“I got 99 problems and arbitration panel diversity is one!” This is what famous rapper Jay-Z probably felt like changing his song lyrics to when he experienced, first-hand, the lack of diversity amongst arbitrators in the arbitration system. Jay-Z had a dispute that arose out of a deal previously made, which had a mandatory arbitration agreement forcing parties to settle the dispute in arbitration with the service provider AAA to facilitate the arbitration. When it came time to select 3 arbitrators, out of a 200-name list, only 3 names were considered people of color, and one of them had a conflict of interest making them ineligible to sit on the neutral panel. It is not a true choice if there are not enough diverse arbitrators to choose from and it is important to recognize the possible affect that a lack of diverse arbitrators sitting on a neutral panel can have on a binding decision, which is why tacking the issue of diversity among arbitrators is essential.
What is Arbitration and Mandatory Arbitration Agreements?
Arbitration is a common alternative dispute resolution (ADR) practice used by many parties to resolve disputes as it mimics a court like process, issues a binding court enforced decision, is a private forum, and takes less time and money. Mandatory Arbitration Agreements are legally enforced by the Federal Arbitration Act; making the parties who sign the contractual agreement bounded to solve their dispute through arbitration, which renders a binding decision. Parties forgo their right for redress in court. Private service providers like JAMS and American Arbitration Association (AAA), offer to help facilitate the arbitration process, where it will be held, and how it will be conducted. Private service providers provide parties with a list of 50-200 names to select a one to three person panel who will render a decision after hearing both sides.
The issue is that common parties to these agreements are consumers, people like you and I, and big corporate businesses; this demonstrates the unequal bargaining power among parties. Often, consumers are not aware they are buying a product or service that binds them to mandatory arbitration, which limits them to seek redress in a privatized system where businesses are often repeat users. Since businesses are repeat users, they tend to use the same arbitrators (repeat players), creating a big potential conflict of interest or implicit bias of arbitrators used. The repeat player effect and potential for bias or conflict of interest is why diversity among arbitrators is necessary; to bring new players to the mix.
Lack of Diversity in Arbitration Displayed Through Statistics
American Arbitration Association’s (AAA) 2019 report indicated just 26 percent of their arbitration cases were considered to have a diverse roster and 30 percent of their arbitration cases actually used diverse appointments (arbitrators who are selected to be on a list to then be selected to a panel).
For employment disputes, out of 481 arbitrators, about “74 percent were male and 92 percent were non-Hispanic white.”
JAMS, overall had 80 percent male arbitrators and a list of “best neutrals” was only 12 percent female.
National Academy of Arbitrators notes only 15 percent of its roster were women.
Source: Bloomberg Law
These statistics point to the lack of diversity (women and people of color) among arbitrators; fostering diversity is important because it brings forth various benefits. Diversity brings innovation and inclusion to make a system more efficient, representative, and legitimate. All parties have the right to be protected equally under the law; since mandatory arbitration agreements essentially remove and limit the ability to choose how a party seeks redress, there must be initiatives to ensure equal protection. Providing parties with a diverse pool of arbitrators to choose from ensures that they are being protected equally under the law. Diversity creates a sense of increased objectivity, minimizes bias, and utilizes more qualified people. Economists view discrimination or lack of diversity as an economic inefficiency because organizations are not tapping into the diverse talent pools, which is a misallocation of human resources.
The issue can be described as a supply and demand problem, for our purposes we will discuss the demand issue as diverse qualified arbitrators are supplied through mentorships and programs creating pathways for their entry as arbitrators, but the parties or service providers who help select the arbitrators are not selecting the diverse candidates to serve on a panel. It is a demand problem because people often pick well-known arbitrators and arbitrators in high positions; but, historically, diverse candidates are not represented in those categories. Part of the solution requires understanding what can motivate parties and service providers to select diverse arbitrators.
The solution is that parties and service providers need to realize that having a diverse roster and panel actually benefits them.
Greater diversity can lead to:
more legitimate decisions;
additional innovation in decision-making from various backgrounds – unique solutions can be created that cannot be sought in court; and
saving money for parties given an economic incentive to select diverse arbitrators.
Annual public reports issued by service providers recording how many diverse candidates are selected, used, and how many diverse arbitrators are on lists presented to parties, can increase accountability and action to select or be aware of selecting arbitrators with diverse backgrounds.
Congress should enact a tax credit incentive. Law firms, providers, and corporations can receive a tax credit for every diverse individual they select to an arbitration panel. The incentive can be implemented over a 5-year period with a contingency to be renewed or altered to respond to the results proffered; at least 20 percent increase in diversity, at the end of the 5-year term. Eventually, using diverse arbitrators will yield benefits like innovative decision-making strategies, that would incentivize parties to select them without the need for the tax incentive.
With the adoption of these solutions, diverse individuals will have a better chance of getting selected to an arbitration panel.