April 27, 2010

U.S. Supreme Court upholds freedom of economic choice in arbitration case

By U.S. Supreme Court upholds freedom of economic choice in arbitration case

Author: Timothy Sandefur

The Supreme Court today decided a case called Stolt-Nielsen S.A. v. Animal Feeds International Corp., and holding that when people don’t agree to be bound by certain kinds of arbitration agreements, they can’t be forced into arbitration against their will. We at PLF have often filed briefs in cases involving arbitration agreements because they represent an important element of the freedom of choice.

The Stolt-Nielsen case is a complicated antitrust case between two companies. These companies had an agreement that disputes between them would be settled by arbitration, so the plaintiff tried to bring a class-action arbitration. But the arbitration agreement didn’t provide for this kind of arbitration, so Stolt-Nielsen argued that it shouldn’t be forced into that procedure.

Some judges and legal scholars argue that arbitration should be preferred because it’s more “efficient”—that is, it costs less, and is faster than having a case heard by a judge. That may be true, but as we argued in our brief, “efficiency” is really a meaningless term standing by itself, and judges shouldn’t try to achieve “efficiency” by forcing people to do things they don’t want to do. Something is only “efficient” if it accomplishes a desired goal with the least cost—which means that “efficiency” can’t be understood outside the context of what the parties to a contract want and are willing to pay:

In short, it makes no sense to speak of a coercive policy as economically efficient. Coercive policies deprive the contracting parties of their judgment, to benefit outsiders, whose goals are thereby deemed more worthy. But if the desires of the contracting parties are to be disregarded, then the determination of whether a decision is efficient for those parties is unnecessary and senseless.

Forcing people into arbitration when they’ve chosen otherwise is to ignore their desires—and is therefore inefficient! Only by allowing people to make agreements by themselves, weighing the costs and benefits of their desires, can we achieve efficient outcomes.

The Court agreed, noting that “as with any other contract, the parties’ intentions control. This is because an arbitrator derives his or her powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution. Underscoring the consensual nature of private dispute resolution, we have held that parties are generally free to structure their arbitration agreements as they see fit…. It falls to courts and arbitrators to give effect to these contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties.” This is a refreshing corrective to some decisions, particularly in California courts, that have completely disregarded arbitration agreements and refused to invalidate them, often on the flimsiest pretexts.

The enforcement of contracts—whether for arbitration or anything else—is a crucial guarantee to freedom of choice. In this, as in other things in life, we all deserve the freedom to choose, to bear the consequences of poor choices, and to enjoy the benefits of wise ones.

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