Arbitration: Freedom versus Erie

There’s a saying that freedom disappears in little pieces. It must also be protected and restored in little pieces—not in some libertarian campaign to reverse 100 years of ConLaw in a single case, but in three-yards-and-a-cloud-of dust disputes that are of interest only to wonks, and to those who intermittently pay attention because they realize that if they don’t, the folks who expand their power under subsection (1)(B)(iii)(a) of a statute you’ve never heard of will win.

Case in point: last year’s decision in AT&T Mobility v. Concepcion, arising over the interpretation of the Federal Arbitration Act. If you can stifle the yawn, here is the link to a podcast (featuring Hiro Aragaki (link no longer available), Christopher Drahozal, Peter B. Rutledge, Brian T. Fitzpatrick, and yours truly) on the nuances and the broader implications. Anent the latter:

That 1920s-era FAA commands federal courts to enforce arbitration agreements, except (says the statute’s savings clause) when they are unenforceable on some general principle of contract law. At issue in Concepcion was an AT&T consumer contract that mandated arbitration (on very generous terms) but precluded class action arbitration. The California Supreme Court, on the other hand, had a rule to the effect that all such preclusions, whether for recourse to ordinary court of in arbitration, were unenforceable. Now what? In a 5-4 opinion, Justice Scalia—in one of his best moments and opinions ever—declared the arbitration agreement valid and the California Court’s interference preempted. Class action “arbitration,” he wrote, would be incompatible with the sort of arbitration Congress had in mind.

Here’s what this does, in real life: it allows corporations to write consumer contracts for a bazillion contracts across the entire country. The terms come in fine print that none of us ever read. However, competition among firms protects against abuse, and we all reap the gains of lower prices, as the contract terms are tied up and priced with the product.

Here’s the legal dimension: it is not at all clear that the FAA “preempts” any state law at all (although here, Justice Scalia could rely on a string of precedents, beginning in the 1980s, that it does). But even if it does, it’s not at all clear that the California Supreme Court’s ostensible neutral rule (“no waiver of class action arbitration”) is barred: if it is, what remains of the FAA’s savings clause?

Little. But consider the alternative: if the California Supreme Court’s rule were to survive, the terms of your contract with the phone company, bank, or any other service you rely on would be dictated by the rules of the state Supreme Court that’s most hospitable to the plaintiffs’ bar (unless the company decides to engage in the very expensive, and usually impossible, endeavor of writing separate contracts for fifty states).

There is a name for that alternative and that world: Erie Railroad. The beauty, and the intended result of Justice Scalia’s Concepcion opinion, is to let corporations and their customers contract out of that world.

That’s the right result, and we are all better off for it. To arrive at it, though, one must surrender the most cherished beliefs of the New Deal Constitution—and of modern-day originalism. More in forthcoming posts.