The Federalization of Consumer Arbitration: Possible Solutions

Sarah Rudolph Cole, John W. Bricker Professor of Law and Director of the Program on Dispute Resolution at the Ohio State University’s Moritz College of Law has authored The Federalization of Consumer Arbitration: Possible Solutions.  In her paper, Professor Cole discusses the United States Supreme Court’s recent arbitration jurisprudence and its effect on state law.

Here is the abstract:

Over the past fifteen to twenty years, businesses dramatically increased the use of arbitration clauses in contracts with consumers. Although commentators criticize the use of arbitration to resolve consumer disputes because arbitration lacks the due process protections inherent in traditional litigation, efforts to regulate or eliminate the use of arbitration in this context have failed miserably. This failure to due in large part to the Supreme Court’s embrace of arbitration and the corresponding lack of federal legislative interest in addressing this issue. The Supreme Court’s arbitration jurisprudence, particularly as it applies to consumer disputes, is the surest example of the “federalization” of an area of law that federalism principles dictate traditionally belong to the states. Interpreting the Federal Arbitration Act (FAA), the Court routinely applies a preemption doctrine that effectively precludes states from regulating the use of arbitration to resolve consumer disputes. As a result, enforcement of state laws regulating the use of arbitration to resolve consumer disputes has become the exception rather than the rule.

This Article will focus on the Supreme Court jurisprudence that led to the current situation in which state law plays a minimal role in arbitration doctrine. While state legislatures traditionally regulate contract law issues, the Supreme Court’s interpretation of the FAA has resulted in an anomalous situation in which federal law routinely trumps state laws attempting to reform arbitration. The Article will also explain how the Court’s Stolt-Nielsen (2010) and Concepcion (2011) decisions took the anti-federalism approach a step further – by permitting preemption in areas the FAA does not address. This expansion of the preemption doctrine further undermines the states’ ability to substantively regulate arbitration by defining arbitration in a very specific way and then declaring preempted any regulation or decision that is not consistent with the definition. Moreover, this expansion, together with Congress’ lack of interest in regulating arbitration, makes it quite likely that private dispute resolution providers will be the only institutions able to reform the arbitration process. Recognizing that arbitration law is largely federalized, this Article will then identify a number of possible reforms private dispute resolution providers could implement and review one of the more promising avenues of reform – arbitrator opinion-writing – in greater depth. This reform would have a number of beneficial effects. It would provide transparency in the arbitration process, address problems perceived to exist in the arbitrator selection process, make clear whether the parties received due process during the arbitration, and ensure that awards are carefully considered and evidence properly balanced.

This and other scholarly articles written by Professor Cole may be downloaded from the Social Science Research Network.