WEBVTT NOTE How to Secede in Business Without Really Leaving: Evidence of the Substitution of Arbitration for Litigation 1 00:00:00.000 --> 00:00:07.560 The evidence increasingly suggests that business is turning to private arbitration away from 2 00:00:07.560 --> 00:00:11.120 litigation to solve their disputes. 3 00:00:11.120 --> 00:00:17.240 Arbitration is faster, it's cheaper, it's less formal, it's less adversarial, so you 4 00:00:17.240 --> 00:00:21.520 can end up being friends after you arbitrate, but it's pretty hard to end up being friends 5 00:00:21.520 --> 00:00:24.560 after you litigate. 6 00:00:24.560 --> 00:00:30.520 Lawyers can be selected for their expertise on the matters that they're judging. 7 00:00:30.520 --> 00:00:34.360 Public judges certainly can't be. 8 00:00:34.360 --> 00:00:37.840 Privacy can be maintained. 9 00:00:37.840 --> 00:00:43.880 And perhaps more importantly from the context of this conference, businessmen that wish 10 00:00:43.880 --> 00:00:52.240 to avoid the application of state-made laws by agreeing to something else in a contract 11 00:00:52.240 --> 00:00:59.100 can avoid the public courts who would overturn the contract if it violates somehow state-made 12 00:00:59.100 --> 00:01:04.980 laws by going to an arbitrator who will look to the contract instead of statutes. 13 00:01:04.980 --> 00:01:10.220 So arbitration would appear to be a pretty attractive alternative to business or for 14 00:01:10.220 --> 00:01:13.240 business disputes. 15 00:01:13.240 --> 00:01:20.740 But it is frequently contended that arbitration clauses in contracts are effective and or 16 00:01:20.740 --> 00:01:29.300 More arbitration rules are accepted primarily because the state courts back arbitration. 17 00:01:29.300 --> 00:01:37.260 The states sanction arbitration, throw the power of the state to coerce behind arbitration 18 00:01:37.260 --> 00:01:38.260 rulings. 19 00:01:38.260 --> 00:01:43.900 Otherwise, so the argument goes, no one would live up to their arbitration agreements. 20 00:01:43.900 --> 00:01:50.020 No one would accept arbitration rules. 21 00:01:50.020 --> 00:01:56.640 This contention is typically based on the assumption then that without a threat, a coercive threat 22 00:01:56.640 --> 00:02:05.200 by the state, people who breach contracts to arbitrate couldn't be, or people would 23 00:02:05.200 --> 00:02:08.460 have incentives to breach contracts to arbitrate. 24 00:02:08.460 --> 00:02:19.060 And this contention is backed by, quote, evidence that the passage of modern arbitration statutes 25 00:02:19.060 --> 00:02:23.940 Statutes that commanded our common law courts to enforce arbitration agreements really is 26 00:02:23.940 --> 00:02:32.520 what set the development of arbitration in motion in the United States and that business 27 00:02:32.520 --> 00:02:37.580 groups actually demanded these statutes so that they could establish arbitration. 28 00:02:37.580 --> 00:02:43.020 Well, both of these pieces of evidence are false as it turns out. 29 00:02:43.020 --> 00:02:52.960 So this leads me to think about an alternative hypothesis, and there is one, that is that 30 00:02:52.960 --> 00:02:59.060 arbitration is a substitute for litigation, and in fact arbitration is a way for business 31 00:02:59.060 --> 00:03:04.200 to escape the control of the state, at least on some dimensions. 32 00:03:04.200 --> 00:03:11.260 The state courts or legislatures propagate rules regarding business behavior and the 33 00:03:11.260 --> 00:03:17.460 and the business prefer to follow rules that they create themselves in their contracts 34 00:03:17.460 --> 00:03:25.860 and therefore when they have a dispute they choose arbitration rather than state courts. 35 00:03:25.860 --> 00:03:32.140 Arbitration is a way for business to secede without really leaving. 36 00:03:32.140 --> 00:03:35.780 I think this, even though it is a departure from what we've been talking about, it is 37 00:03:35.780 --> 00:03:41.100 an important issue to think about in the context of a conference on secession because 38 00:03:41.100 --> 00:03:52.740 has at least three reasons. One, it suggests that there are many ways to withdraw from 39 00:03:52.740 --> 00:04:01.820 the control of the state, short perhaps of actually physically separating. And it also 40 00:04:01.820 --> 00:04:07.900 suggests that secession is going on all the time on many dimensions besides arbitration. 41 00:04:07.900 --> 00:04:13.260 Arbitration is one way that people are pulling themselves out from under the thumb of the 42 00:04:13.260 --> 00:04:19.100 state and this discussion should illustrate that. 43 00:04:19.100 --> 00:04:27.200 The third point to make is that one of the strong arguments often made in support of 44 00:04:27.200 --> 00:04:35.320 a stable centralized state is that you need the state to enforce contracts in order to 45 00:04:35.320 --> 00:04:37.000 have free markets. 46 00:04:37.000 --> 00:04:42.400 And what I'm suggesting here is, in fact, that's a fallacious argument as well. 47 00:04:42.400 --> 00:04:45.320 You don't need the state to enforce contracts. 48 00:04:45.320 --> 00:04:51.000 People will do it themselves if the state doesn't do it well. 49 00:04:51.000 --> 00:05:00.520 So in my paper, I try to illustrate that the assumption of state backing is false, that 50 00:05:00.520 --> 00:05:08.940 The evidence listed or cited to support that is false and that in fact the evidence is 51 00:05:08.940 --> 00:05:13.600 more consistent with the alternative. 52 00:05:13.600 --> 00:05:19.920 In my paper, which is a lot longer than my talk, I do present a theoretical argument 53 00:05:19.920 --> 00:05:30.320 as to why people might voluntarily accept arbitration, might voluntarily accept a loss 54 00:05:30.320 --> 00:05:35.840 in Arbitration and live up to the arbitration ruling 55 00:05:35.840 --> 00:05:38.920 without the coercion of the state. 56 00:05:38.920 --> 00:05:43.040 It's essentially an argument that Mises made. 57 00:05:43.040 --> 00:05:46.680 He pointed out in his book on human action 58 00:05:46.680 --> 00:05:54.160 that there are at least two sources of cooperation, 59 00:05:54.160 --> 00:05:56.840 if you want to think of it in that way. 60 00:05:56.840 --> 00:05:58.480 One is threat. 61 00:05:58.480 --> 00:06:00.740 You can make people cooperate. 62 00:06:00.740 --> 00:06:04.180 Coercion can be a source of cooperation. 63 00:06:04.180 --> 00:06:08.020 But Mises also explained that contractual coordination 64 00:06:08.020 --> 00:06:12.100 based on symmetric expectations of long-term gains 65 00:06:12.100 --> 00:06:16.140 can be a source of cooperation 66 00:06:16.140 --> 00:06:19.100 and a willingness to settle disputes. 67 00:06:19.100 --> 00:06:23.340 So essentially then there are two alternative hypotheses 68 00:06:23.340 --> 00:06:24.260 to think about. 69 00:06:24.260 --> 00:06:32.180 Actually, there are a number of theoretical reasons to expect that business would voluntarily 70 00:06:32.180 --> 00:06:38.980 arbitrate and voluntarily accept arbitration rulings without the threats imposed by state 71 00:06:38.980 --> 00:06:39.980 sanctions. 72 00:06:39.980 --> 00:06:44.780 I don't want to go into a lot of detail on the theory, but I think I can summarize it 73 00:06:44.780 --> 00:06:46.380 and illustrate it fairly easily. 74 00:06:46.380 --> 00:06:54.540 The essential idea, one that Mises makes, is that people often voluntarily create incentives 75 00:06:54.540 --> 00:07:00.160 for themselves to do things that may appear undesirable in the short run because they 76 00:07:00.160 --> 00:07:03.580 expect to benefit in the long run. 77 00:07:03.580 --> 00:07:15.080 And to illustrate this, I thought I'd, maybe I need to pause and set it up a little bit. 78 00:07:15.080 --> 00:07:22.440 I got my PhD from Texas A&M, which makes me an Aggie, I guess, and in Texas they tell 79 00:07:22.440 --> 00:07:30.120 Aggie jokes, and in fact the last time I spoke at a Mises conference was the 10th anniversary 80 00:07:30.120 --> 00:07:36.800 conference in New York, and I based my whole presentation on an Aggie joke. 81 00:07:36.800 --> 00:07:43.160 I hesitated to do that again, but then I remembered when I did that that Murray sat in the audience 82 00:07:43.160 --> 00:08:06.460 and Chuckle the whole time I was talking suggesting either he thought it was pretty funny or he thought I was ridiculous but out reminding me of that I decided to go ahead and do it again and so I'm going to illustrate my argument with an 83 00:08:06.460 --> 00:08:11.320 an Aggie Joke. I'm not trying to push an alternative paradigm to the Austrian 84 00:08:11.320 --> 00:08:17.020 School. I'm not suggesting there's an Aggie Joke School of Economics, 85 00:08:17.020 --> 00:08:22.980 although it probably would generate more insight than a lot of what passes 86 00:08:22.980 --> 00:08:32.140 for economics today. But I thought I'd try another Aggie Joke on this Mises 87 00:08:32.140 --> 00:08:42.140 I know that the Mises Institute is very concerned about maintaining its political correctness image, 88 00:08:42.140 --> 00:08:49.140 but I did check with the PC police and they tell me that white males can tell jokes about other white males. 89 00:08:49.140 --> 00:08:55.140 I am an Aggie, so I think this will be alright that I can tell an Aggie joke as well. 90 00:08:55.140 --> 00:09:01.140 The joke goes something like this. 91 00:09:01.140 --> 00:09:09.140 An Aggie walked into the men's room at Texas A&M in one of the buildings on campus. 92 00:09:09.140 --> 00:09:14.140 Saw another Aggie standing over the toilet, staring down into the toilet. 93 00:09:14.140 --> 00:09:18.140 So he walked over and looked into the toilet to see what was laying at the bottom. 94 00:09:18.140 --> 00:09:22.140 Well, there was a nickel laying in there. 95 00:09:22.140 --> 00:09:27.840 Both Aggies stood staring down into this bowl for a while and then the first one 96 00:09:27.840 --> 00:09:31.580 reached into his pocket and he pulled out a quarter. He dropped it in the 97 00:09:31.580 --> 00:09:36.260 toilet. The second one said, why in the world did you drop a quarter in the 98 00:09:36.260 --> 00:09:40.540 toilet? And the first one said, you don't think I'm going to reach in there for a 99 00:09:40.540 --> 00:09:48.500 nickel, do you? Well, I don't know if that illustrates much about arbitration but it 100 00:09:48.500 --> 00:09:54.400 It does suggest that people will create incentives for themselves to do things they may not necessarily 101 00:09:54.400 --> 00:09:57.700 like to do. 102 00:09:57.700 --> 00:10:04.500 And in the world of business, businessmen do that all the time. 103 00:10:04.500 --> 00:10:13.580 Businessmen, for instance, invest in building reputations for honesty, for fairness, for 104 00:10:13.580 --> 00:10:17.020 ethical behavior. 105 00:10:17.020 --> 00:10:27.900 investment becomes valuable and then they become bound by it and forced at times to do things they 106 00:10:27.900 --> 00:10:33.740 don't want to do in order to maintain the value of that investment. So, for instance, if you have a 107 00:10:33.740 --> 00:10:38.220 reputation for honesty, it means you have to live up to your promises. If you promise to accept an 108 00:10:38.220 --> 00:10:44.700 arbitration ruling and it goes against you, you accept it anyway. Just like the Aggie might reach 109 00:10:44.700 --> 00:10:56.300 So the point then is that people voluntarily can create incentives to do things they don't 110 00:10:56.300 --> 00:11:02.480 necessarily want to do in the short run because they expect to be better off in the long run. 111 00:11:02.480 --> 00:11:10.700 The question then I guess in this talk is are businessmen more like Aggies or more like 112 00:11:10.700 --> 00:11:40.700 the people that suggest that they have to be forced to live up to their promises and in that regard we need to look at or there are certainly different ways to test these alternative hypotheses but one is to look at history and see what businessmen have done the conventional wisdom seems to be that arbitration in the United States started in 113 00:11:40.700 --> 00:11:48.420 1920, with the passage of the arbitration statute in New York, and then subsequent passages 114 00:11:48.420 --> 00:11:58.460 in New Jersey, the federal government, Oregon, Massachusetts, all before 1925, and a series 115 00:11:58.460 --> 00:12:05.280 of additional state statutes, which essentially ordered common law courts to accept arbitration 116 00:12:05.280 --> 00:12:10.180 rulings as binding. 117 00:12:10.180 --> 00:12:19.140 I guess the evidence supporting this contention is that there weren't very many cases brought 118 00:12:19.140 --> 00:12:22.020 to court about arbitration. 119 00:12:22.020 --> 00:12:31.500 And so before 1920, suggesting to some historians that there must not have been very much arbitration. 120 00:12:31.500 --> 00:12:38.780 But looking at public court records is not a very good indicator of the amount of arbitration. 121 00:12:38.780 --> 00:12:46.420 Similarly, with the passage of arbitration statutes, I'm going to suggest that the propensity 122 00:12:46.420 --> 00:12:52.420 to litigate, to appeal to the public courts, increase dramatically. 123 00:12:52.420 --> 00:12:58.020 And so what we see is with the passage of the statutes is not an increase in arbitration, 124 00:12:58.020 --> 00:13:03.300 but an increase in litigation about arbitration. 125 00:13:03.300 --> 00:13:08.760 So we need to look at all other sources of evidence about arbitration. 126 00:13:08.760 --> 00:13:14.180 The historians have done so. 127 00:13:14.180 --> 00:13:19.340 Their work has simply been ignored, I think, in this debate. 128 00:13:19.340 --> 00:13:28.940 For instance, Jones, in an important article, I think, published in 1956, used newspapers, 129 00:13:28.940 --> 00:13:35.900 Merchant Letters, records from the New York Chamber of Commerce, legal records, and he 130 00:13:35.900 --> 00:13:44.700 found arbitration was in constant and widespread use in New York, going back into the 1600s, 131 00:13:44.700 --> 00:13:56.460 1624 to 1664 under the Dutch, and then again under the British after that. Others have 132 00:13:56.460 --> 00:14:02.740 looked at New York as well and found similar evidence, 133 00:14:02.740 --> 00:14:07.540 wide-scale use of arbitration among the business communities. 134 00:14:07.540 --> 00:14:10.700 Others have looked at all of the other states or colonies 135 00:14:10.700 --> 00:14:13.940 and found widespread use of arbitration 136 00:14:13.940 --> 00:14:17.900 among businessmen in those places. 137 00:14:17.900 --> 00:14:22.820 Arbitration between businessmen in New York and Philadelphia 138 00:14:22.820 --> 00:14:26.020 was common in the 17th century. 139 00:14:26.020 --> 00:14:35.980 So commercial arbitration was widespread even before the United States was a nation. 140 00:14:35.980 --> 00:14:43.660 An example, the New York Chamber of Commerce at its first organizational meeting in April 141 00:14:43.660 --> 00:14:51.140 1768 established an arbitration committee. 142 00:14:51.140 --> 00:15:02.340 It was appointed on June 7th of that year and was in business continuously until 1776 143 00:15:02.340 --> 00:15:10.740 when it disband for a while, but then even during the war it was revitalized. 144 00:15:10.740 --> 00:15:18.660 During the British occupation, the British forces sent all civil cases to the Chamber 145 00:15:18.660 --> 00:15:26.580 of Commerce, because it was the only court in town. So arbitration by businessmen has 146 00:15:26.580 --> 00:15:35.420 a long history in the United States. The assumption that it started in 1920 is simply false. Not 147 00:15:35.420 --> 00:15:40.980 only did it have a long history, but the evidence suggests that it was growing continuously 148 00:15:40.980 --> 00:15:50.260 through this history, despite a very contentious view of arbitration by the public courts, 149 00:15:50.260 --> 00:15:51.260 by the common law courts. 150 00:15:51.260 --> 00:15:59.380 The common law courts didn't like arbitration, and if a case was appealed from arbitration, 151 00:15:59.380 --> 00:16:03.040 they found lots of ways to overturn the arbitration ruling. 152 00:16:03.040 --> 00:16:08.220 So these arbitrators and their courts were not taking their authority from the common 153 00:16:08.220 --> 00:16:10.840 law courts during this time. 154 00:16:10.840 --> 00:16:15.760 The relevant precedent comes from England in 1609, 155 00:16:15.760 --> 00:16:19.920 which essentially says the common law courts are, 156 00:16:19.920 --> 00:16:21.980 they know the law, arbitrators don't, 157 00:16:21.980 --> 00:16:25.720 so we can overturn anything that arbitrators do. 158 00:16:27.320 --> 00:16:30.940 So this was arbitration based, 159 00:16:30.940 --> 00:16:33.600 gaining its authority from someplace else. 160 00:16:33.600 --> 00:16:35.680 Well, I would suggest it was gaining its authority 161 00:16:35.680 --> 00:16:37.760 from the business community itself. 162 00:16:37.760 --> 00:16:40.440 Businessmen were willing to arbitrate 163 00:16:40.440 --> 00:16:45.480 and willing to accept arbitration because it was in their self-interest to do so. 164 00:16:45.480 --> 00:16:52.520 Even if they lose, they recognize that in the long run, they gain by behaving honestly, 165 00:16:52.520 --> 00:17:00.440 by living up to their promises to accept arbitration and so on. 166 00:17:00.440 --> 00:17:09.000 The fact is that every commercial group that organized, that I've seen evidence about through 167 00:17:09.000 --> 00:17:16.840 the 1800s established some sort of arbitration mechanism, not just between businessmen but 168 00:17:16.840 --> 00:17:22.840 also between businessmen and their customers. The New York Stock Exchange established its 169 00:17:22.840 --> 00:17:33.360 arbitration arrangements in 1817, I think, to arbitrate disputes between the stock industry 170 00:17:33.360 --> 00:17:41.560 and their customers and it's been going ever since so the evidence of 171 00:17:41.560 --> 00:17:50.360 widespread use of arbitration is quite strong and the the reasons are also I 172 00:17:50.360 --> 00:18:00.600 think fairly apparent the one interview of a businessman in New York back in 173 00:18:00.600 --> 00:18:09.320 The early 1800s asked why they didn't use the public courts. He responded not 174 00:18:09.320 --> 00:18:14.840 only did courts, according to expensive endless law, they were slow to 175 00:18:14.840 --> 00:18:19.320 develop legal doctrines that facilitated commercial development. In other words, 176 00:18:19.320 --> 00:18:27.000 they were slow, they were costly, they didn't enforce the law that the 177 00:18:27.000 --> 00:18:32.000 that the businessmen wanted, so the businessmen simply ignored them, by and large. 178 00:18:37.000 --> 00:18:44.000 The growth of arbitration is particularly strong during the last third, roughly, of the 1800s. 179 00:18:45.000 --> 00:18:48.000 And I think there's a couple of reasons for that. 180 00:18:48.000 --> 00:18:51.000 Essentially, the cost of litigation was increasing. 181 00:18:51.000 --> 00:19:00.140 Court delay was becoming increasingly important during this period and of course as it takes 182 00:19:00.140 --> 00:19:06.640 longer to get a case tried, that's expensive for businessmen and so even those who might 183 00:19:06.640 --> 00:19:13.920 prefer litigation over arbitration for some reason would tend to shift towards arbitration. 184 00:19:13.920 --> 00:19:19.480 And the other factor of course is the growth of the regulatory state which we can start 185 00:19:19.480 --> 00:19:28.120 start seeing in the last part of the 1800s as commercial autonomy became increasingly 186 00:19:28.120 --> 00:19:35.280 an issue and businessmen were trying to shield themselves from government more and more with 187 00:19:35.280 --> 00:19:42.920 the increasing effort of government to control business activity. 188 00:19:42.920 --> 00:19:50.520 So in other words, businessmen were seceding from the control of government long before 189 00:19:50.520 --> 00:19:53.700 the passage of the arbitration statutes. 190 00:19:53.700 --> 00:19:59.320 By World War I, arbitration, I mean the courts were completely irrelevant in many areas of 191 00:19:59.320 --> 00:20:07.040 business as business trade associations had their own arbitration tribunals and that's 192 00:20:07.040 --> 00:20:10.560 where disputes were handled. 193 00:20:10.560 --> 00:20:17.920 Well this brings up another question. If arbitration is so great and the businessmen were using 194 00:20:17.920 --> 00:20:24.600 it anyway, why were the statutes passed? What motivated the passage of these statutes? The 195 00:20:24.600 --> 00:20:28.120 typical argument is the business community demanded them because they felt like they 196 00:20:28.120 --> 00:20:36.200 needed the backing of the state in order to avail themselves to this more efficient litigation 197 00:20:36.200 --> 00:20:38.540 or dispute resolution process. 198 00:20:38.540 --> 00:20:41.840 Without state sanction, they couldn't pull it off. 199 00:20:41.840 --> 00:20:45.920 Well, I've looked at the history of the passage 200 00:20:45.920 --> 00:20:49.440 of the statutes as well then. 201 00:20:49.440 --> 00:20:52.080 And it turns out that the political pressure that 202 00:20:52.080 --> 00:20:54.400 started to build during the second decade of the 20th 203 00:20:54.400 --> 00:21:00.480 century for legislation of these arbitration statutes 204 00:21:00.480 --> 00:21:05.440 came primarily from the legal profession. 205 00:21:05.440 --> 00:21:07.600 not from the business community. 206 00:21:08.880 --> 00:21:11.080 Trial lawyers, for instance, 207 00:21:11.080 --> 00:21:15.800 were seeing business disputes shifted increasingly 208 00:21:15.800 --> 00:21:18.340 into arbitration tribunals. 209 00:21:20.520 --> 00:21:24.040 The trade associations don't like lawyers 210 00:21:24.040 --> 00:21:26.920 and they never have. 211 00:21:26.920 --> 00:21:30.600 In fact, one survey 40 years after the passage 212 00:21:30.600 --> 00:21:40.800 of these statutes in the late 1950s found that 40 years later, 40% of the trade associations 213 00:21:40.800 --> 00:21:50.680 still explicitly forbade lawyers representing parties in arbitration, and the other 60% 214 00:21:50.680 --> 00:21:52.720 discouraged them. 215 00:21:52.720 --> 00:22:00.280 So there was a forum for dispute resolution that was developing and very viable that wasn't 216 00:22:00.280 --> 00:22:10.200 using lawyers and lawyers then were looking for a way to get themselves into the arbitration 217 00:22:10.200 --> 00:22:16.800 process. At least that's my hypothesis. They, of course, they might have preferred, some 218 00:22:16.800 --> 00:22:21.840 of them even explicitly said they would have preferred to eliminate arbitration, make it 219 00:22:21.840 --> 00:22:27.520 illegal so that they could force disputes into the public courts. But I think they recognized 220 00:22:27.520 --> 00:22:31.200 that that wasn't possible, at least many of them did. 221 00:22:31.200 --> 00:22:35.000 So what might we do then as lawyers 222 00:22:35.000 --> 00:22:37.520 to get some arbitration business? 223 00:22:37.520 --> 00:22:44.640 Well, maybe we can pass some laws that 224 00:22:44.640 --> 00:22:50.640 allow for arbitration to be appealed to the public courts 225 00:22:50.640 --> 00:22:54.800 and tell the public courts to recognize arbitration rulings. 226 00:22:54.800 --> 00:23:01.800 But then with the prospect of appeal to the public courts, 227 00:23:01.800 --> 00:23:04.800 the parties in the arbitration disputes 228 00:23:04.800 --> 00:23:09.240 might need to consult with lawyers about that potential. 229 00:23:12.280 --> 00:23:16.840 Now, one critic of my argument here 230 00:23:16.840 --> 00:23:20.680 pointed out that most lawyers never go to trial, 231 00:23:20.680 --> 00:23:22.680 that most lawyers wouldn't be worried 232 00:23:22.680 --> 00:23:24.900 about this particular issue. 233 00:23:24.900 --> 00:23:26.900 But my response was that the lawyers 234 00:23:26.900 --> 00:23:28.740 who specialize in contract writing 235 00:23:28.740 --> 00:23:31.200 also would be threatened by arbitration 236 00:23:31.200 --> 00:23:33.620 because if you've got a good, cheap way 237 00:23:33.620 --> 00:23:35.480 to resolve disputes, you don't have to spend 238 00:23:35.480 --> 00:23:39.080 nearly as much time worrying about what the contract says. 239 00:23:39.080 --> 00:23:42.700 So contract writing lawyers were also threatened 240 00:23:42.700 --> 00:23:45.460 by arbitration and its growth. 241 00:23:47.040 --> 00:23:49.640 So the Bar Association started pushing 242 00:23:49.640 --> 00:23:51.620 for arbitration statutes. 243 00:23:52.680 --> 00:24:00.960 and they were successful first in New York and then in some other states and they got the Federal Statute passed. 244 00:24:00.960 --> 00:24:08.480 The impetus came from the Bar Associations. The Bar Associations drafted the statutes. 245 00:24:08.480 --> 00:24:16.280 They did create some other organizations sort of as fronts in this lobbying effort. 246 00:24:16.280 --> 00:24:21.280 The Arbitration Society of America was a big pusher, 247 00:24:21.280 --> 00:24:25.360 but it turns out that it was a spinoff of the American 248 00:24:25.360 --> 00:24:27.760 and New York Bar Associations. 249 00:24:27.760 --> 00:24:32.000 The American Arbitration Association, as well, 250 00:24:32.000 --> 00:24:39.000 was early on dominated by the Bar Association 251 00:24:39.000 --> 00:24:42.880 and active in the political process. 252 00:24:42.880 --> 00:24:44.840 and I have a lot of detail in my paper 253 00:24:44.840 --> 00:24:49.280 about that process for those of you who might be interested. 254 00:24:50.120 --> 00:24:51.720 What's the consequence? 255 00:24:51.720 --> 00:24:56.720 Well, as one observer noted shortly 256 00:24:57.020 --> 00:25:00.200 after the New York Arbitration Act was passed, 257 00:25:01.140 --> 00:25:04.220 the legal machinery for protecting and safeguarding 258 00:25:04.220 --> 00:25:08.080 and supervising arbitration was established, 259 00:25:08.080 --> 00:25:10.200 but instead of narrowing the jurisdiction 260 00:25:10.200 --> 00:25:12.040 of the Supreme Court, it broadened it. 261 00:25:12.040 --> 00:25:14.840 Instead of being ousted of jurisdiction over arbitration, 262 00:25:14.840 --> 00:25:17.460 the courts are given jurisdiction over them. 263 00:25:17.460 --> 00:25:22.320 The parties aggrieved have ready recourse to the courts. 264 00:25:22.320 --> 00:25:24.840 There was an explosion of litigation, 265 00:25:24.840 --> 00:25:27.560 not about arbitration rulings, 266 00:25:27.560 --> 00:25:29.920 but about the arbitration process itself. 267 00:25:29.920 --> 00:25:31.960 What was the court going to accept 268 00:25:31.960 --> 00:25:35.000 as appropriate procedures in arbitration? 269 00:25:35.000 --> 00:25:38.480 Do lawyers have to be present to all of those sorts of issues? 270 00:25:38.480 --> 00:25:43.000 And so, to a substantial degree, 271 00:25:43.000 --> 00:25:48.000 it appears that the bar associations were successful. 272 00:25:48.660 --> 00:25:53.600 For instance, in American Arbitration Association arbitration, 273 00:25:54.480 --> 00:25:59.480 the use of counsel rose from 36% in 1927 to 70% in 1938 274 00:26:00.040 --> 00:26:04.600 to 84% in 1942 to 91% in 1947. 275 00:26:04.600 --> 00:26:10.600 So, start out with no lawyers and end up with lots of lawyers. 276 00:26:10.600 --> 00:26:15.600 I'm running out of time here. 277 00:26:15.600 --> 00:26:30.600 In conclusion, then, let me suggest that there's a literature in economics and law that says that common law rules evolve efficiently. 278 00:26:30.600 --> 00:26:36.880 And I certainly don't agree with that, but in the area of commercial law, there might 279 00:26:36.880 --> 00:26:41.260 be a little bit to it because of competition. 280 00:26:41.260 --> 00:26:46.000 There is competition from arbitration tribunals for the common law courts. 281 00:26:46.000 --> 00:26:51.300 So common law courts want business, dispute resolution business. 282 00:26:51.300 --> 00:26:57.400 They are going to have to develop law or enforce laws that the business community in general 283 00:26:57.400 --> 00:27:02.760 Supports, assuming the competition is fair, assuming we have a level playing field. 284 00:27:02.760 --> 00:27:06.680 Unfortunately, that's not the case. 285 00:27:06.680 --> 00:27:17.120 Since 1930, for instance, a Supreme Court case, Paramount Lasky Corporation v. the United 286 00:27:17.120 --> 00:27:23.920 States, an agreement to boycott, designed to back an arbitration system was struck down 287 00:27:23.920 --> 00:27:26.720 by the Supreme Court. 288 00:27:26.720 --> 00:27:33.580 A group of motion picture producers had agreed to place an arbitration clause in their contracts 289 00:27:33.580 --> 00:27:38.560 with motion picture exhibitors to boycott any exhibitor who refused to arbitrate or 290 00:27:38.560 --> 00:27:41.120 refused to accept arbitration rulings. 291 00:27:41.120 --> 00:27:45.060 The boycott agreement was declared illegal. 292 00:27:45.060 --> 00:27:52.560 So the mechanisms that private groups might develop to support their arbitration can be 293 00:27:52.560 --> 00:27:57.560 be undermined by coercive public, by the coercive state. 294 00:27:58.160 --> 00:28:02.880 Maybe a more significant threat to arbitration 295 00:28:02.880 --> 00:28:07.880 is the indirect one of limiting the scope of contracting. 296 00:28:07.920 --> 00:28:12.240 For instance, under the common law up until 1916, 297 00:28:12.240 --> 00:28:15.040 product liability issues were contract issues. 298 00:28:15.040 --> 00:28:17.720 You had to have a contractual relationship 299 00:28:17.720 --> 00:28:22.280 with someone before product liability issue could be tried. 300 00:28:22.280 --> 00:28:32.080 But then in 1916, the courts started expanding the product liability to people who were not 301 00:28:32.080 --> 00:28:35.200 in a contractual relationship. 302 00:28:35.200 --> 00:28:42.280 And that tidal wave, of course, has led to the explosion in product liability torque 303 00:28:42.280 --> 00:28:44.600 that we see today. 304 00:28:44.600 --> 00:28:50.800 Taking product liability issues out of contract means that it makes it much more difficult 305 00:28:50.800 --> 00:28:59.200 to Arbitrate Them and creates a booming business for the public courts, of course. 306 00:28:59.200 --> 00:29:05.040 So with these kinds of changes, it may be increasingly difficult for businessmen to 307 00:29:05.040 --> 00:29:07.760 secede without really leaving. 308 00:29:07.760 --> 00:29:16.820 They may have to actually leave if they want to avoid the public common law courts. 309 00:29:16.820 --> 00:29:21.380 The sheriff might come in and tell the Aggie that he can't throw his quarter in the toilet 310 00:29:21.380 --> 00:29:27.300 in order to get the nickel out, but the Aggie can always flush the toilet and head for the 311 00:29:27.300 --> 00:29:28.780 sewer plant, I guess. 312 00:29:28.780 --> 00:29:32.460 And maybe that's what businessmen will have to do as well.