Private Adjudicators and the Public Interest
PRIVATE ADJUDICATORS AND THE PUBLIC INTEREST*
And the King said, “Bring me a sword.” So a sword was brought before the King. And the King said, “Divide the living child in two, and give half to one and half to the other.”
I Kings 3:24–25
A. Introduction
When Solomon arbitrated a child custody dispute, the baby almost perished.1 Today’s arbitrator probably could not propose such a drastic award. Yet courts may refuse to compel arbitration of some disputes for fear that societal interests may suffer a fate similar to that which would have befallen the baby under Solomon’s initial judgment. The parties to the dispute are not free to compromise rights other than their own.
Legal rules that affect private commercial transactions may benefit the public as well as provide justice between disputing parties. The businessman who brings an action for treble damages for injury due to a violation of the Sherman Act, designed to preserve the free enterprise system, enforces the Act for the benefit of all society. Courts have resisted giving effect to agreements to arbitrate disputes relating to such “core” public law claims, of which antitrust actions are but one illustration, for fear that private adjudicators may under-enforce laws designed to protect all of society.2 These “non-arbitrable” laws are often statutory, but they need not be so.
To find public law claims “non-arbitrable” because of their subject matter is only one approach to protecting the public interest in relation to arbitration of public law claims. Another approach would be to order the arbitration to go forward, reserving to the court a “second look” at the arbitral process after the award is rendered. This “second look” approach was taken in Justice Blackmun’s opinion for the majority in Mitsubishi Motors v. Soler Chrysler-Plymouth,3 which held that American courts must recognize an agreement to arbitrate antitrust claims, at least when they are implicated in an international, rather than domestic, transaction.
The decision in Mitsubishi provides a prism for separating the various themes that inhere in arbitration affecting public rights. The case supplies the occasion for examining whether the needs of the international business community for a neutral dispute resolution mechanism require a special status for transnational commercial arbitration, either with or without a “second look” at the award stage of the process.
This chapter will suggest that in transnational commercial matters the international business community’s need for neutral dispute resolution outweighs society’s interest in supervising adjudication of public law claims. The traditional hesitation of courts to compel arbitration of public law claims should yield to a deeper concern that the refusal of American corporations to honor agreements to arbitrate may impede effective neutral dispute resolution in transnational business relations.
B. Of Automobiles and Antitrust
An apparently routine termination of an automobile distributorship arrangement led the U.S. Supreme Court, on 2 July 1985, to hold that agreements to arbitrate antitrust issues should be enforced in the context of an international transaction. Soler-Chrysler Plymouth (Soler), an auto dealer, had entered into two contracts relating to the distributorship arrangement. One contained a clause providing that disputes arising between the dealer and the manufacturer would be settled by arbitration in Japan. When Soler could not meet minimum sales commitments in its territory, metropolitan San Juan, Mitsubishi Motors, the manufacturer, brought an action in the federal district court for the District of Puerto Rico4 to compel arbitration. Mitsubishi claimed to have suffered damages in storing vehicles never delivered. Soler counterclaimed with allegations of injury due to Mitsubishi’s participation in a conspiracy to divide markets and to restrain trade, in violation of Section 1 of the Sherman Act.5
The Sales Agreement contained a peculiar arbitration clause, which covered only disputes between Soler and Mitsubishi Motors, and only if arising under five of the contract’s fifteen articles:
All disputes, controversies or differences which may arise between [Mitsubishi] and [Soler] out of or in relation to Articles I-B through V of [the Sales Agreement] or for breach thereof, shall be finally settled by arbitration in Japan in accordance with the rules and regulations of the Japan Commercial Arbitration Association.
The arbitration was interrupted when the First Circuit held that the antitrust counterclaims could not be referred to arbitration because of the vital public interest in preserving free market competition through proper enforcement of antitrust laws. The First Circuit very neatly set up a single issue for appeal, rejecting arguments made by Soler based on (i) the scope of the arbitration agreement, the terms of which were found wide enough to cover statutory claims arising under the Sherman Act; (ii) a Puerto Rican “unfair competition” statute, rendering null and void arbitration agreements in dealership contracts; and (iii) the Federal “Automobile Dealers’ Day in Court Act.” Arbitration was found inappropriate only as to Sherman Act claims, and the district court was directed to consider how parallel judicial and arbitral proceedings should go forward.
The First Circuit followed the doctrine announced in 1968 by the Second Circuit in American Safety Equipment v. J.P. Maguire,6 which found antitrust claims to be more than private matters. Antitrust laws are enforced in large measure by private litigants whose claims for treble damages protect the public interest by posing a deterrent to potential violators. The core of the non-arbitrability argument is that the public—which never signed the arbitration agreement—is hurt directly when a law of fundamental importance to democratic capitalism is improperly enforced. The unstated assumption is that arbitrators will be less likely than courts to interpret the law correctly, to find liability, or to award treble damages. Thus, as the argument goes, just as war is too important to be left to generals, public law issues are too important to be decided by arbitrators.
The First Circuit had to reconcile its view of law and policy with the 1958 New York Arbitration Convention,7 which requires recognition of arbitration agreements falling within its scope as long as they “concern a subject matter capable of settlement by arbitration.”8 To fit the non-arbitrability doctrine into the framework of the New York Convention, the First Circuit linked Article II, relating to enforcement of the arbitration agreement, with Article V, relating to recognition of the award. The language in Article V—“under the laws of [the enforcement] country”—permits refusal of recognition of an award if the subject matter of the difference is not capable of settlement by arbitration under the law of that country where enforcement is sought. This language was read into Article II which mandates enforcement of agreements concerning a subject matter “capable of settlement by arbitration.”9
The Supreme Court reversed the First Circuit judgment on the issue of the antitrust counterclaims, holding these claims to be arbitrable in the international case at bar, even if a contrary result would be reached in a domestic context. The case was remanded to the Court of Appeals, which on remand affirmed the judgment of the district court that had ordered Soler to submit its antitrust claims to arbitration.
In reversing the First Circuit, the Supreme Court did not deal with the New York Convention. Rather, it denied the presumption that arbitrators would not apply the Sherman Act. Justice Blackmun wrote: “And so long as the prospective litigant effectively may vindicate its statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.”10
In September 1984, Soler filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, which provides for an automatic stay of all actions including arbitration against the bankrupt.11 The parties returned to court in Puerto Rico to litigate whether the Bankruptcy Code prevails over the Arbitration Act. On 14 April 1986 the United States District Court for the District of Puerto Rico removed the reference to the Bankruptcy Court, and ordered arbitration to resume forthwith.12
C. Subject Matter Arbitrability: Characterizing Claims and Prioritizing Policies
Beyond the cheers of Mitsubishi by arbitration connoisseurs and the bewailing of the case by antitrust enforcers13 lie the interests of a larger society.14 One approach to the task of distinguishing between those interests and claims that are negotiable and those that are not is the establishment of a hierarchy of values as suggested in this section.
Taxonomy: Non-negotiable public law claims
All laws implicate public interests, in the sense that they further societal goals, such as ensuring respect for contracts or the orderly inheritance of property. Yet some laws appear to bear upon public interests to a greater degree than others.
Private parties may negotiate away some rights by an arbitration clause or choice-of-law clause—even before any dispute arises15—and courts will enforce this bargain. The right to demand payment for goods sold and delivered might, for example, be bargained away. As to other rights, however, courts hesitate to permit a waiver, before the dispute arises, of rights that implicate what might be referred to as “non-negotiable” public interests. Indeed, the vindication of some claims involves widespread effects, external to the parties, which are so significant that adjudication becomes a matter of public concern.
Disputes arising under competition law represent but one of several types of claims as to which courts have refused to compel arbitration, pursuant to an otherwise enforceable pre-dispute agreement to arbitrate.16 With respect to commercial disputes,17 American courts, at one time or another, have found at least a half-dozen other areas of federal law to be “non-arbitrable” because of subject matter,18 including (i) the 1933 Securities Act,19 (ii) patents,20 (iii) ERISA claims at termination of employment,21 (iv) civil claims under the Racketeer Influenced and Corrupt Organizations Act,22 (v) bankruptcy matters as to which there is an automatic stay of all actions,23 (vi) the Commodities Exchange Act24 and (vii) the Civil Rights Act.25
Certain areas of state law have also been non-arbitrable, including claims under franchise law,26 not implicating interstate commerce and thus pre-empted by the Federal Arbitration Act (FAA)27 and claims for punitive damages.28
The goal of these “non-negotiable” legal rules is not merely justice between the parties. They also create benefits for all of society such as a fair stock market or an orderly way to deal with bankruptcies. For this reason courts consider that these rules implicate what might be called “public rights.”
The first refrain that appears in arguments against arbitrability of public disputes is that court proceedings will fertilize judicial precedent. The development of the legal system, it may be argued, requires implementation and interpretation of statutes by courts that create precedents open for all to see.
This argument seems to put the cart before the horse, however. Doubtless, judicial interpretation of statutes creates precedent that may guide business managers in their future conduct. However, courts elaborate the law to deal with disputes. They do not entertain litigation in order to permit scholars and practitioners to explain the law.
The second and more central theme that runs through the non-arbitrability cases is a concern that society at large will be injured by arbitration of public law claims. Courts express this fear in a variety of ways. They may say that the legal and factual issues are too complicated for arbitrators; that arbitration proceedings are too informal, providing inadequate discovery; that arbitrators, like foxes guarding the chicken coop, have a pro-business bias and will under-enforce laws designed to protect the public; that arbitrators are less connected to the democratic process than judges; that lack of appeal to arbitral awards makes arbitration a “black hole” to which rights are sent and never heard from again.
No empirical evidence suggests that arbitrators are necessarily any less trustworthy or competent than judges. There may, however, be merit in holding “public law issues” non-arbitrable under a slightly different alternative analysis, which starts with a recognition that arbitrators are paid only to do justice between or among the parties before them. “Public rights” belong not to the litigants, but to society at large. Society never signed the arbitration agreement, and is not a party to the arbitration. If the arbitration, which is a consensual process, affects only the consenting adults who signed the agreement, they alone are hurt by the arbitrators’ folly. But if the dispute affects the property of one who never signed the arbitration agreement, the arbitration takes on a different cast. Indeed, the right to proper enforcement of antitrust laws may be analogous to a third person’s property right. Furthermore, the societal interest in the vindication of claims relating to matters such as free economic competition and the securities markets belongs not to the businessmen in the controversy, but to a community which never agreed to arbitrate.
The dozen years before the Mitsubishi decision saw a chipping away of the judicial resistance to arbitration of public law claims. From one perspective, the Mitsubishi case is merely an extension of the doctrine announced in previous cases. Specifically, prior to Mitsubishi, the Supreme Court held in Scherk v. Alberto Culver29 that in an international contract securities law issues were arbitrable, notwithstanding their non-arbitrability in a domestic setting. Scherk’s special rule for cross-border transactions, justified as necessary to avoid damaging the “fabric of international commerce and trade,”30 was a logical extension of the Courts opinion in Bremen v. Zapata31 which had been decided two years previously. In Bremen, the Court gave effect to a pre-dispute choice of forum clause that selected the High Court of London to decide a controversy between a German company and an American company.32
Moreover, in 1984 the Supreme Court ruled that when interstate commerce is involved, prohibitions on arbitration under state franchise laws are invalid,33 pre-empted by the FAA,34 as are prohibitions on arbitration of state securities law claims.35 The trend toward greater arbitrability of subject matter is also manifest in legislative measures. Congress has removed barriers to arbitration of disputes involving the validity and infringement of patents, although the decisions are not binding on third parties.36
A hierarchy of policies
The Mitsubishi case skeletonizes various rival policies, each sound and worthy of recognition by itself, yet conflicting with each other in their application. These competing themes require a hierarchical ordering so that their application to a particular controverted event may be determined. In viewing these policies, one might articulate three competing objectives: (i) freedom of contract to provide for private dispute resolution, which calls for an efficient arbitral process; (ii) protection of society against under-enforcement of law by private adjudicators; and (iii) meeting the needs of international trade and investment for a system of neutral non-national binding dispute resolution.
Underlying the first objective is the assumption that the enforcement of a freely accepted bargain to arbitrate, entered into by parties with equal negotiating power, will provide the business community with the benefits of confidential, economical, and speedy dispute resolution. A different result might be reached in the case of “contracts of adhesion” imposed on weaker parties with little bargaining power. It may have been so in the Mitsubishi relationship with Soler, though the First Circuit based its refusal to compel arbitration on non-arbitrability of subject matter, not on the “adhesive” nature of the contract.
The second goal, protecting the public against under-enforcement of mandatory public norms, relates to a concern of many judges that arbitrators will be less likely than courts to apply our competition law correctly, or at least less likely to find liability and to assess treble damages. Incorrect application of the law may hurt those segments of society that have a stake in the outcome of the arbitration.