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Court Shreds Contracts

January 18, 2002

Tags Legal SystemPhilosophy and MethodologyPraxeology

For decades, millions of American workers have made themselves more attractive to their employers by formally agreeing to keep any future disputes outside the court system. These increasingly popular arbitration agreements replace the high costs of a court case with the speedier and less expensive arbitration process. Some scholars have also argued that arbitrators' decisions are more likely to be well-considered and appropriate than opinions by modern state courts. In a disastrous recent ruling, however, the U.S. Supreme Court held that the federal Equal Employment Opportunity Commission may ignore arbitration agreements and pursue a case in court for an employee who has waived his right to do so.

The January 15 decision in EEOC v. Waffle House (No. 99-1823) involved one Eric Scott Baker, who suffered a seizure in 1994 while working the grill at a Waffle House in West Columbia, S.C. The Waffle House quickly discharged Baker, contending that continued employment was unsafe for him and bad for business. Baker, who had been subject to occasional seizures due to an injury received in a car accident, had signed an arbitration agreement along with his employment application; even so, he took his case to the EEOC when he was fired. The EEOC then filed an enforcement action against Waffle House, arguing that the company had violated the Americans with Disabilities Act and the Civil Rights Act of 1991.

Baker was allowed to circumvent his waiver of his own rights to sue in court by simply getting a third party--the government--to file the suit and obtain damages for him. Justice Thomas, in his dissent, argued that this was inappropriate. "To the extent that the EEOC is seeking victim-specific relief in court for a particular employee," Thomas wrote, "it is able to obtain no more relief for that employee than the employee could recover for himself by bringing his own lawsuit."

Thomas also pointed out, correctly, that the majority opinion "eviscerates" the Waffle House arbitration agreement and puts Waffle House in the unenviable position of possibly having to defend itself in two forums in later cases. The employee gets a shot at arbitration and an opportunity to have a federal agency file a sort of proxy suit in federal court for more damages. In fact, if a case can be brought by the EEOC (or another federal agency) on behalf of an employee regardless of any arbitration agreement in force, there is the potential for double recovery of damages. The arbitrator could award damages to the employee, followed by an award from the EEOC in a court case. 

The double award could be avoided if the court's award were to be reduced by the amount of the arbitrator's award, but if the court's award is the lesser of the two, the employee is in the position of having to repay the employer. That, Thomas wrote, is unlikely to be enforced. As a result, the defendant-employer faces two sets of legal proceedings, and pays the greater of the two awards.

Employers are certainly going to think twice about arbitration agreements in the future. This is a serious blow to market-oriented dispute resolution, and, consequently, to the quality of adjudication. An arbitrator, being unbacked by the coercive power of the state, succeeds or fails based on his ability to produce rulings that are generally viewed as fair. 

As Lon Fuller wrote, he "must be at greater pains than a judge to get his facts straight, to state accurately the arguments of the parties, and generally to display in his award a full understanding of the case." Bruce Benson pointed out that an arbitrator will wish to preserve a reputation for good decisions "in order to maintain or enhance his position in the market for arbitration services," or to maintain status in the community.

Moving beyond arbitration agreements, there is the larger question of exactly what kinds of rights an individual might be allowed to sign away. Many libertarians have an expansive view of the alienability of rights, though most stop short of the right to sign away one's life into slavery. As it stands, the legislature and court system have produced a host of "rights," and thus an incredible number of potential violations of those rights over which virtually anyone might sue.

The EEOC assures me that I have the right not to be fired except under certain circumstances, while the EPA guards my right to air and water of a quality it has deemed appropriate.  Consumer product safety regulations and zillions of product liability cases provide me with the statute and precedent to support my "right" to round-edged, nontoxic, idiot-proof products. Waivers, as we see in the Waffle House case, are frequently ignored. The government has affixed to me so many inalienable rights that it is a wonder merchants and employers see me as anything other than a walking bag of potential lawsuits. 

Thus, the price of many products and services is higher, and my salary is lower, because of the legal risk I pose to each person with whom I interact in the marketplace. Many of us, as is obvious by the number of arbitration agreements in existence, would gladly waive a few state-created rights in exchange for higher pay or greater job security. Some of us might be willing to forego the right to sue a ladder company for design flaws in exchange for a less expensive product. Yet, as it becomes increasingly impossible for us to divest ourselves of these rights, we become more tightly bound to the costs of bad regulatory law and poor court decisions.

At the same time, the state has restricted or eliminated other legal rights. Because of the immense efficiency gains to seeking resolution outside the court system, the right to arbitration is not an unimportant legal right (and, as such, it is ostensibly protected by the Federal Arbitration Act). The Waffle House opinion promises to reduce those gains by blocking another exit to the state's courts. If the right to choose an alternative venue for dispute resolution can be so severely circumscribed by the courts, one more check on judicial tyranny has been lost.

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Timothy Terrell is assistant professor of economics at Wofford College and an adjunct scholar of the Ludwig von Mises Institute. Send him MAIL. See his Mises.org Articles Archive. Recommended Readings: Bruce L. Benson's "The Impetus for Recognizing Private Property and Adopting Ethical Behavior in a Market Economy: Natural Law, Government Law, or Evolving Self-Interest," Review of Austrian Economics, vol. 6, no. 2, 1993, and Lon Fuller's The Principles of Social Order (Durham, NC: Duke University Press, 1981).


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