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Pirate Arbitration

By David Horton. Full Text.

The U.S. Supreme Court’s expansion of the Federal Arbitration Act (FAA) has transformed the American civil justice system. In a series of controversial opinions, the Court has held that the FAA preempts state law, bars class actions, and empowers companies to delegate questions about the arbitration itself to arbitrators. For decades, critics have objected that forced arbitration dilutes consumers’ and employees’ rights. However, this Article explores a byproduct of the arbitration revolution that is arguably even more troubling. Recently, criminals, opportunists, and other shady entities have started exploiting the Court’s FAA jurisprudence to accomplish goals that are illegal. The Article calls this practice “pirate” arbitration. It discusses three examples: sham arbitration administrators that sell fraudulent awards, companies that obtain rulings from crooked arbitrators that have the same effect as illegal contracts, and payday lenders that mandate arbitration in a vacuum where no federal or state law applies. The Article then explains why this trend may become a serious problem. By creating a force field around arbitration clauses and awards, the Court has made it hard to regulate sophisticated arbitration-related scams. Finally, the Article proposes a novel approach for combatting pirate arbitration. It argues that these schemes do not actually involve “arbitration” and thus do not fall within the safe harbor of the FAA.