The Evolution of Arbitration: A Century in Review

One hundred years ago, arbitration was at the forefront of legal innovation. On February 12, 1925, President Calvin Coolidge enacted the Federal Arbitration Act, which recognized private dispute resolution as a legitimate alternative to traditional court trials. This groundbreaking legislation established that the decisions made by arbitrators in such disputes would be binding, albeit subject to limited judicial oversight. Just two months after this landmark signing, The New York Times published an article titled, “Business Arbitration Spreads Over World.” The article highlighted remarks from Herbert Hoover, who was then the esteemed Secretary of Commerce and a proponent of the new law. He stated, “Next to war, the greatest source of economic waste in our national life is needless litigation.”

During a visit to the White House in June of that year, the president of the Association of Cotton Textile Merchants expressed optimism about the new law, asserting that “We believe American business will be freed in great measure from the strife and ill will which now arise because of disputes in the conduct of business.”

Fast forward to the present, as we approach the centennial of the Federal Arbitration Act, and the sentiment surrounding arbitration has shifted dramatically. Nowadays, when arbitration hits the headlines, it often involves consumers voicing their frustrations about being compelled into arbitration agreements. For example:

A couple from New Jersey, who suffered serious injuries following an Uber accident, found themselves barred from suing the company due to a court ruling that they had agreed to arbitration by accepting the app’s terms of service.
In a tragic incident, a woman died from an allergic reaction after dining at a restaurant within Walt Disney Parks and Resorts. The company claimed that her widower had forfeited his right to sue by signing up for Disney+ years prior. However, after facing public backlash, Disney reversed its position in August and consented to a trial.
In a surprising revelation from 2018, it was disclosed that Stormy Daniels, an adult film star, had entered into a comprehensive arbitration agreement regarding any disputes with Donald Trump, in exchange for $130,000 to maintain her silence about their affair. Ultimately, she chose to disclose the affair anyway.

The pressing question remains: Can arbitration reclaim the allure it had in 1925? I believe it can, but the key lies in returning arbitration to its original purpose—primarily resolving contract disputes between businesses. We must refrain from extending its application to consumer and employee claims where it may not be appropriate. When utilized effectively, arbitration can yield swift, cost-effective, and equitable judgments. Arbitrators are empowered to implement more lenient evidentiary standards and can curtail delays from either party. Unlike a jury, which may be influenced by emotional appeals, arbitrators tend to focus on the facts at hand.

Arbitration is particularly beneficial for cases that would be prohibitively expensive to pursue individually or are too unique to be addressed through class action lawsuits. However, class actions often present their own issues, frequently generating significant profits for attorneys while providing minimal compensation to the individuals they represent.

“Hands down, writ large, arbitration tends to provide faster recoveries, higher recoveries, and a greater chance of recoveries for consumers and employees,” stated Matthew Webb, a senior vice president at the U.S. Chamber of Commerce’s Institute for Legal Reform. A recovery, in this context, refers to the monetary compensation awarded to a claimant.

Nonetheless, it is crucial to recognize that many individuals simply desire their day in court, as envisioned by the nation’s founders. They often resent the notion that they relinquished this right by hastily clicking through an online agreement or by giving “implied consent” through a purchase. Furthermore, not all scholars support the Chamber of Commerce’s assertion that arbitration consistently yields superior and expedited outcomes. Research indicates that in employment cases, employees tend to fare worse in arbitration compared to traditional court proceedings, as highlighted in a recent study conducted by Alexander J.S. Colvin of Cornell’s School of Industrial and Labor Relations and Mark Gough of Pennsylvania State University.