Edward C. Anderson*
In his 1973 work, The Machinery of Freedom,(1) David Friedman drew
upon classical liberal thought to catalog his principles of a society
focused on the rights of individuals. The book is Friedman's toolbox
for such a society, filled with specific items for specific uses,
many consistent with the most basic ideas of the Founders of the
nation and writers of the Constitution. While filling the toolbox,
Friedman also advocated discarding some outmoded devices of the
1970's -- technical, practical, and philosophical failures that
acted as both burdens and restrictions on the freedom of citizens.
Among the obvious societal and economic failures Friedman identified
were government and government-sponsored monopolies: the Post Office;
the airline monopolies ruled by the CAB; the telephone monopoly;
and, the government monopoly in resolving disputes between private
parties, the government civil court system. Friedman offered, for
each of these, criticisms which, twenty-five years later, we take
as obvious, but reserved some of his unkindest words for the civil
There exists a government monopoly bigger and more inefficient
than the Post Office. A service business run so inefficiently that
customers wait in line for years before receiving any attention
and spend years more waiting for the government to finish a job
that should take a week or two. It is not surprising that 80 to
90 percent of the customers give up, go home, and finish the job
Of course, today, three of these monopolies have been replaced
by vibrant competition. Service in each industry is vastly expanded;
real costs have fallen. Federal Express, MCI, and Southwest Air
may not rule their industries, but those industries march to the
ever-accelerating competitive beat established by these new giants.
As always, providers which meet the needs of the users rise to the
top, unless they are prevented by force (or force of law) from offering
Friedman observed that, so long as this kind of decisionmaking
was the sole province of the government, the court's interest could
not be to balance the interests of the parties, but rather must
be in the power of the government over the current and future disputes.
The purpose would never be to serve the "customers" as
efficiently and effectively as possible. Every matter would be subject
to the conflicted desires of the government. The historical opposition
of government courts to non-government adjudication was merely an
example of this dynamic.
Friedman prescribed a system of decisionmaking in private matters,
conducted not by the government, but by "judges" chosen
by the parties to the dispute.(3) He made clear, as do most classical
liberal thinkers, that he did not impugn the personal motives of
government judges, but merely acknowledged the reality of human
At the end of the 20th Century, "federalists" accept
that government in the United States has usurped far too much power.
Further additional aggrandizement in Washington, D.C. or state capitals
would be, at least, tragic, and perhaps fatal for the liberty which
this nation and its citizens have enjoyed for two centuries. Yet,
many have failed to recognize the role that judicial power over
mundane private issues has played in the growth of that power.
In fact, Friedman's proposal that the contracting parties select
their judges surely reflected exactly the anticipation of the Founders
and the drafters of the Constitution, who adopted the Contract Clause:
"No state shall . . . pass any . . . law impairing the obligation
of contracts . . . ."(4)
The Founders expected that contract terms, such as who would resolve
disputes, were to be decided by the parties and protected from government
intrusion. They recognized the threat created by the power of government
(and, particularly, multiple state governments) to superimpose terms
on private contracts.
At the time of the Revolution, private decisionmaking was common
in commercial transactions in the colonies; the government gave
those decisions the full force of law.(5) Back in England, however,
the courts regularly interfered with contracts for private decisionmaking
and refused to enforce arbitration and other similar agreements,
asserting, for the courts of the Crown, universal jurisdiction of
all disputes.(6) In the years between the adoption of the Constitution
and 1925, similar practices would grow in the United States.(7)
By 1925, a patchwork of court rulings and local statutes had grown
up, restricting, impeding, or prohibiting contracts for non-government
decisionmaking. Federal and state judiciaries had inherited from
the English judges a belief that only a government system could
provide proper adjudication of disputes. The last great legislative
act reflecting broad rights of individuals, before the wave of centralized
power created by the "New Deal" and the "Great Society,"
was the Federal Arbitration Act of 1925 (the "FAA").(8)
The FAA overturned 125 years of miscellaneous central and state
judicial pronouncements, under which these judicial "lawmakers"
had proclaimed themselves as the only true arbiters of almost every
claim or dispute. The Congress, in passing the FAA, unequivocally
reiterated that it was the right of contracting parties to determine
how decisions regarding their contracts, relationships, and claims
would be made.(9)
Contemporaneously, some states adopted similar statutes, setting
forth a general policy empowering contracting parties to decide
how their disputes would be resolved.(10) The premier business adjudicators
of the day, based in New York City, took the Congress at its word
and, in 1926, formed the American Arbitration Association.(11) These
events did not happen in a vacuum, as some industries, such as the
securities markets, had used private adjudication since at least
1872.(12) Nominally, at least, the nation had committed itself to
these individual rights.
Whether, absent the hurricanes of centralization which swept the
country in the following fifty years, these private systems would
have been give the chance to perform their Constitutional, statutory,
and contractual duties, will never be known. As the wars of philosophy
between the centralists and the federalists were fought and won
by the centralists, many rights of individuals disappeared. As the
government in Washington battled the governments of the various
states from 1932 to 1980, the Supreme Court increased the power
of both. The Contract Clause, protecting individual rights, was
reduced to a mere footnote to state "police powers".(13)
In retrospect, the emasculation of the FAA also serves as a textbook
example of judicial activism. Few acts of the national Congress
are more clear. When individuals contract for a dispute resolution
method, the courts must give that method effect and enforce the
result.(14) Nonetheless, when the courts addressed the enforcement
of the act, they simply rejected the words, the meaning, and the
purpose of the Congress and the FAA. In Wilko v. Swan, the U.S.
Supreme Court took it upon itself, without the slightest factual
basis, to conclude that, as a factfinding technique, private arbitration
was, not only inferior to a jury trial, but was so inferior that
parties could not be allowed to exercise their rights under Article
I, Section 10 or the FAA.(15)
The courts were quite frank about the usurpation of power in which
they were engaged. The Supreme Court held that no fact finder could
decide matters correctly without "judicial instruction".(16)
The government courts took it upon themselves to pull cases from
the judges to whom the parties had entrusted the matters and to
take the power of decision upon themselves.
Of course, these private disputes decided in the multitudinous
government court systems have been the source of much of the power
exercised by these unelected and practically unelected judges. The
creation of the doctrines of "punitive damages" and of
new and creative causes of action would not have happened in private
system. These dramatic, dynamic, and draconian changes occurred
only because government judges saw them as being in the "public
New Congresses, confident in the value of ever-expanding government
action, also embraced this judicial power, adopting wide-reaching
and vague pronouncements, the definition and enforcement of which
was left to the courts. Courts were not reluctant to engage in this
legislative function. Not unlike the rest of us, judges of every
stripe hold their own opinions in high regard. It requires super-human
discipline and humility, when entrusted with an important decision,
to say, "I am not the right person to make this decision."
It is hard to find such humility anywhere, much less among lawyers
who are friends of United States Senators and Governors.
Of course, the standard is not that, for any specific decision,
the person confronted thinks that he is the "right person".
The standard is: The parties have the Constitutional right to contract
for a decisionmaking process, as for all other terms of the contract,
and they are then entitled to the benefits and burdens of their
It should also be consistently observed that there is ample reason
for parties contract for private decisionmaking. As Friedman described,
the government systems don't work and haven't worked for some time.
Judge Learned Hand, decades earlier, at the time of the Federal
Arbitration Act, observed: "As a litigant, I should dread a
lawsuit above all else, other than sickness and death."(18)
Few would argue that the government court systems, as determiners
of truth, have improved since Judge Hand's evaluation.
In 1984, with very little attention, the U.S. Supreme Court began
the process of restoring the power of the Federal Arbitration Act.
In Southland v. Keating,(19) the Court enforced the FAA against
a contrary California Statute, asserting Commerce Clause preemption.
That Federal supremacy and the power of the FAA has since been reasserted
in eight Supreme Court opinions, culminating in Doctors Associates
v. Cassarotto,(20) in 1996.
It can well be argued that no other change in the Court's jurisprudence
has been so profound and yet so overlooked. Few among the judicial
philosophers of our time entered into these battles and each decision
passed almost without notice in the popular, professional, and business
press. And yet, no other change in course by the Court seems likely
to be so profound or have so wide an impact. Once understood, the
Doctor's Associates opinion and its immediate predecessor, Allied-Bruce
Terminex v. Dobson,(21) make it clear that the courts will enforce
the decisions of most, if not all, non-government adjudication systems.(22)
This puts the private systems on a legal and practical par with
the various government systems. The alternatives available in a
"choice of forums" clause have been greatly increased.
Lower courts have expanded on these principles to emphasize the
rights of contracting parties:
Indeed, short of authorizing trial by battle or ordeal or, more
doubtfully, by a panel of three monkeys, parties can stipulate to
what ever procedures they want to govern the arbitration if their
disputes; parties are as free to specify idiosyncratic terms of
arbitration as they are to specify any other terms in their contract.(23)
Under the reinvigorated FAA, contracting parties can select the
system and procedures by which claims will be decided, whether it
be one of the government court systems or one of several private
alternatives. These systems, such as the National Arbitration Forum
and the American Arbitration Association, differ from each other
in rules, limits, costs, risks, decisionmakers, and a variety of
procedural aspects.(24) But they always involve less time, expense
and risk than the government systems. With professional decisionmakers,
instead of impassioned juries of limited skill and experience, the
rules can be simpler, the process easier, the decisions prompt and
The lack of public interest in such profound changes may have resulted
from the process which brought these cases to the Court. The cases
came to the Supreme Court, not on the philosophical issues, but
upon narrow interpretations of federal versus state jurisdiction.(25)
Lost in the elephantine battle of the states and the federal government,
was the "grass," the basic right of the contracting parties
to make a binding agreement. Of course, the FAA says nothing profound.
It simply reiterates the Constitutional rights of contracting parties
and, then, provides procedural mechanism to enforce those contracts
Perhaps, had the issues been differently framed, the Court would
have avoided the dissents of Justices Thomas and Scalia, among those
who most frequently hew to the original language and meaning of
the Founders.(27) These dissents favored state power to regulate
such contracts over the federal power to do so. Had the Contract
Clause been left with any meaning, these regulatory powers could
not be reserved to the states by the Tenth Amendment.(28) But, caught
in the carnage of the war between Washington and the states, individual
contractual rights seem to be prisoner of one faction or the other,
dependent upon the mercy of that legislature.
Nonetheless, after fifty years of rejection of Constitutional rights
and Congressional language, this reversal by the Court represents
a philosophical epiphany and a significant practical change of course.
The FAA outlines and reinforces the contract rights of private parties
against the power of Courts and legislatures. Its adoption in 1925
and rebirth over the last decade both represent profound statements
of the rights of individuals. And, unlike some such pronouncements
of the Court, which often seem to have practical application only
to drug peddlers and pornographers, the right agree to non-government
adjudication provides immediate benefits for every American. As
a result of these changes, Americans will see disputes resolved
more quickly, with fairer results for meritorious parties, and fewer
frivolous or extortionate claims. The "lawsuit tax" paid
by every American will be reduced.
These changes by the Court are correct, not only because they follow
the law of the Congress under the FAA and protect the basic Constitutional
rights of the parties, but, equally importantly, because they will
benefit everyone who has borne the cost of a monopoly system that
doesn't work. Non-government adjudication will bring profound change
to the American practice of law and the practice of business in
America. Productive endeavors already killed by the weight of the
lawsuit system may not be reborn, but innovation and entrepreneurship
have had a heavy burden lifted from their future.
Every contracting party now has the right to determine where and
by whom potential claims will be resolved. Some may choose to stay
in one of the lawsuit systems. But, absent the most unusual circumstances,
most parties will likely opt for the most economic, efficient, and
rational alternative. As Chief Justice Warren Burger noted, near
the beginning of this Supreme Court process:
I cannot emphasize too strongly to those in business and industry-and
especially to lawyers-that every private contract of real consequence
to the parties ought to be treated as a candidate for binding private
*Ed Anderson is the Managing Director of the National Arbitration
Forum, a nationwide non-profit network of arbitrators deciding cases
under the applicable substantive law since 1986. The Forum provides
a uniform Code of Procedure and established fees and schedules,
nationwide. For more information contact firstname.lastname@example.org
or (800) 474-2371.
- David Friedman, The Machinery of Freedom (Open
- Id. at 81.
- U.S. Const., Art. I, § 10 (the "Contract
- Moglen, "Commercial Arbitration in the
Eighteenth Century: Searching for the Transformation of American
Law," 93 Yale L.J. 135 (1983).
- Hirsham, "The Second Arbitration Trilogy:
The Federalization of Arbitration Law," 71 Va. L. Rev. 1305
- 9 U.S.C. §§ 1-16 (1996).
- Id. § 2.
- See Hirsham, supra note 7.
- Robert Coulson, Business Arbitration (American
Arbitration Association 1993).
- Fletcher, "Arbitrating Securities Disputes,"
28 (PLI 1990).
- See Allied Structural Steel Co. v. Spannus,
98 S. Ct. 2716 (1978); United States Trust Co. v. New Jersey,
97 S. Ct. 1505 (1977); Home & Building Ass'n v. Blaisdell,
54 S. Ct. 231, 242 (1934).
- 9 U.S.C. § 2 (1996).
- 74 S. Ct. 182, 187 (1953).
- Mitsubishi Motors Corp. v. Soler Chrysler Plymouth
Inc., 105 S. Ct. 3346 (1985).
- "The Deficiencies of Trials to Reach the
Heart of the Matter," 3 Lectures on Legal Topics 89, 105
- 104 S. Ct. 852 (1984).
- 116 S. Ct. 1652 (1996).
- 115 S. Ct. 834 (1995).
- Doctor's Associates, 116 S. Ct. at 1661.
- Bavarati v. Josephthal, Lyon & Ross Inc.,
28 F.3d 704 (7th Cir. 1994).
- See National Arbitration Forum Code of Procedure
(1996) (www.arb-forum.com); and American Arbitration Association
- Commercial Arbitration Rules (1993) (www.adr.org).
- Dobson, 115 S. Ct. at 835.
- 9 U.S.C. § 2 (1996).
- Dobson, 115 S. Ct. at 843, 845; Doctor's Associates,
116 S. Ct. at 1657.
- "The powers not delegated to the United
States by the Constitution, nor prohibited by it to the states,
are reserved to the States respectively, or to the people."
U.S. Const. amend. X.
- Speech to the AAA, Washington, D.C. (August