Arbitration and State Action

Brigham Young University Law Review, 2005 by Cole, Sarah Rudolph

The increasing popularity of arbitration among employers and businesses has triggered skepticism and concern among the plaintiffs' employment discrimination bar and consumer advocacy groups. Groups critical of the use of arbitration often characterize the very advantages of this mechanism-its streamlined procedures, speed, and confidentiality-as problematic. According to them, streamlined procedures and speed may disproportionately impact the party who had less bargaining power when the parties negotiated the original agreement. Confidentiality suggests surreptitious and underhanded tactics swept under the rug.1 With little empirical support, critics, particularly of the use of predispute arbitration agreements, began an attack in the mid-1990s to unseat arbitration as a popular mechanism for dispute resolution among employers and employees, as well as businesses and consumers.2

The attack on arbitration has taken different forms over time. Originally, plaintiffs asserted a type of jurisdictional challenge, claiming that statutory claims, such as discrimination, fell outside the scope of arbitration agreements.3 Repeated failure of that claim precipitated a redirection of effort. Today, challenges to arbitration primarily focus on contractual theories, particularly unconscionability.4 While the ultimate verdict on this tactic is still out, arbitration's critics have sought to open another front in the war on arbitration. In particular, they have begun leveling constitutional attacks against employment and consumer arbitration, contending that all forms of arbitration, whether court-ordered or contractual, are subject to the Constitution's procedural due process requirements.5

A necessary prerequisite for constitutional challenges to arbitration, however, is some theory under which arbitration constitutes state action. Constitutional prohibitions, after all, apply only to state action.6 Of course, state action is easier to see in some forms of arbitration than in others. For example, court-ordered arbitration, when a court mandates that the parties participate in arbitration as a prerequisite to a court filing, clearly involves state action.7 A second form of arbitration, agency-initiated arbitration, occurs when an agency requires entities it regulates to register with a private organization that utilizes arbitration to resolve disputes involving its registrants. Although mandatory registration may create state action when the private organization mandates participation in arbitration, commentators have largely ignored this issue when contemplating reform of the securities arbitration process.8 Courts have examined the question, but have universally rejected a finding of state action in this context.9 This article will demonstrate that, at least in the securities industry, since the SEC imposes a requirement that brokers and dealers register with a private self-regulatory organization (SRO), state action is present when SROs mandate that brokers and dealers participate in arbitration.

Finally, there is contractual arbitration, that is, arbitration that arises out of an agreement between two private parties. At least as an initial matter, it is difficult to see how agreements between private parties regarding arbitration involve state action. Critics, however, have developed a theory of state action in this context to attempt to allow them to overcome this hurdle. Under this arbitration as state action theory, critics contend that contractual arbitration gives rise to state action when courts enforce contractual commitments to participate in arbitration and when courts subsequently enforce arbitration awards.10 If contractual arbitration is state action, then the arbitral forum must satisfy the constitutional requirements of the Due Process and Equal Protection clauses.

Because a finding of state action in any type of arbitration would have significant, and likely adverse, implications on the continued use of arbitration, careful consideration of whether state action is present in arbitration is necessary. This article attempts to provide that analysis and offers a critique of the arbitration as state action theory that others have advanced.

Courts have had several opportunities to address the question of whether judicial enforcement of contractual arbitration agreements rises to the level of state action. Interestingly, courts and commentators are deeply divided on the question of whether state action is present in contractual arbitration. Every federal court considering the question has concluded that there is no state action present in contractual arbitration.11 Yet virtually every commentator addressing the same issue has concluded that the opposite is true.12 What accounts for this extraordinary dichotomy is not clear. Perhaps the muddied waters of the state action doctrine are responsible. More likely, the commentators interested in this issue, particularly Professors Reuben and Sternlight, are hopeful that encouraging the adoption of the state action doctrine in arbitration will accomplish by constitutional means what legislatures have failed to provide-a wholesale cessation of the use of predispute arbitration agreements between one-shot and repeat players, such as employers and employees.13 Courts, by contrast, enamored with the efficiency of arbitration, would prefer not to undermine the process by finding state action. Whatever the reason, additional attention to this question, and to the question of whether agency-initiated arbitration involves state action, would provide normative benefits for courts and commentators alike.