Next time you’re talking to a corporate CEO, ask them this: Suppose the company found itself in court for one reason or another. The judge had no legal training. The process had no real rules. The judge was neither required to follow law nor issue a written legal opinion. Once the judge ruled, their decision was enforceable with the full weight of the law even though it might be legally incorrect. And it all happened in secret. No legal precedent could ever be established to guide the company’s – or any other company’s – future conduct. Would you consider this a system that promotes legal predictability and certainty for businesses, or not?
I think we all know the answer. Yet what I just described are critical elements of “forced arbitration.” We usually talk about forced arbitration as a corporate-designed private, secretive process of dispute resolution rigged against consumers, employees, and small businesses. But for corporations who must rely on a strong, stable civil justice system for guidance on how to act, it’s unpredictable, uncertain, and mostly useless. And that’s exactly the point Rep. Katie Porter made in her questioning last week of the U.S. Chamber of Commerce’s Tom Quaadman, at a U.S. House called, “Putting Investors First: Reviewing Proposals to Hold Executives Accountable.”
The context of her questioning was the concern that pressure and, for the first time, allow public companies to force defrauded investors into private arbitration to resolve securities disputes. Such a process would not only harm investors, but also would “the crucial role shareholder lawsuits play in deterring financial fraud and protecting the integrity of U.S. capital markets.”
Getting directly at the arbitration problems described above, Rep. Porter Mr. Quaadman, “Do you think the certainty of law is important to companies?” and “Is legal uncertainty positive?” Immediately he knew where she was going. As she tried to nail him, he did his best to slither out of it, ultimately pivoting the discussion to a completely different system, called FINRA (the Financial Industry Regulatory Authority). She wasn’t asking about FINRA. FINRA rules would not apply to shareholder arbitration. But she let it go.
Huge props to her, however, for starting this conversation. Clarity. Predictability. Certainty. These are recurrent themes coursing through the business community’s arguments for “tort reform.” “Business certainty” is the reason states cap punitive damages and enact a myriad of liability limits. It’s the reason Congress sometimes considers federalizing state tort laws. It’s the reason corporate groups seek to establish uniform legal standards, curtail federal agency power, preempt state tort remedies, or otherwise block plaintiffs’ access to the courts. Corporations make this argument to legislators. They argue it to judges. They argue it to federal agencies. No branch or level of government has been exempt.
Please, take their word for it:
- : “This new law will provide certainty and predictability for businesses.” : [We] are at the fore-front of efforts to restore fairness and predictability to state civil justice systems … that treats defendants in a consistent manner.”
- : “[A]bsence of uniformity [in the law] creates damaging uncertainty for businesses in this sector.… [U]ncertainty about the scope of a federal statute has harmful consequences for any national business whose conduct is regulated by that statute.”
- : State tort claims should be preempted because they subject businesses to “uncertain, unpredictable” liability.
- : Venue and personal jurisdiction rules “give a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit.…" This “[p]redictability is valuable to corporations making business and investment decisions.” ): Expanding liability under labor laws “would cause uncertainty for businesses.”
- : State by state products liability laws “create uncertainty for businesses selling in a national marketplace.”
- : Competition is harmed “[i]f businesses are unsure about where the line between legal and illegal behavior is drawn.”
Even when it comes to investor protection, they make the argument. : To foreign investors, the legal system can be “a source of significant investor uncertainty” and “international investors are not alone in that concern. It is a concern that is shared by U.S. businesses in general.” And while we generally agree with none of that, one thing is clearly true: the last thing the U.S. Chamber should support now is a legal system for investors that’s secret, with no trained judges, no rules, no record, no decisions with any precedential value and which actually might be legally wrong, and provide basically nothing to help companies establish what’s legal and what’s not.
Big business lobbyists like to complain about the unpredictability of jury awards even though data them to be generally consistent and conservative. But when it comes to unqualified legal uncertainty for defendants, forced arbitration wins that contest by orders of magnitude. It’s about as uncertain, unpredictable and unclear as a legal system could be.