04.10.18.Clough-Amalia Kessler.crop

Online Exclusives

How We Became Pawns in the Arbitration Game

The recent flood of high-profile sexual harassment cases, and the resulting #METOO movement, has brought arbitration into public light. To take two prominent cases—former Fox News boss Roger Ailes and casino magnate Steve Wynn—the allegations (and settlements) are numerous and stretch back decades. This leads us to ask: Are the rich and powerful using arbitration to conceal bad behavior and avoid accountability for their actions?

Listening to Amalia D. Kessler, professor of law at Stanford University, one would conclude yes. She spoke April 10 at a Clough Center for the Study of Constitutional Democracy event titled “The Public Roots of Private Ordering: An Institutional Account of the Origins of Modern American Arbitration.”

According to one recent study, since the early 2000s, the number of American workers subject to mandatory arbitration more than doubled. Consumers, too, have forfeited their right to sue, both individually and collectively, in everything from credit card agreements (included in 53 percent of new cards) to gym memberships.

This did not come out of nowhere. As Kessler explains, beginning in the 1980s, a series of Supreme Court decisions have “radically reinterpreted” the Federal Arbitration Act of 1925. But what was that act about? In her latest project, Kessler reconstructs the institutional foundations of arbitration in America, specifically the American Arbitration Association (AAA), founded in 1926 with the stated goal of implementing the 1925 act and institutionalizing arbitration nationwide.

Using new documents from the AAA’s archives, Kessler shows that arbitration did not develop as an alternative to a state regulatory or judicial apparatus, but was a product of it. The early AAA understood itself to be a private entity that served key public functions, and its authorities struggled to ensure that it would act to promote the “public good.” AAA arbitrators were not allowed to take payments for their services, and authorities insisted that all awards be made public.

How and when did this change? According to Kessler, the answer is in the remarkable life of Frances Kellor, the AAA’s first vice president from 1926 until her death in 1952. Educated at the University of Chicago and Cornell, where she was one of the first women to receive a law degree, Kellor was a leading progressive reformer and believer in “industrial democracy,” a way of moderating capitalism by organizing both labor and capital into bargaining units.

The New Deal was an enormous boon to the AAA, which continued growing even after the Supreme Court struck down FDR’s 1935 National Industrial Recovery Act. A 1938 anti-trust suit brought against the Motion Pictures and Television Administration expanded the AAA’s activities outside of Manhattan, but it also brought another change: the first time AAA arbitrators charged fees (although Kellor stuck to her policy of making settlements public).

World War II impacted the AAA even more than the New Deal. In 1941, the AAA agreed to play a role in ending strikes that threatened the US defense buildup. The resulting organization, the National Defense Mediation Board, provided the AAA with a vast opportunity for lucrative new clients in that industry, and the prohibition against fees was quickly dropped. In 1948, the AAA abandoned its policy of making settlements public, and it was Kellor, under threat from a rival who wanted to turn the AAA into a for-profit business, who led the charge in 1951 to allow fee-taking arbitrators on its board.

Kellor died in 1952, accused of having exercised “dictatorial control,” and her reliance on wealthy friends, rather than fee-paying clients, for the AAA’s funding was dismissed by her successor as unfit for the modern postwar economy. From then on, arbitration was thoroughly embedded in the market, and the dream of arbitration as a form of public service forgotten.

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