Regulating Arbitration

Regulating Arbitration

Enabled by Supreme Court decisions that grant contract drafters broad authority over the procedures used to resolve legal claims, agreements to arbitrate have proliferated in consumer and employment contracts. As arbitration has spread, so have demands for Congress and federal administrative agencies to regulate it. But when does arbitration warrant regulation through new legislation and administrative action? The most prominent policy arguments for regulating arbitration focus on its effects on consumer welfare and democratic governance. By and large, the standard policy arguments for regulating arbitration do not grapple with arbitration’s effects on specific regulatory statutes.

This Article explains arbitration’s effects on the implementation and enforcement of federal regulatory statutes and argues that controlling these effects should be a central focus of efforts to regulate arbitration through new legislation and agency action. In hundreds of statutes, Congress has created financial incentives for private litigants to enforce its laws. The enactment of incentives for private civil litigation allows litigants to assert claims that would be too expensive to prosecute under ordinary procedural rules, and, more importantly, allows Congress to calibrate enforcement of federal law. By establishing stronger incentives for private enforcement of a statute—e.g., provisions that shift attorneys’ fees to successful plaintiffs and provide enhanced damages—Congress drives enforcement of the statute. By providing weaker incentives, Congress directs enforcement elsewhere.

Arbitration can dramatically alter the returns from enforcement of statutes with incentives for private civil litigation. In doing so, it may subvert or completely undermine congressional efforts to mobilize and calibrate private enforcement of federal law. These “enforcement effects” threaten Congress’s ability to accomplish substantive regulatory objectives through private civil litigation but have received only passing attention in discussions about the policy response to arbitration. To illustrate how greater attention to them would impact efforts to regulate arbitration, the Article analyzes the Consumer Financial Protection Bureau’s proposed arbitration regulation under § 1028 of the Dodd-Frank Act and shows how it falls short of ensuring that certain consumer financial protection laws administered by the agency are enforced in the manner and to the extent contemplated by Congress.

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