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The incoming Trump administration should work quickly to reverse the Obama administration’s aggressive efforts to outlaw arbitration. Arbitration — essentially, a contractual agreement to resolve disputes out of court — is at least as fair as litigation, significantly faster and significantly cheaper. Arbitration helps consumers benefit through more services and lower prices, and the spread of arbitration agreements has helped to limit the once-explosive growth in America’s litigation costs.
Trial lawyers hate arbitration because it squeezes their outsized contingent fees out of the system. Lawyers and law firms have been the largest special-interest political contributors to Congress in each electoral cycle of the 21st century, and the plaintiff’s bar has concentrated its largesse among Democrats. Two of the three largest contributors to the career of retiring Sen. Harry Reid (D-Nev.) were out-of-state plaintiffs’ law firms, trailing only his home-state MGM Casinos.
The Obama administration has been working feverishly through its last days to eliminate arbitration clauses through executive actions, new regulations and new regulatory interpretations.
The first battleground for the Obama administration involved class-action lawsuits over employee wages and hours. In January 2012, the National Labor Relations Board decided, for the first time, that class-action waivers in labor contract arbitration clauses violated employees’ collective-bargaining rights under the National Labor Relations Act of 1935 — which preceded by more than three decades the modern class-action litigation device.
The board’s decision was adopted by two Democrat appointees, one of whom — Craig Becker, the former associate general counsel of the Service Employees International Union — was a “recess” appointee whose tenure had already expired. (The administration had resorted to recess appointments to fill the board after failing to reach a compromise with Senate Republicans; the Supreme Court unanimously rebuked the administration’s gambit.) The NLRB has continued to assert its interpretation in the face of conflicting appellate court decisions, and the issue now awaits Supreme Court review.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in the wake of the 2008 financial crisis, not only outlawed arbitration clauses in mortgage-loan contracts but also opened up new avenues for the Obama administration to take executive action. In March 2015, the Obama administration’s Consumer Financial Protection Bureau, newly created under Dodd-Frank, released a study that purported to justify a potential rule that would prohibit arbitration clauses that foreclosed class-action lawsuits in various other consumer-financial products. The rule was proposed in May 2016.
In response to a request by the American Association for Justice — the organization formerly known as the Association of Trial Lawyers of America — the Centers for Medicare and Medicaid Services proposed a rule outlawing arbitration clauses in nursing-home contracts in July 2015. The final rule was issued in September of this year before a federal judge blocked the rule from taking effect in November.
These are just some of the areas in which the Obama administration has acted to curtail arbitration. The Department of Education has issued new rules outlawing arbitration clauses in student-loan contracts, and the Labor Department’s new fiduciary rules governing investment advisers foreclose arbitration and are designed to be enforced through class-action lawsuits. The administration has even gone so far as to “blacklist” companies that include arbitration clauses in their employment contracts—preventing them from doing business with the government.
Each of these attacks on arbitration is an executive-branch end run around Congress, which has by and large resisted the trial lawyers’ assault on private dispute resolution. These attacks on arbitration also share the common feature that they would hurt consumers and the broader public for the benefit of the Obama administration’s trial-lawyer pals.
Consider nursing homes. After an explosion of lawsuits in the 1990s, arbitration clauses became standard in nursing home contracts by 2002. Not coincidentally, Medicaid expenditures on nursing-home care — which constitute one-third of all Medicaid expenses — peaked in inflation-adjusted terms that very year. Eliminating arbitration clauses in nursing-home contracts will drive up the cost of such care: a 2003 study by the U.S. Department of Health and Human Services found that the principal effect of nursing-home litigation was to prompt insurance companies to hike the price of litigation insurance across the board. And patients will see no improvement in services or safety: a 2013 study in the journal Medical Care found that “tort litigation does not increase the quality performance of nursing homes, and may decrease it slightly.”
The increased use of arbitration has helped to slow the growth rate in litigation costs in recent years, but U.S. tort liability costs remain 2.6 times the cost in the European Union, according to a 2013 study by NERA Economic Consulting, so it makes no sense to jettison one of the best available tools for limiting lawsuit abuse. On the campaign trail, President-elect Donald Trump pledged to “put an end to” what he called “the regulation industry” on his first day in office. Unwinding most of the Obama administration’s actions to expand litigation by foreclosing arbitration will take more time than that, but it should be a top Trump administration priority.
James R. Copland is a senior fellow with and director of legal policy for the Manhattan Institute and primary author of a new report, Trial Lawyers, Inc. Update 2016: Arbitration.
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