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Arbitration on Trial

Mises Daily: Wednesday, July 17, 2002 by

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In June, ABC World News Tonight ran a story on the decision by an increasing number of employers to contractually bind employees to settle all disputes between themselves and the firm through arbitration. The Web page for this report was entitled "No Right to Sue - Workers, Consumers Unwittingly Allow Mandatory Arbitration." This televised piece of "advocacy journalism" was marketed for days in advance, via commercials asking you whether you've unknowingly signed away your right to sue.

Hosted by Cynthia McFadden, the piece recounted the story of Kristy Rubio, who claims her employer demoted her from a recent promotion as escrow coordinator to receptionist because she was pregnant. Ms. Rubio decided to sue her employer, only to discover that the employment contract she signed contained a clause requiring that all disputes be resolved through mandatory arbitration. Unsurprisingly, Ms. Rubio claims that she had felt pressured into signing that contract and that she wasn't even given a chance to read it before she signed it.

Of course, Ms. McFadden served up the all-purpose excuse: that these mandatory arbitration clauses which are showing up in health-insurance, credit-card, and phone-service contracts are often "buried in the fine print." The host also raised this specter: that "removing the prospect of a trial by judge and jury can make it easier for companies to disregard the law."

The report gave two supposed weaknesses of the arbitration alternative: first, public scrutiny of the arbitration process and public disclosure of the award are lacking, and, second, arbitrators' rulings do not create legal precedents. The first is not a weakness but a strength; it is derived from the arbitration system's nature of being an open system with a wide range of choices of providers.

In contrast to this is the state's judicial system, where the parties have no choice but to agree to its mediation because it is imposed on them. Public scrutiny, such as the right of a public trial by jury, is only necessary under a system where you are, not a customer, but a subject--one that can easily be railroaded.

As for the legal precedence issue, legal precedence is indeed possible in arbitration. The arbitrators are motivated by monetary incentives to reduce the time and effort it takes to reach a conclusion, and thus to work from accepted conclusions about similar situations--i.e., not to continuously reinvent the wheel. That the state, not surprisingly, takes no notice of the commonsense judgments that emerge from negotiated settlements is the fault of the state, not of arbitration.

Also, this concern could be construed as a claim that all legal precedents are beneficial, that none are bad, and that none serve merely to provide opportunities for more looting. The history of labor-related litigation shows otherwise. Government-court precedent has warred against the freedom of contract to the harm of both businesses and employees. The more costly the prospect of lawsuits for business, the less willing business is to take the risk of hiring potentially litigious employees. Laws giving any class of employees special rights over the employer would not exist in a free market; so long as they do exist, it makes sense that claims concerning them be arbitrated in the least invasive way possible, which means privately.

The common theme that runs through this story by ABCNews and most other mainstream news coverage of commercial labor contracts is that the worker or employee is completely dominated and at the mercy of the employer. In a free market, however, neither party dominates the other. Just as the employee enjoys the freedom to walk away, provided he or she otherwise keeps the terms of the contract, so too is the employer free to hire and fire, so long as he or she keeps the terms of the contract. This is the path to peace between all parties.

Ms. Rubio's predicament could have been avoided completely if she had simply adhered to the contract that she herself signed. She claims that she felt that she "needed to sign [the contract] right there or there were going to be problems." What problems could there have been? She wasn't yet employed before she signed her contract, and employers aren't in the habit of maintaining gulags or torture chambers. Obviously, Ms. Rubio thought that her employer would look favorably on her eagerness, and she choose to ignore common sense.

In any case, the private-arbitration clauses are in the interest of works. Arbitration allows the two parties involved in a contract dispute to defend their interests without the forced intervention of an aggressive third party that forces the other two to surrender their rights to it. The driving force behind the growth of arbitration contracts is the increasing uncertainty presented by the state's antidiscrimination laws, what could be termed affirmative-discrimination statutes, which are increasingly destroying the rights of private property and peaceful association and disassociation.

Arbitration is increasingly sought out as an alternative as more and more people are coming to realize the legal system does not protect the property rights of the parties to the lawsuit, but rather the system is designed to principally benefit its special interests: the lawyers and those who write the laws.

What is so distressing about stories in the news media like this is the total failure to see that employer and employee are mutual customers, not master and slave. Ms. Rubio did not own her new position, nor was she entitled to her promotion. By consenting to the terms of her contract, which she signed voluntarily, she agreed to the terms for how she and her employer would behave as each other's customer. If she is dissatisfied with what the employer offers in exchange for her labor, she is free to decline the offer.

But so, too, is the employer. If her employer is dissatisfied with the quality of the work that it is buying from her, it too is free to seek better alternatives for itself. Unlike in the caricature that is the standard fare given to describe employment conditions, Ms. Rubio and her unnamed employer remained secure at all times in their property and their freedom of movement.

But the oft-recommended plea for state intervention can only cripple the rights of individuals and bring about what they claim to be acting to prevent: the completely dependent employee without the ability to choose--in other words, a serf, or worse.

The free-enterprise system abolishes this sort injustice and puts in its place a system where neither party is dominated by the other. Just as the employee needs the employer as a buyer for his skills and labor, so too, the employer needs the employee to sell the skills and labor he needs to produce his wares. Unless the free choice of occupation is destroyed by state intervention, the employer cannot make the employee subservient to him. Forcing everyone back into government courts is not in the interest of laborers or business owners.


Adam Young writes from Canada. His articles have appeared in Ideas on Liberty, Mises.org, LewRockwell.com, and The Free Market. Send him MAIL. Also, see his Mises.org Articles Archive. Also on arbitration, see Edwar Stringham on Market Chosen Law, and Stephen Ware on Arbitration under Assault.