Protocol of Peace it negotiated with garment manufacturers in the second decade of the twentieth century. Grievance arbitration became even more popular during World War II, when most unions had adopted a no-strike pledge. The War Labor Board, which attempted to mediate disputes over contract terms, pressed for inclusion of grievance arbitration in collective bargaining agreements. The Supreme Court subsequently made labor arbitration a key aspect of federal labor policy in three cases which came to be known as the Steelworkers' Trilogy. The Court held that grievance arbitration was a preferred dispute resolution technique and that courts could not overturn arbitrators' awards unless the award does not draw its essence from the collective bargaining agreement. State and federal statutes may allow vacating an award on narrow grounds. These protections for arbitrator awards are premised on the union-management system, which provides both parties with due process. Due process in this context means that both parties have experienced representation throughout the process, and that the arbitrators practice only as neutrals. See National Academy of Arbitrators.Securities
In the United States securities industry, arbitration has long been the preferred method of resolving disputes between brokerage firms, and between firms and their customers. The arbitration process operates under its own rules, as defined by contract. Securities arbitrations are held primarily by the Financial Industry Regulatory Authority.The securities industry uses pre-dispute arbitration agreements, through which the parties agree to arbitrate their disputes before any such dispute arises. Those agreements were upheld by the United States Supreme Court in Shearson v. MacMahon, 482 U.S. 220 and today nearly all disputes involving brokerage firms, other than Securities class action claims, are resolved in arbitration.
The SEC has come under fire from members of the Senate Judiciary Committee for not fulfilling statutory duty to protect individual investors, because all brokers require arbitration, and arbitration does not provide a court-supervised discovery process, require arbitrators to follow rules of evidence or result in written opinions establishing precedence, or case law, or provide the efficiency gains it once did. Arbitrator selection bias, hidden conflicts of interest, and a case where an arbitration panel refused to follow instructions handed down from a judge, were also raised as issues.