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stebbinsd

Private arbitration unconstitutional?

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Is there any solid precedent on this issue, one way or another?

 

I wonder if private arbitration, by its very definition, may be unconstitutional. Bear in mind that arbitration awards can be set aside if a court of competent jurisdiction is satisfied that the arbitrator was biased against me. See 9 USC §10(a)(2). The National Arbitration Forum is now forever precluded from hearing any cases of consumer law because courts have caught wind of the fact that NAF was inherently biased in favor of businesses. Arbitration awards are now automatically vacated by most courts, simply because NAF issued them, and that alone is enough evidence of arbitrator bias.

 

Bear in mind that the American Arbitration Association has an inherent conflict of interest in consumer law. In fact, they have the same conflict of interest that ultimately lead to NAF being “blacklisted,” for lack of a better term. Agreements to Arbitrate will specify which arbitration firm is used. It would, quite obviously, be in the arbitration firm's best interests to issue awards in favor of the party who controls the contractual arrangement (in 99.99999% of cases involving consumer law, that will be the business), lest those parties re-write their contracts in order to take their “dispute resolution” business elsewhere. Unlike courts of law, arbitration firms – even non-profit ones like AAA – rely on continued patronage to keep their lights on. Even if they do not turn a profit, per se, they still need to cover their overhead costs.

 

This is in stark contrast to courts of law, which are 100% state-owned and state-funded. They charge filing fees, but only to cover the actual costs of receiving new cases, costs they would not have incurred if the lawsuits were never filed to begin with. The costs they incur regardless of case load (such as flat annual salaries for their officers and the costs of electricity and water for the courthouse itself) are provided by appropriations from Congress and the state legislatures. They do not rely on people continuing to file lawsuits with them to avoid bankruptcy, nor do parties have the option of simply taking their “dispute resolution” business elsewhere, since courts have strict laws government which courts have jurisdiction over a dispute.

 

Even private prisons have been shown to actively manipulate criminal law to increase demand for their services regardless of what is best for public safety (see https://represent.us/action/private-prisons-1/ ). But even they do not have a financial conflict of interest that is nearly as direct as that of arbitration firms.

 

If you take out the financial conflict of interest,  arbitration is not really all that different - as far as procedure is concerned - from most states' small claims courts. Whenever your case qualifies for such a court, that forum is actually highly sought after. But then again, it also has the aforementioned taxpayer-funded independence from big businesses.

 

Because of this clear financial conflict of interest, I have grave doubts as to whether private arbitration firms period may even be constitutional under the 14th Amendment. Just as the NAF has been blacklisted because of its track record, I wonder if arbitration firms as a whole might become disallowed unless they become 100% owned, funded, and controlled by the state, kind of like a small claims court with much wider jurisdiction and no damages caps.

 

Is there any solid precedent on this issue, one way or another? Because I was unable to find any.

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The constitution does not address it, which is why you don't find cases asserting that it does. The Congress passed the Federal Arbitration Act (FAA) over 70 years ago to address the perceived problem that the courts were hostile to arbitration agreements. In the years since it's adoption, the Supreme Court has strongly defended the right to arbitrate against the efforts of state legislatures to weaken it, which it would not have done if it thought that arbitration was not Constitutional. The Congress expressly held arbitration agreements to be valid in 9 U.S.C. § 2 and considering that Congress enacted that law under its authority to regulate interstate commerce. That makes a constitutional challenge a difficult one to make. "Thus, legislating within its constitutional domain, Congress has declared, as a matter of substantive law, that an arbitration agreement such as that here in question, is valid and enforceable." Jackson v. Kentucky River Mills, 65 F. Supp. 601, 603 (E.D. Ky. 1946).

 

Arbiters can be just as neutral as a judge. You just have to avoid the situation where the arbiter and the firm for which he/she works is effectively captive to one party in the dispute. That works out best when the parties going to arbitration are more or less on an equal footing and mutually agree on the arbiter to be used. Thus, two large businesses that want to resolve their dispute by arbitration can likely settle on an arbiter whom they both think will be objective. The problems occur mostly in consumer contracts where the large bank or corporation specifies a single arbitration firm for all the disputes; that arbitration firm is going to feel pressure to favor that bank or corporation because if it rules too often against that bank or corporation the arbitration firm may get dropped in favor of another one. That problem can be addressed by amending the FAA to provide special rules for arbitration in consumer contracts to guard against that problem, which is far better than outlawing all arbitration completely as you suggest.

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13 hours ago, stebbinsd said:

Is there any solid precedent on this issue, one way or another?

 

Probably, but it would overwhelmingly say that private arbitration is constitutional (I'm not going to conduct legal research for you).

 

The federal constitution says nothing about arbitration.  The Seventh Amendment provides for a right to trial by jury in federal civil actions, but it is a waivable right, so if parties have agreed by contract to arbitrate their disputes, it can't possibly run afoul of the Seventh Amendment (the Seventh Amendment has never been held applicable to the states, so any right to trial by jury in state civil actions is entirely depending on state law).  I haven't looked at all 50 states' constitutions, but I've never heard of any state constitution prohibiting private arbitration.

 

 

13 hours ago, stebbinsd said:

Because of this clear financial conflict of interest, I have grave doubts as to whether private arbitration firms period may even be constitutional under the 14th Amendment.

 

What portion of the 14th Amendment do you think has any application to this issue?

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1 hour ago, stebbinsd said:

Due process. Specifically, the right to an impartial and disinterested tribunal.

 

I might agree with the due process argument (but not for the reason mentioned) if arbitration were forced on someone, but it's not.  If you don't want to arbitrate, then don't waive the right to a jury or court trial by signing an arbitration agreement.

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4 hours ago, stebbinsd said:

Due process. Specifically, the right to an impartial and disinterested tribunal.

 

You have a right to due process when dealing with the government. The Constitution does not provide you a right to due process with respect to private persons, nor does the Constitution expressly or by implication say that you have a right to bring all disputes you may have with a private person to a court. Given what the Supreme Court and the federal courts of appeals have said about the FAA being within Congress' power to enact I think a Constitutional challenge to all arbitration would certainly fail.

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On 12/14/2018 at 10:32 PM, Tax_Counsel said:

the Supreme Court and the federal courts of appeals have said about the FAA being within Congress' power to enact

Yes, but the FAA also explicitly has a provision saying that an arbitration award can be vacated if there is evident partiality from the arbitrator.

 

The question is ... couldn't this be established by default if the arbitration firm has a financial conflict of interest enticing it to side with big businesses?

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https://www.califcreditlaw.com/2008/04/national-arbitration-forum-sued-san-francisco-city-attorney/

Quote

the company on the other side uses the arbitrator frequently. Since the company wouldn’t continue to use the arbitrator without good results, the arbitrator has an incentive to rule for the company.

...

San Francisco City Attorney Dennis Herrera has sued the ... National Arbitration Forum ... for unfair business practices. The lawsuit says the NAF “is actually in the business of operating an arbitration mill, churning out arbitration awards in favor of debt collectors and against California consumers.

...

“The lengths to which [the NAF has] gone to ensure that California consumers lose in arbitrations against debt collectors is shocking,” Herrera said in a statement.

...

Elizabeth Bartholet testified in a deposition about her experience as an NAF arbitrator. After ruling against a credit card company in a single arbitration, she was blackballed and blocked from hearing any more cases. Worse, the NAF sent out letters falsely stating that she would no longer be the arbitrator in future cases because she supposedly had a scheduling conflict. The professor did not have a scheduling conflict, but the NAF told consumers she did rather than explain that she had been blackballed by a lender who didn’t like how she had ruled.

 

That was in 2008. Here we are, a decade later, and the only thing that seems to have changed is that the big businesses have switched in droves to the American Arbitration Association, rather than NAF. There is no indication that the AAA has any less of a conflict of interests. So couldn't the AAA - and by proxy, all private arbitration firms - be similarly "blackballed" because they habitually violate 9 USC § 10(a)(2)?

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1 minute ago, stebbinsd said:

https://www.califcreditlaw.com/2008/04/national-arbitration-forum-sued-san-francisco-city-attorney/

 

That was in 2008. Here we are, a decade later, and the only thing that seems to have changed is that the big businesses have switched in droves to the American Arbitration Association, rather than NAF. There is no indication that the AAA has any less of a conflict of interests. So couldn't the AAA - and by proxy, all private arbitration firms - be similarly "blackballed" because they habitually violate 9 USC § 10(a)(2)?

 

No. Not all arbitration firms or arbitrators operate the same way. Moreover, you have to look at each case they handle individually. The AAA doesn't just do arbitrations for big business vs consumers, for example. And the AAA is not the NAF;  you cannot assume that findings applicable to the NAF are equally applicable to the AAA. That's like saying all the cars made by GM are like the cars Toyota makes, and clearly that's not the case. You have to evaluate each firm on its own merits in the various settings in which they operate.  Not all arbitration situations result in the kind of bias that concerns you. Used correctly arbitration can be an effective and less expensive way to resolve at least some kinds of disputes. Thus, as I said before, the better way to deal with that in the consumer setting is to get Congress to amend the FAA to deal with that problem. 

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1 hour ago, Tax_Counsel said:

The AAA doesn't just do arbitrations for big business vs consumers

Uuuuh ... yes they do!

 

https://www.adr.org/sites/default/files/Consumer Rules.pdf

Page 1: "CONSUMER ARBITRATION RULES"

 

Quote

Used correctly arbitration can be an effective and less expensive way to resolve at least some kinds of disputes. 

The key word, there, however, is "used correctly." If big businesses can simply take their dispute resolution business elsewhere whenever they aren't getting results that please them, then the arbitration firms have a clear financial conflict of interest.

 

You have to evaluate the AAA independently from NAF? Well, unless AAA is completely financially independent of big businesses and doesn't stand to lose even one dime if big businesses suddenly decide to stop using them, then there's a financial conflict of interest. It's as simple as that. Even if they "operate" differently than the NAF, even the slightest financial conflict of interest is grounds to vacate the award. A financial stake in getting the big businesses to come back to you is a financial conflict of interest, period. No amount of "operating differently" is going to change that.

 

I don't see what is so confusing about this. A conflict of interest is a conflict of interest.

 

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6 hours ago, stebbinsd said:

Uuuuh ... yes they do!

 

Uh, no they don't. Consumer arbitration is one of the things they do, not the only thing. Note my use of the word "just" in my previous reply.

 

6 hours ago, stebbinsd said:

Even if they "operate" differently than the NAF, even the slightest financial conflict of interest is grounds to vacate the award.

 

That's your opinion and you of course entitled to that. I see nothing in the case law that suggests the courts agree with you, however. The fact is that the parties to the arbitration pay the arbiters. Congress knew that then it passed the FAA. So you need more than just that to show bias. I get that you are anti-arbitration. That's quite clear. But not all arbitration is bad. If you push all dispute resolution to the courts, the courts will be even more bogged down than they are today and if you think it takes long to get court decisions now, it'll only get worse if you do that. Unless, of course, you think the public would support a significant increase in taxes to fund more courts to deal with the work they do. So far, there hasn't been the support to do that for courts that are already overloaded. My preferred way to deal with the problem is not banning all arbitration. That's not needed to deal with the problem of arbitration firms being potentially biased towards large corporations in consumer disputes. Instead, address that particular problem rather than throwing out all arbitration, which if you did that would end commercial and purely individual arbitration cases, too, and those don't raise the same problems. 

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On 12/16/2018 at 12:59 AM, stebbinsd said:

the FAA also explicitly has a provision saying that an arbitration award can be vacated if there is evident partiality from the arbitrator.

 

Uh huh...so what?  You seem to have moved away from your original premise that private arbitration is unconstitutional and are now trying to make some other point, but it's not clear what that point might be.

 

 

On 12/16/2018 at 12:59 AM, stebbinsd said:

couldn't this be established by default if the arbitration firm has a financial conflict of interest enticing it to side with big businesses?

 

Not really sure I understand what you mean by this, but "big business" isn't an entity recognized by law.  In order to establish "evident partiality," the aggrieved party will need to present evidence relevant to the particular proceeding at issue.  It would not be sufficient to present evidence that the arbitration firm that conducted the arbitration regularly hears matters for large businesses.

 

 

On 12/16/2018 at 2:32 AM, stebbinsd said:
On 12/16/2018 at 1:17 AM, Tax_Counsel said:

The AAA doesn't just do arbitrations for big business vs consumers

 

Uuuuh ... yes they do!

 

Uuuuh...no, it doesn't.  A majority of cases handled by AAA involve disputes between medium to large businesses.

 

Everything else you wrote seems to be nothing more than statements of opinion that aren't going to get you anywhere in a forum like this, and even if you could convince someone here of your point, I doubt any federal legislators follow these boards.

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On 12/16/2018 at 11:04 AM, Tax_Counsel said:

That's your opinion and you of course entitled to that. I see nothing in the case law that suggests the courts agree with you, however.

How about Tumey v. Ohio, 273 US 510 (1927), overturning a judgment just when the arbiter had even a potential financial interest in the outcome of the case, even when there was no direct evidence that this financial interest had any effect whatsoever on the outcome. The Supreme Court in that case made it clear that the constitutional right to an impartial tribunal is an absolute right and cannot be taken from a citizen for absolutely any reason, no matter what.

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4 hours ago, stebbinsd said:

How about Tumey v. Ohio, 273 US 510 (1927), overturning a judgment just when the arbiter had even a potential financial interest in the outcome of the case

 

The Tumey case had NOTHING to do with arbitration despite your use of the word "arbiter."

 

Ironic that you are railing against arbitration but cite a CRIMINAL court trial to support your point.

 

Tumey was convicted in a criminal trial and fined by the Mayor of North College Hill, Ohio for violation of Prohibition. The US Supreme Court reversed the conviction because the Mayor received part of the fine in addition to his salary. The court ruled that "No matter what the evidence was against him (Tumey), he had the right to have an impartial judge. He seasonably raised the objection, and was entitled to halt the trial because of the disqualification of the judge, which existed both because of his (the Mayor) direct pecuniary interest in the outcome and because of his official motive to convict and to graduate the fine to help the financial needs of the village." The case was remanded for further proceedings which would have required an impartial judge.

 

https://supreme.justia.com/cases/federal/us/273/510/

 

It should be clear to you that even a judge in a civil or criminal court can be disqualified if he has a pecuniary interest in the outcome of the trial. Are you saying that the entire judicial system of the United States should be declared unconstitutional just because there is a possibility that a judge in a given set of circumstances may have a pecuniary interest in the outcome of a trial? That's what you appear to be saying about the arbitration system so why not add the country's judicial system into it as well since judges AND arbitrators can be subject to disqualification.

 

Or can you be satisfied that the judicial system and the arbitration system both have checks and balances designed to disqualify judges and arbitrators when appropriate.

 

Or will you just waste our time with more spurious and trollish argument?

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9 hours ago, stebbinsd said:

How about Tumey v. Ohio, 273 US 510 (1927), overturning a judgment just when the arbiter had even a potential financial interest in the outcome of the case, even when there was no direct evidence that this financial interest had any effect whatsoever on the outcome. The Supreme Court in that case made it clear that the constitutional right to an impartial tribunal is an absolute right and cannot be taken from a citizen for absolutely any reason, no matter what.

 

I'll come right out and say it: you either did not read the case at all and relied on someone else's wrong summary of it, or you did read it and in that circumstance are guilty of mischaracterizing the holding of the case. Either way, it's not a good look for you. That case has nothing to do with private arbitration of civil disputes. It is a criminal case in which the mayor got $12 in fees for each conviction that he did not get for an acquittal. It should be pretty clear that a judge or magistrate in a criminal proceeding who benefits financially from a conviction of the accused would indeed be a violation of the defendant's right to a fair trial. Nothing about this case, however, is like the situation you complain about with private arbitration. So I'll say it again — I have seen no cases that suggest the courts agree with your position on arbitration, and certainly the Tumey case falls far short of the mark on that. 

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On 1/14/2019 at 12:40 AM, Tax_Counsel said:

It should be pretty clear that a judge or magistrate in a criminal proceeding who benefits financially from a conviction of the accused would indeed be a violation of the defendant's right to a fair trial.

Yes, and private arbitrators benefit financially from big businesses agreeing to use them, which in turn entices arbitrators to give rulings that are favorable to big businesses.

 

This is not rocket science.

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5 hours ago, stebbinsd said:

Yes, and private arbitrators benefit financially from big businesses agreeing to use them, which in turn entices arbitrators to give rulings that are favorable to big businesses.

 

This is not rocket science.

 

Not rocket science, no. Which means it should be clear to you that the situation in the Tumey case is vastly different from the arbitration situation you present. It is (1) a criminal case in which (2) the judicial officer got compensated more for finding for against the defendant, making for a direct conflict of of interest and providing incentive to rule against defendants, denying them a fair trial.

 

Arbitration is a civil proceeding and the problem about which you complain is not one in which the deal is that the arbiter gets paid more for ruling for the business instead of the consumer. The arbiter gets paid the same either way he or she rules in that case. The fear you raise is more indirect than in the Tumey case: the fear by the arbiter that if he or she rules too often against the arbiter that the business will look to someone else for future arbitration. While I agree that's a potential problem, it does not provide the same kind of incentive that was present in Tumey. And, of course, the considerations are quite different in a criminal versus civil setting. 

 

While I agree that more should be done to deal with the problem you mention in the situation where a consumer is arbitrating with a large business who selects the arbitration firm, your solution of simply banning all arbitrations is tossing out the baby with the bath water. There are a lot of arbitrations that do not result in the problem that concerns you, and there is no reason to ban those just to fix the consumer vs big business situation. 

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On 1/24/2019 at 6:30 AM, Tax_Counsel said:

While I agree that more should be done to deal with the problem you mention in the situation where a consumer is arbitrating with a large business who selects the arbitration firm, your solution of simply banning all arbitrations is tossing out the baby with the bath water. There are a lot of arbitrations that do not result in the problem that concerns you, and there is no reason to ban those just to fix the consumer vs big business situation. 

So how exactly should the problem be fixed?

 

Bear in mind that sometimes "throwing the baby out with the bath water" is indeed the only solution. For example, the SUpreme Court threw the baby out with the bath water in 1954 when they realized that southern states were not keeping their promise of racial segregation being separate but equal. They didn't simply issue an injunction ordering the schools to be equalized (in terms of funding, maintenance, quality of staff being hired, etc.); because the states weren't keeping their promise of it being equal, they simply banned all segregation, period, even if the states could make them equal.

 

A similar problem happened when a constitutional amendment banned literacy tests as a condition for voting. I can honestly see a few ways in which literacy tests can serve legitimate purposes. It's obvious why some people would want those who have a say in the government to have a certain minimum IQ, so a literacy test is a quick, easy, and inexpensive means of ensuring that. But historically, southern states have not used literacy tests for that purpose. So instead of forcing them to stop using literacy tests for racist agendas, Congress simply banned all literacy tests across the board. Granted, that was Congress rather than the Supreme Court, but still: They "threw the baby out with the bath water" in order to achieve a result they felt was more important.

 

The bottom line is, if "throwing the baby out with the bath water" is the only way to prevent an abuse, then that has historically been seen as a small price to pay, especially when it comes to something as optional as arbitration. By banning arbitration, nobody's inherent rights are being violated, so if that's the only way to prevent arbitrators from violating someone else's fundamental rights, well ... if that's what it takes, then that's what it takes.

 

So unless you can come up with a better plan to deal with this problem, that may be what we have to do.

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Also ...

 

On 1/24/2019 at 6:30 AM, Tax_Counsel said:

your solution of simply banning all arbitrations


I did not suggest that solution. Re-read my OP. I said we could solve this problem simply by requiring arbitrations to be state-owned and financed, with state-mandated monopolies on arbitration services.

 

Stop putting words in my mouth.

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14 hours ago, stebbinsd said:

I said we could solve this problem simply by requiring arbitrations to be state-owned and financed

 

You'd be the first one to squeal like a stuck pig when your taxes go up to fund that bureaucracy.

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17 hours ago, stebbinsd said:

Also ...

 


I did not suggest that solution. Re-read my OP. I said we could solve this problem simply by requiring arbitrations to be state-owned and financed, with state-mandated monopolies on arbitration services.

 

Stop putting words in my mouth.

 

Which amounts to the same thing: banning all private arbitration.

 

Realistically, what would be the difference between state run arbitrations and the courts?

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On 1/27/2019 at 3:42 PM, Tax_Counsel said:

 

Which amounts to the same thing: banning all private arbitration.

 

Realistically, what would be the difference between state run arbitrations and the courts?

 

On 1/27/2019 at 1:37 PM, adjusterjack said:

 

You'd be the first one to squeal like a stuck pig when your taxes go up to fund that bureaucracy.

 

So basically ... you're both arguing that arbitrations are just as expensive and time consuming as courts are?

 

In that case, what even is the whole point of arbitration in the first place? The whole point of arbitration is that it's supposed to be cheaper and faster than litigation. But if you argue that this isn't actually the case, then arbitration doesn't appear to serve any legitimate purpose whatsoever. If there is no financial incentive to arbitrate because it costs the litigants the same amount as litigation, then the only thing arbitration does is strip indigent citizens of their constitutional due process rights and provide nothing of value in return.

Edited by stebbinsd

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1 hour ago, stebbinsd said:

So basically ... you're both arguing that arbitrations are just as expensive and time consuming as courts are?

 

I'm not going back over this whole thread to make sure but I don't think anybody said that. So, if all you are going to do is make spurious arguments by attributing statements to us that weren't made, then there's no point in continuing the discussion. Believe what you want to believe. Nobody cares.

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4 hours ago, stebbinsd said:

 

So basically ... you're both arguing that arbitrations are just as expensive and time consuming as courts are?

 

No, I'm saying two things. First, that your solution of banning all private arbitration is throwing out the baby with the bath water. Your complaints are about the potential financial conflicts that may arise in arbitration between a large business and a consumer where the large business picks the arbitration firm that is to be used. But that situation is only one of the various situations in which private arbitration is used, many of which do not raise the problem that concerns you. So why ban arbitration in those other settings just to attach the consumer problem that you have discussed.

 

Second, arbitration is the process of having some third party decide the dispute. The government already has its own arbitration system that everyone can use: they are called the courts. Private arbitration is generally faster and can be cheaper because the courts have to provide rights and process that private arbiters do not and, importantly, the courts are underfunded and that slows down the pace at which they resolve cases. So saying that we should eliminate private arbitration altogether and having every dispute handled by government arbiters means that everyone ends up using the courts. That would jack up the costs of the courts even more, meaning more tax dollars would be needed to hire the extra judges and staff, and provide the extra court rooms, that would be needed to do it. That is, unless you plan to charge the parties the full the costs of using the courts.

 

You could provide litigants with optional alternative courts that use simplified rules and in which the parties agree there will be no appeals and that would handle cases faster, but again you have to find the money to pay for that and sufficiently staff it to get the cases processed quick enough. Are the parties going to pay the full cost of that? And by full cost I mean not a penny of tax money would be use to pay for it. I'd not favor using more tax money to create that alternative forum when we don't even have enough money to fully fund the courts we have now. And again, I see no need for this alternative system just to address the particular complaint that you have. A lot of private arbitration works just fine and is not subject to the concerns you have.

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