Market Solutions to Market Problems: Re-Examining Arbitral Immunity as a Solution to Unfairness in Securities Arbitration

This paper addresses the fairness of securities arbitrations in the United States. A few decades ago, such a topic would have been relegated to the academic hinterlands. For the first fifty years following the enactment of the nation\u27s securities laws, pre-dispute arbitration agreements between investors and the securities industry were not enforceable. In a series of decisions in the late 1980s, the Supreme Court reversed course and held that such disputes were indeed arbitrable. Following those decisions, arbitration quickly became the preferred method of dispute resolution for cases arising under the nation\u27s securities laws, especially disputes between investors and broker-dealers. Between 1990 and 2004, the number of arbitration cases filed at the NASD rose from 3,617 to 8,201. As securities arbitration grew in popularity, concerns over the fairness of securities arbitration proceedings quickly followed. Indeed, the ink on the Supreme Court decisions had barely dried when Congress tasked the General Accounting Office (GAO) with reporting on the fairness of securities arbitrations. Most calls to reform securities arbitration suffer from a common flaw – they have relied largely on regulatory solutions without considering the market incentives of the arbitrators. When viewed through an economic lens, the inefficacy of this “regulatory” approach comes as no surprise. Calls for reform rest on a basic premise – that securities arbitration is unfair because the system is “captured” by the industry. If we accept that premise, then regulatory reforms are unlikely to be an effective long-term solution. Such reforms may yield ephemeral results as arbitrators and broker-dealers need time to react to shifting norms. Over the long run, however, economic analysis suggests that they will simply adapt their behavior to the new legal regime and, eventually, new norms will develop that continue to give favored treatment to the repeat players, namely the industry. Efforts to reform the perceived inequities in securities arbitration need a fresh approach. This essay provides that approach. It applies to the peculiar problem of securities arbitration a theory that I developed in an Article in the Georgia Law Review. That Article developed an economic argument against arbitral immunity. It proposed that we strip arbitrators and arbitral institutions of any immunity that they enjoy as a matter of law. In place of that immunity, contractual damages caps and liability waivers would limit the exposure of arbitrators and arbitral institutions. That same basic model provides a novel, viable and partly efficacious solution to the (perceived) problem of unfairness in securities arbitration. The effects of such a paradigm shift are subtle but important. This model addresses many (but, admittedly, not all) of the most vexing problems about unfairness in securities arbitration. It also better aligns the incentives of arbitrators and arbitral institutions with the “public interest” arguments that underpin calls for greater fairness in securities arbitration

The Case Against the Arbitration Fairness Act

The Arbitration Fairness Act is a well-intended but ultimately misguided attempt to address a system of dispute resolution that has largely worked well. The bill currently being considered by Congress rests on a series of flawed empirical premises. This article addresses three. First, though the bill posits that arbitration leaves consumers and employees worse off, data demonstrate individuals overall are often better off under a system with enforceable predispute arbitration agreements than a system without them. Second, although the bill promises improved access to justice, the proposal actually erects more impediments. Third, though the bill suggests that postdispute arbitration will provide a continued outlet for this system of dispute resolution, it fails to recognize the significant structural impediments to a successful system of postdispute arbitration. First, it now appears to be common groun

Apprendi, Blakely and Federalism

The Clark Y. Gunderson Lecture is a memorial to a man who devoted his life to legal education and spent thirty years teaching at the Law School. It is supported by a trust fund in the University of South Dakota Law School Foundation established principally by Colonel Gunderson\u27s family. Professor Rutledge delivered the 2004 Gunderson Lecture at the Law Review\u27s Symposium on Sentencing and Punishment, which took place at the Law School on November 5, 2004. What follows is an adapted version of Professor Rutledge\u27s lecture

Miranda and Reasonableness

Last term\u27s decisions in Yarborough v. Alvarado and Missouri v. Seibert shed important light on the state of the Miranda doctrine in the Supreme Court. In Yarborough, a slim majority held that a state appellate court\u27s failure to consider a defendant\u27s age and history of contact with law enforcement in its “custody” determination was not “contrary to” or an “unreasonable application of” clearly established Supreme Court case law. In Seibert, a fractured majority affirmed the Missouri Supreme Court\u27s decision to exclude a defendant\u27s confession where police officers strategically withheld a suspect\u27s Miranda rights at the outset of a custodial interrogation and only gave the warnings after obtaining a complete confession. On first impression, both decisions appear quite unrelated. Consider the precise issues before the Court: Yarborough concerned the definition of “custody”; Seibert addressed the proper remedy when police have not honored Miranda\u27s command that the warnings precede any custodial interrogation. Consider too their procedural postures: Yarborough concerned review of a federal appellate court decision on a habeas petition challenging a state conviction; Seibert involved direct review of a state Supreme Court decision. Studied more closely, the two cases share an important common thread. Both concerned whether an actor\u27s “subjective” understanding was relevant to the doctrinal inquiry or, instead, whether the inquiry should be guided by purely “objective” factors. In Yarborough, the Court revisited its definition of custody—whether “a reasonable person [would] have felt he or she was not at liberty to terminate the interrogation and leave”—and appeared to hold that a defendant\u27s peculiar characteristics were not relevant to the “reasonableness determination.” In Seibert, the justices divided over whether the availability of the exclusionary remedy following delayed administration of the warnings turned on the objective unreasonableness of the officer\u27s conduct or on evidence of deliberate misconduct by police. Seen at this level, Yarborough and Seibert carry broader implications about the Court\u27s willingness (or reluctance) to rely on subjective or objective tests to shape the formation of the Miranda doctrine specifically and “reasonableness” doctrines more generally. To be sure, the Court has not charted an entirely consistent path on these matters, and these most recent decisions confirm the Court\u27s unpredictability. Nonetheless, one can draw both positive lessons about how the Court confronts reasonableness determinations and normative lessons about how it should do so. This Essay explores these lessons in three parts. Part I traces some of the traditional arguments for and against subjective and objective standards of reasonableness, drawing on debates in other contexts where those issues have arisen. Part II reviews the facts and various opinions of Yarborough and Seibert and then evaluates the opinions in light of these traditional arguments. Part III elevates the critique to a normative level and offers guidance on how the Court should address these doctrinal issues in the future. In the interest of brevity, I subject this Essay to two important simplifying assumptions. First, the Essay does not take a position in the debate over the legitimacy of Miranda—either as a matter of constitutional doctrine or as a matter of policy. I take Miranda doctrine as I find it and simply trace out its logical implications. Second, the Essay assumes that Miranda doctrine should be developed in light of its underlying purposes: to counteract the inherently compelling nature of the custodial interrogation and reduce the risk that an involuntary confession will be admitted at trial through the use of its presumptions, prophylactic rules and exclusionary principles

Clerks

Book Review of Sorcerers\u27 Apprentices: 100 Years of Law Clerks at the United States Supreme Court, Artemus Ward and David L. Weiden. NYU, 2006. Pp xiv, 337. and Courtiers of the Marble Palace: The Rise and Influence of the Supreme Court Law Clerk, Todd C. Peppers. Stanford, 2006. Pp xv, 30

Apprendi and Federalism

Since the emergence of the Apprendi majority and its newly minted (and evolving) constitutional limits on criminal punishment, many commentators have begun to address its implications for the horizontal relations between the branches of government — between legislators and courts, between judges and juries, and between judges and prosecutors. Less widely addressed, though equally (if not more) important, has been the Apprendi doctrine’s implications for vertical relations, particularly federalism. This essay seeks to begin to fill that lacuna in the literature. Part I explains how Apprendi undermines principles of federalism, a curious tension because several of Apprendi’s strongest defenders, particularly Justices Scalia and Thomas, are also the most ardent protectors of federalism. Part II proposes how these justices can reconcile their commitments to Apprendi and federalism: relying on the Privileges or Immunities Clause, they should hold that the Sixth Amendment aspects of Apprendi do not apply to the states except where a state scheme departs from settled historical practice. Part III tests this theory against the existing Supreme Court Apprendi jurisprudence and as a tool for solving several current Apprendi-related debates developing in state courts. Part IV concludes

Arbitration Reform: What We Know and What We Need to Know

The future of commercial arbitration has become a centerpiece of the domestic congressional agenda. According to one estimate, ten different bills introduced in the 110th Congress would chip away at the enforceability of pre-dispute arbitration agreements. By far the most significant bill, the Arbitration Fairness Act, would retroactively invalidate arbitration agreements in all employment, consumer, securities and franchise contracts. An especially vague provision in a prior version of the bill would invalidate agreements involving claims under statutes intended to protect civil rights or designed to regulate transactions between parties of unequal bargaining power. Are these wise moves

Samantar, Official Immunity and Federal Common Law

This essay examines the theoretical underpinnings of the immunity of foreign government officials following the Supreme Court\u27s recent decision in Samantar. Part of a forthcoming symposium with the Lewis and Clark Law Review, the paper tackles the federal common law in the Court\u27s decision and, more broadly, international civil litigation. It criticizes the Court\u27s unexamined assumption that its federal common law power extended to create an immunity that, at best, coexists only uncomfortably alongside the legislative framework of the FSIA. It explains the problematic implications of this assertion of federal common law, both for suits against foreign officials and for international civil litigation more generally. Drawing on a longstanding stream of statutory interpretation literature, the paper concludes that the Court should have declined to exercise its gap-filling authority in this context and, instead, employed an information-forcing default rule that would have induced congressional action in the field

Bending (and Breaking) the Cost Curve of Legal Education

Law school graduates will accumulate an average of over $140,000 in debt for their undergraduate and law school studies, and some law schools have reported costs exceeding$100,000 annually. Peter B. “Bo” Rutledge, dean of the University of Georgia School of Law, examines the ever-escalating costs and explains his school’s three-part strategy for dealing with it

Medellin, Delegation and Conflicts (of Law)

The case of Medellin v. Texas presented the Supreme Court with a recurring question that has bedeviled judges, legal scholars, and political scientists-what effect, if any, must a United States court give to the decision of an international tribunal, particularly where, during the relevant time, the United States was party to a treaty protocol that bound it to that tribunal\u27s judgments. While the Supreme Court held that the International Court of Justice\u27s ( ICJ ) decision was not enforceable federal law, its decision reflected an important recognition that the issues presented in that case were not limited to the specific area of ICJ judgments. Rather, these issues in Medellin represent simply the latest chapter in a longstanding and increasingly important debate among academics, political scientists and public policy experts-the wisdom of delegations. While the meaning of that term is controversial (a topic I address in Part I), there is common agreement that delegation at least includes a bilateral (or multilateral) grant of authority to an international institution. This includes relationships such as the United States\u27 membership in the United Nations or its accession to the North American Free Trade Agreement ( NAFTA ). Delegations often, though not always, involve a transnational dispute resolution body such as the NAFTA Dispute Resolution Boards or, in the case of Medellin, the International Court of Justice. Another current example of this hotly debated topic is whether the United States should ratify the United Nations Convention on the Law of the Seas ( UNCLOS ), which has its own dispute resolution body for boundary disputes. Advocates defend ratification as action in the national interest and in furtherance of international norms; critics decry it as a surrender of United States sovereignty, particularly its naval prerogatives, to unaccountable transnational bureaucrats. In my view, delegation debates exemplified by cases like Medellin and the ratification debate over UNCLOS suffer from three related distortions. First, the term delegation has been defined too narrowly. Second, this unduly narrow definition has caused some participants in the debate to fail to differentiate between different types of delegations. Third, the unduly narrow definition and insufficiently nuanced account have skewed the normative analysis of specific delegations. Conflicts-of-law jurisprudence, particularly the early jurisprudence from both Europe and nineteenth century American conflicts scholars, supplies an important tool to correct all three distortions. Part I of this Essay considers the first distortion. It addresses an important definitional aspect of this debate-the meaning of delegation. This issue involves more than mere quibbling over jargon. Rather, it defines the very scope of the discussion. An unduly narrow definition of delegation runs the risk of rendering irrelevant a data subset that might influence the analysis. Conversely, an unduly broad definition of delegation runs the opposite risk-defining the relevant sample set so broadly that verifiable conclusions cannot be generated or are, at best, so tentative and diluted as to be useless. Part I reviews the competing definitions offered in the literature. It then defends the following definition of delegation: delegation occurs whenever a sovereign state grants legislative or adjudicative jurisdiction to an institution-transnational or otherwise-that is not within the direct reach of the sovereign. I use the term institution in its broad sense-to encompass more than a physical or juridical entity. Instead, following Professor Robert Keohane, I use the term to mean legal regimes, with or without a bureaucratic infrastructure. Here, conflicts-of-law scholarship which sought to provide a tool for reconciling jurisdictional conflicts among states in a post-Westphalian world-provides a historically rooted,well-tested benchmark for redefining delegation. Part II of this Essay considers the second distortion in the delegation debate: the lack of a sufficiently nuanced account for classifying delegations. The early delegation debates tended to be bipolar-different camps criticized or defended delegation generally without really making much effort to differentiate between types of delegation. Unfortunately, framing the debate in this manner overlooks salient differences between various forms of delegation. Some recent scholarship has begun to recognize the need for a more sophisticated typology. This Part reviews those recent efforts and then derives a typology that, drawing on an important distinction in conflicts jurisprudence, classifies delegations according to the following criteria: (1) what type of jurisdiction is being delegated (legislative vs. judicial), (2) does the delegation create a new bureaucracy (or instead rely on preexisting institutions), and (3) are the decisions of the newly created bureaucracy automatically domesticated (or instead rely on domestic institutions to give legal effect to their decisions)? In contrast to previous schemes, this one better permits a more nuanced normative debate about delegation. Part III addresses the third and final distortion: the need for a more nuanced normative debate over the costs and benefits of delegations. It begins by laying out an account of the costs of delegation (such as the loss of sovereignty) and the benefits of delegation (such as improved coordination). Part III then evaluates the costs and benefits through the lens of the conflicts-based typology developed in Part II; it discusses how particular delegations, depending on whether they involve legislative or judicial jurisdiction, organizational or non-organizational activity and automatic or nonautomatic domestication, will entail different mixtures of costs and benefits. Part III concludes with a discussion of the lessons of the Medellin case for the future of the delegation debate. While this Essay seeks to remedy these three distortions in the delegation debate, it is important to identify at the outset what it does not seek to do. It does not offer an opinion on the constitutionality of a particular delegation. Nor is it meant to provide a normative guidebook for the acceptability or unacceptability of a delegation. Rather, my ambition is more limited-by correcting these three distortions in the debate, I hope to refocus the debate along terms that will facilitate those broader constitutional and normative discussions, whether in the arena of a decision to enact legislation or a judicial decision to apply foreign law