Outsourcing Justice

Ed. Note: Professor Imre Szalai recently published a book, Outsourcing Justice: The Rise of Modern Arbitration Laws in America. He agreed to tell us more about Outsourcing Justice, published by Carolina Academic Press, and how he came to be fascinated by arbitration agreements. He also maintains a blog on the topic, outsourcingjustice.com

About My Book

Arbitration is a method of dispute resolution in which parties agree to submit their dispute to a private, neutral third person instead of a traditional court with a judge and jury.This private system of arbitration, which is often confidential and secretive, can be a polar opposite, in almost every way, to the public court system.

Over the past few decades, arbitration agreements have proliferated throughout American society. Such agreements appear in virtually all types of consumer transactions, and millions of American workers are bound by arbitration agreements in their employment relationships. America has become an “arbitration nation,” with an increasing number of disputes taken away from the traditional open court system and relegated to a private, secretive system of justice. How did arbitration agreements become so widespread and enforceable in American society? Prior to the 1920s, courts generally refused to enforce such agreements, and parties had the right to bring their disputes to court. However, during the 1920s, Congress and state legislatures suddenly enacted groundbreaking laws declaring that arbitration agreements are “valid, irrevocable, and enforceable.”

Drawing on previously untapped archival sources, my book explores the many different people, institutions, forces, beliefs, and events that led to the enactment of modern arbitration laws during the 1920s and examines why America’s arbitration laws radically changed during this period. By examining this history, my book demonstrates how the U.S. Supreme Court has grossly misconstrued these laws and unjustifiably created an expansive, informal, private system of justice touching almost every aspect of American society and affecting the lives of millions.

How It Started
When I was in law school, I never heard of the Federal Arbitration Act, the federal law enacted in 1925 saying that arbitration agreements are valid and enforceable. However, as soon as I entered practice as a litigator, I saw this law being used all the time. Many of my clients had arbitration agreements in their transactions, and if someone sued one of my clients in court, I would often invoke the Federal Arbitration Act and ask the court to enforce the arbitration agreement by dismissing the case and ordering arbitration. When the court ordered arbitration, the cases would often just disappear, with the other party not pursuing claims. Cases alleging significant liability and entire class actions would often just evaporate when a court compelled arbitration. I became amazed at how powerful this old, rather short law could be (the heart of the Federal Arbitration Act is just one sentence, saying arbitration agreements are valid). I saw how the law was being used to stop class actions and other cases from the very get-go. I began to wonder was this the original intent behind the 1925 law, but I continued to use the law because it cleared up my workload as young attorney very easily and made my clients very happy.

After a few years, when my first child was born, I began to see the Federal Arbitration Act in a different light. I was an anxious, soon-to-be first-time dad, and upon arriving at the hospital with my wife in labor, I was handed a stack of papers to sign while my wife was whisked away to a delivery room. One of the papers I was presented with contained an arbitration clause saying I promised never to sue the doctors, hospital, nurses, or insurance company in connection with the delivery of my child. I didn’t want to sign the agreement and sign away my rights, but the nurses kept on insisting everything had to be filled out. I quickly took the papers to my wife ¬– who was in the middle of labor – and asked her to initial the arbitration agreement, thinking that no judge would ever enforce the arbitration agreement under these conditions. Thankfully, the delivery went smoothly, and my wife and I had an adorable, healthy daughter with no complications. To be fair to the hospital, I don’t think it was their usual practice to make everyone sign these papers at the moment of delivery. I had been presented with these papers a few weeks prior during a doctor’s visit, but I never got around to filling them out because my daughter arrived earlier than expected.

I began noticing arbitration agreements appearing everywhere – in credit card agreements, cell phone contracts, cable television service contracts, employment agreements, and the back of a box of Cheerios. My kids watch cartoons on Netflix, and they recently yelled at me from the television room, saying “Daddy, Netflix is not working!” I thought a cable had become disconnected, and so I went to the television room to fix it. When I walked to the TV room, I saw an arbitration notice flashing across the screen saying that if I wanted to continue using Netflix, I must agree to submit any dispute with Netflix to a private arbitrator instead of a court. In order to start the cartoons, I grabbed the remote, pushed a button, and zapped away my right to bring a lawsuit in court.

I became fascinated with arbitration, and I began studying anything I could find regarding the history of American arbitration laws. One name kept on appearing in my research, the name of a merchant in New York City from the 1920s, and he was the driving force in pushing for the enactment of arbitration laws in the 1920s. He was an interesting Indiana Jones-like character who went on expeditions to unexplored areas of the Southwest on behalf of the American Natural History Museum. I tried to track down his relatives, and I discovered his personal files were now in the archives of my alma mater, Columbia University. His letters and memos detailed the entire lobbying campaign for the Federal Arbitration Act. In his materials, I saw personal, behind-the-scenes meetings with congressmen (including an invitation to one of Hollywood’s first exclusive celebrity hangouts, which became a brothel). I also learned that German law inspired the Federal Arbitration Act, but because of the First World War and the hatred of all things German, the lobbying campaign kept this background a secret. I saw how Prohibition influenced the enactment of arbitration laws. An amazing, stranger-than-fiction history of the Federal Arbitration Act began to come to life, letter by letter.

When I saw the history behind the Federal Arbitration Act and compared the history to the uses of arbitration I saw in my law practice and my own private life, the juxtaposition was extremely jarring. The drafters in the 1920s intended the law to apply solely in federal court and to cover simple, routine contract disputes between two merchants. Today, however, as a result of flawed Supreme Court decisions ignoring the rich history of the law, the Federal Arbitration Act applies in state court (and powerfully pre-empts any state law standing in its way), and the Federal Arbitration Act applies to employment and consumer disputes. My book shows that these Supreme Court interpretations are all wrong.

“Szalai’s 202-page book – which is accessible to lawyers and laypersons alike – traces the history of arbitration law in the U.S. from the eighteenth century through the enactment of the Federal Arbitration Act in 1925, focusing primarily on the 1911 to 1925 period. ‘Wait a minute,’ you might say, ‘didn’t Ian Macneil already do that?’ Well, yes. But whereas Macneil paints in broad strokes, Szalai delves into meticulous detail, providing an almost week-by-week account of the crucial period between the enactment of the first ‘modern’ arbitration statute in 1920 to the passage of the FAA five years later. By way of example, the chapter covering 1920-1925 has more than 800 footnotes!

“Using newspaper articles, monthly bulletins of the New York Chamber of Commerce, reports of various trade and bar associations, and other overlooked sources, Szalai brings leading figures of the arbitration reform movement to life and truly manages to transport the reader to another time. Also unlike Macneil, Szalai manages to situate and explain features of the arbitration law reform movement in the context of broader historical events and movements: the First World War, progressivism, growing interest in international arbitration treaties, and the movement to reform judicial procedure (famously inaugurated by Roscoe Pound’s ‘The Causes of Popular Dissatisfaction with the Administration of Justice’). …

“But perhaps the crowning achievement of this book is that it brings to light archival material that, to my knowledge, nobody has ever written about. Ever. Szalai sifted through boxes and boxes of the New York Chamber of Commerce’s dusty records now housed at Columbia University. … The records include things like minutes of meetings, personal notes, and letters written by leading figures in the arbitration movement such as Julius Henry Cohen and Charles Bernheimer. They enabled Szalai to reconstruct events and behind-the-scenes maneuverings that have thus far been lost to history. For example, we get a glimpse of meetings that Bernheimer had with Congressmen and business representatives whom he was trying to persuade to endorse the arbitration bill, just days before and after key Congressional hearings in 1923 and 1924.

“The last chapter, entitled ‘Concluding Observations,’ tries to tease out some of the implications of this historical research for the way that the modern Court has interpreted the FAA. Szalai concludes that the Court has butchered the statute, inter alia, by interpreting it to apply to ordinary employment agreements—something that was never intended by Bernheimer and his colleagues. He reaches a similar conclusion as to consumer agreements, but here he concedes that the historical evidence is less clear. This may come as a surprise to many, since the dominant view is that FAA was only intended to apply to transactions between merchant peers (and thus never contemplated consumer transactions).” –Hiro Aragaki, Associate Professor of Law, Loyola Los Angeles, on Indisputably.org

“[A]lthough I agree that a book should not be judged by its cover – one cannot help but feel intrigued by the image of the French Fry carton appearing on the front cover. A closer look reveals a tiny arbitration clause at the bottom of the carton – a neat, if exaggerated, visual illustration of how arbitration agreements became widespread in American society. … Szalai’s book provides a detailed and provocative examination of the history of (sort of) modern arbitration laws in the United States. In particular, the book offers a careful analysis and description of the legislative history of the FAA, including the support of the business and legal communities for the proposed law. One can readily enjoy this description, without necessarily accepting the author’s conclusion that ‘this book demonstrates how the U.S. Supreme Court has grossly misconstrued these laws.’”—Gary Born, Chair, International Arbitration Practice Group, and Partner, WilmerHale, London



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