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 court system:

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 themselves.(2)

Of course, today, three of these monopolies have been replaced by vibrant competition.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 their services.

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 behavior.

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 interest".

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 bargain.(17)

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 more accurate.

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 between individuals.(26)

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 arbitration.(29)

*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 info@arb-forum.com or (800) 474-2371.

1. David Friedman, The Machinery of Freedom (Open Court 1973).
2. Id. at 81.
3. Id.
4. U.S. Const., Art. I, § 10 (the "Contract Clause").
5. Moglen, "Commercial Arbitration in the Eighteenth Century: Searching for the Transformation of American Law," 93 Yale L.J. 135 (1983).
6. Id.
7. Hirsham, "The Second Arbitration Trilogy: The Federalization of Arbitration Law," 71 Va. L. Rev. 1305 (1985).
8. 9 U.S.C. §§ 1-16 (1996).
9. Id. § 2.
10. See Hirsham, supra note 7.
11. Robert Coulson, Business Arbitration (American Arbitration Association 1993).
12. Fletcher, "Arbitrating Securities Disputes," 28 (PLI 1990).
13. 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).
14. 9 U.S.C. § 2 (1996).
15. 74 S. Ct. 182, 187 (1953).
16. Id.
17. Mitsubishi Motors Corp. v. Soler Chrysler Plymouth Inc., 105 S. Ct. 3346 (1985).
18. "The Deficiencies of Trials to Reach the Heart of the Matter," 3 Lectures on Legal Topics 89, 105 (1926).
19. 104 S. Ct. 852 (1984).
20. 116 S. Ct. 1652 (1996).
21. 115 S. Ct. 834 (1995).
22. Doctor's Associates, 116 S. Ct. at 1661.
23. Bavarati v. Josephthal, Lyon & Ross Inc., 28 F.3d 704 (7th Cir. 1994).
24. See National Arbitration Forum Code of Procedure (1996) (www.arb-forum.com); and American Arbitration Association - Commercial Arbitration Rules (1993) (www.adr.org).
25. Dobson, 115 S. Ct. at 835.
26. 9 U.S.C. § 2 (1996).
27. Dobson, 115 S. Ct. at 843, 845; Doctor's Associates, 116 S. Ct. at 1657.
28. "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.
29. Speech to the AAA, Washington, D.C. (August 20, 1985).