For nearly six decades, States have entered into approximately 3,000 bilateral investment promotion and protection treaties (“BITs”) and some multilateral treaties (“MITs”), which possess the same dual purposes as the North American Free Trade Agreement (“NAFTA”) and the Energy Charter Treaty (“ECT”). They have been signed, ratified, and entered into force for mutual benefit: investment in the States party to the BIT or MIT is mutually encouraged, in good part by each State party guaranteeing the other State party’s investors an acceptable level of legal protection, usually consisting of “fair and equitable treatment” (“FET”), “full protection and security” (“FPS”), specific rules governing compensation for expropriation, and, via a “most-favored-nation clause” (“MFN”), the same overall level of legal protection as is accorded to nationals of other States with whom the respondent State party to the BIT or MIT has similar treaties in force.
Key to the nationals of each State party who invest in the other State is the mechanism for enforcing those protections, which is known as investor-State arbitration, or investor-State dispute settlement (“ISDS”). As most treaty parties do not wish their nationals investing abroad to be compelled to dispute with the host State over whether the involved treaty has been breached decided by a national court of the host State, the parties agree in the BIT or the MIT that any dispute between a national of one party investing in the other party will be decided by, typically, a three-person arbitral tribunal, to which each party to the dispute—the investor and the host State—appoints one arbitrator. The third person, who is to chair the arbitration, is appointed by the other two arbitrators, or by the parties to the dispute, or—failing success in that effort for a stated period of time—by an agreed “appointing authority.” All three members of the arbitral tribunal are required and pledge to be independent and impartial to the arbitrating parties.
Mandatory predispute arbitration clauses requiring individual, final, and binding arbitration and excluding all class or representative actions, whether in court or arbitration, are often embedded in employment contracts and nearly all aspects of commercial and consumer transactions. The Federal Arbitration Act (“FAA”) requires courts to enforce agreements to arbitrate. However, both state and federal administrative agencies regulate the sectors in which arbitration contracts are used. Likewise, state and federal legislation may authorize or “deputize” private individuals to assert representative private attorney general or qui tam actions to enforce legislation on behalf of the state or agency. Strict enforcement of these arbitration clauses can thus impair an individual’s access to legislative and administrative schemes otherwise established to address specific areas of public policy.
This Article examines the impact of private arbitration on individuals’ rights to access agency regulatory procedures and to assert representative claims under state laws authorizing private attorney general or federal quitam enforcement. Although the scope of FAA preemption is established doctrine, state and federal courts continue to variously analyze the FAA’s preemptive impact on administrative and regulatory schemes. For instance, courts differ on how to square FAA preemption against regulatory administrative procedures providing substantive protections, laws that “deputize” aggrieved individuals to assert representative claims on behalf of the government, and situations in which a federal agency has declared its statutory scheme exempt from FAA preemption.
This Article argues that the FAA, where applied to preempt and thus deny access to simplified and protective state and federal agency procedures, violates not only constitutional guarantees of federalism, with regard to the states’ sovereign right to regulate traditional matters of public concern, but also separation of powers. Established doctrine, requiring exhaustion of administrative remedies, deference to agency rulings and expertise, as well as respect for state authority under the FAA’s “savings clause,” also supports maintaining such access. This Article proposes alternative reforms to retain the benefits of agency regulation and expertise while respecting contractual obligations and promoting informed decision-making.
In 1924, proponents of the Federal Arbitration Act (“FAA”) believed arbitration was an amicable way to resolve disputes between business professionals: Arbitration “preserves business friendships. . . . It raises business standards. It maintains business honor.” This indeed may be true, but judicial opinions interpreting the FAA have transcended the realm of legal reasoning, becoming hostile and antagonistic not toward a party’s improper action, but toward judges.