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Judicial Monopoly November 8, 2007

Posted by federalist in Judiciary, Regulation.

I see no reason why a government should impose a judicial monopoly on civil affairs. If two parties are competent to enter into a contract, then they should also be competent to agree on how that contract should be adjudicated.

Indeed, when given a choice it seems that many American entities would rather have their first appeal through manifestly more cheap and efficient private arbitration. However, the WSJ yesterday noted that the Trial Bar Lobby is tired of losing its monopoly on civil litigation. Which brings us the Arbitration Fairness Act, which “would outlaw pre-dispute arbitration agreements in the future for all private contracts involving consumers, employment and franchising.”

An earlier post here noted the beauty of competition in regulation in principle. The WSJ points out that competition in civil litigation (through arbitration agreements) has proven itself an effective alternative to government monopoly in practice:

Even lawyers concede its virtues. In 2003, an American Bar Association survey found that 78% of lawyers “believe that arbitration is generally timelier than litigation, and 56% feel it is more cost effective.”

One could imagine that without any government oversight a particular industry could form an arbitration cartel at the expense of its customers, but the government already guards against that:

Under existing law, judges can throw out arbitration agreements tilted too far in favor of one party, so most arbitration clauses tend to give the consumer a reasonably fair shake. University of Kansas law professor Stephen J. Ware says that even in cases where arbitration contract terms are more favorable to sellers, the result is generally lower prices for consumers, because the cost of lawyering has been stripped out. “Recognition of this has been standard in the law-and-economics literature for at least a quarter of a century,” he notes.



1. federalist - November 19, 2007

One George Nicolau offers a good caveat in a letter to the WSJ:

Unrepresented employees do not “voluntarily” agree to a pre-dispute arbitration system; they either agree or they don’t have a job. The same is true for consumers; they either agree or they don’t have telephone service. Thus, to suggest that such arbitration agreements have been “voluntarily accepted by consenting adults” is simply not so.

Knowing this, the sponsors of these bills simply seek to ban mandatory, pre-dispute, condition-of-employment or condition-of-service arbitration. This does not mean that arbitration will disappear. What it means is that when a dispute arises an employee or a consumer will be able to choose between arbitration or the courts. If the system offered by the employer or the service company is fair, the likelihood, given arbitration’s swiftness and lower costs, is that this will be the chosen alternative. If, however, the offered arbitration procedure is unfair, if the employee or the consumer has no say in choosing the arbitrator, or the arbitrator is not given the same authority or remedial power of a judge, or if the system, as many now are, is otherwise tilted in favor of the offering party, then the choice will be the judicial system.

I suppose I would be in favor of a law requiring all contracts to be offered with an option allowing unrestrained litigation in the fiat judicial system — but not necessarily at the same price. E.g., if you want to buy phone service without binding arbitration, then the company must offer you such a contract, but they can charge you a premium that fairly reflects their expected increase in costs from that alternative.

One thing I love about Pennsylvania auto insurance is the option to elect “limited tort rates,” whereby my insurer can offer me 30% savings when I agree to limit their tort exposure to $250k for certain coverage.

2. Hamilton - December 3, 2007

1. How strong is the ‘arbitration lobby?’

2. Regarding the 2003 survey, if arbitration cuts out the need for many attorney fees, perhaps the number of 56% (for lawyers who say that arbitration is more cost-effective) is low as some attorneys would not want to talk up the benefits of arbitration very much.

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