Market Solutions to Market Problems: Re-examining Arbitral Immunity as a Solution to Unfirness in Securities Arbitration

Peter B. Rutledge, University of Georgia Law School


This paper addresses the fairness of securities arbitrations in the United States. A few decades ago, such a topic would have been relegated to the academic hinterlands. For the first fifty years following the enactment of the nation's securities laws, pre-dispute arbitration agreements between investors and the securities industry were not enforceable. In a series of decisions in the late 1980s, the Supreme Court reversed course and held that such disputes were indeed arbitrable. Following those decisions, arbitration quickly became the preferred method of dispute resolution for cases arising under the nation's securities laws, especially disputes between investors and broker-dealers. As securities arbitration grew in popularity, concerns over the fairness of securities arbitration proceedings quickly followed. Indeed, the ink on the Supreme Court decisions had barely dried when Congress tasked the General Accounting Office (GAO) with reporting on the fairness of securities arbitrations.

The empirical premise of the “unfairness” critique has always been hotly contested. Regardless of the validity of the “unfairness” criticism, it has nonetheless influenced the debate in two important respects. First, as the GAO noted, regardless of whether securities arbitrations are actually fair, it is as important, if not more important, that securities arbitrations be perceived as fair. Second, the “unfairness” critique has had a significant effect on the development of the industry. Indeed, at the recent House subcommittee hearing on the fairness of securities arbitration, NASD and NYSE representatives seemed to be bending over backwards to demonstrate how frequently the broker-dealers lost in securities arbitrations and how they had designed procedures to enhance the likelihood that investors would prevail.

This essay provides that approach. It applies to the peculiar problem of securities arbitration a theory that I developed in an Article in the Georgia Law Review. Peter B. Rutledge, Toward a Contractual Approach for Arbitral Immunity, 39 Ga. L. Rev. 151 (2004). That Article developed an economic argument against arbitral immunity. It proposed that we strip arbitrators and arbitral institutions of any immunity that they enjoy as a matter of law. In place of that immunity, contractual damages caps and liability waivers would limit the exposure of arbitrators and arbitral institutions.

That same basic model provides a novel, viable and partly efficacious solution to the (perceived) problem of unfairness in securities arbitration. The effects of such a paradigm shift are subtle but important. This model addresses many (but, admittedly, not all) of the most vexing problems about unfairness in securities arbitration. It also better aligns the incentives of arbitrators and arbitral institutions with the “public interest” arguments that underpin calls for greater fairness in securities arbitration.

I develop this argument in four parts. Part I catalogues the various complaints about unfairness in securities arbitration. Part II sketches out the liability model proposed here. Part III explains how this model would address some of the complaints identified in Part I. Part IV explores problems with and limitations on the liability model.