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Criticism of Supreme Court arbitration decisions should be reconsidered in historical context, law professor writes

Wednesday, August 29, 2018

LAWRENCE — In some legal circles, there is a general consensus that when it comes to U.S. Supreme Court decisions regarding arbitration, “no one thinks they got it right.” That’s not entirely true, as the decisions are defensible when viewed alongside historic changes to the American legal landscape, a University of Kansas law professor suggests.

Stephen Ware, professor of law at KU, in a new article in the Loyola Consumer Law Review, offers a short defense of Southland, Casarotto and other long-controversial arbitration decisions by the Supreme Court. Ware’s sympathy for those decisions comes from viewing these arbitration cases in the context of a broader legal history. Congress passed the Federal Arbitration Act, known as the FAA, in the 1920s. In the following decade, however, the Supreme Court effected two major changes to the relationship between federal and state law: the landmark case Erie v. Tompkins, and the expansion of federal power to allow President Franklin Roosevelt’s New Deal.

Erie v. Tompkins was not a case about arbitration, but it greatly changed the relationship between federal and state law.

“When Congress enacted the FAA in the 1920s, its drafters and adopters may have thought the FAA would apply only in federal, not state, courts. But interpreting the FAA that way after Erie (1938),” Ware says, “might well have rendered the FAA unconstitutional.”

Around the same time as Erie, the Supreme Court expanded its interpretation of the U.S. Constitution’s commerce clause. Previously, the court interpreted this clause to permit federal regulation only of transactions with large interstate effects, which led the court to hold some of the New Deal unconstitutional by 1936. During his re-election campaign that year, in the midst of the Great Depression,  Roosevelt criticized the court’s “horse and buggy interpretation” of the commerce clause, which he said was preventing necessary reforms. Roosevelt and his Democratic allies won that election in a landslide and credibly threatened “court-packing” legislation that would enable him to appoint pro-New Deal justices to the court.

Following this threat, two previously conservative members of the court switched to FDR’s side by broadening their interpretation of the commerce clause to uphold the New Deal’s Social Security Act and National Labor Relations Act. This “switch in time that saved nine” expanded the federal “commerce” power to reach even largely local transactions with small, indirect interstate effects, and thus it authorized federal legislation in a variety of areas from civil rights and employment discrimination to consumer protection.

One other effect of this expansion of federal power was consumer contracts with arbitration clauses becoming subject to federal laws such as the FAA, which enforces agreements to arbitrate. This holding by the Supreme Court’s Southland and Casarotto cases is controversial but, Ware argues, defensible in historical context. Using the metaphor of “the tail wagging the dog,” Ware says a relatively obscure statute such as the FAA is the tail, while the court’s changing interpretation of the Constitution to allow the New Deal and much else is the far bigger dog.

“We might initially think it’s strange the FAA is being interpreted differently now than it was originally in the 1920s, but that’s a little tail compared to the big dog of so many types of statutes such as employment discrimination, consumer protection and others that have come along since then and likely would have been declared unconstitutional had the Supreme Court not expanded federal power over commerce in the 1930s,” Ware said.

If Congress does not want arbitration agreements enforced against consumers, Ware points out, it could repeal the FAA. So far, however, Congress has enacted only minor exceptions to it. Ware argues for a centrist position on the FAA and arbitration law.