ADR and Norm-Creation

In the 1970s, Lon Fuller initiated what became an extended scholarly conversation about the extent to which ADR can and should serve the public function of norm-creation that is such a central feature of adjudication. That topic remains a theme of recent ADR scholarship, appearing in the work of Carrie Menkel-Meadow, Susan Sturm, Amy Cohen, and others. Two recent cases suggest, in very different ways, how extrajudicial dispute resolution may increasingly play a very public role in the creation of legal norms.

The first is the Google Book Settlement. The Google Book Settlement, if approved, would end a class action brought against Google by US authors holding copyrights in one or more of the books included in Google Book Search. From what little I understand about the settlement, it would effectively establish Google as a giant copyright clearinghouse for books, giving it a license to digitize and commercialize an enormous number of books and to serve as an institutional mediator of many copyright disputes. In a new article, Berkeley Law Professor Pamela Samuelson argues that the Google Book Settlement can be understood as a kind of quasi-public copyright reform, achieving by way of a class action settlement the equivalent of a legislative fix that Congress has been unwilling or unable to enact. Of most significance, the settlement offers a solution to the ongoing problem of “orphan” works—in-copyright books whose copyright holders cannot easily be located. Congress has considered a number of possible solutions to that problem; the settlement solves it (for better or worse—the settlement is quite controversial) at a stroke.

The second case is a FINRA arbitration that resulted in a $20.6 million award on behalf of a creditors’ committee of the collapsed Bayou Group against Goldman Sachs. The Bayou creditors had argued that Goldman, which cleared trades for Bayou, failed to investigate the trades after it learned of potential fraud on the part of Bayou’s former CEO. Goldman argued that, as a clearing broker, it had no obligation to detect or report fraud. Judge Jed Rakoff confirmed the award, which was for the full amount sought, over a “manifest disregard” challenge. (Further evidence, by the way, that Hall Street has had little or no effect on either the number of manifest disregard challenges filed or their likelihood of success.) He said he would issue an opinion later. In the meantime, this appears to be a case in which an arbitral award may have public repercussions equivalent to the effect of a judicial precedent. The Securities Industry and Financial Markets Association certainly seems to see it that way, having filed an amicus brief arguing that the award could “cripple securities markets” by requiring clearing firms to monitor trades for fraud. The New York Times described the award as “a watershed” that “could have ramifications across the financial sector.”

Owen Fiss feared the growth of ADR because of its potential to undermine the public values promoted by adjudication. Are these cases evidence that ADR can promote public values in the same way adjudication can? Or are they evidence that ADR has hastened the decline of public processes and replaced them with less participatory, less democratic, and less accountable substitutes? However one answers those questions, it seems clear that ADR is gaining in importance just as Congress becomes increasingly fractured and immobile and as the courts lose their efficacy due to a combination of inadequate resources, ill-conceived litigation “reforms”, and prohibitively expensive processes. ADR may or may not have caused the breach; it certainly seems to be stepping into it.

3 thoughts on “ADR and Norm-Creation”

  1. The award against Goldman Sachs in the Bayou Group case reminds me of an award nearly a decade ago against a clearing firm for failing to stop Duke & Co.’s boiler room activities (the Koruga case). After the award, the securities industry expressed the same concern that the award established new norms, and created precedent that strayed from well-established law. Those concerns turned out to be misplaced, as clearing firms continue to be immune from liability for an introducing broker’s fraud absent evidence of active participation in the fraud. I suspect that, like Koruga, the Goldman/Bayou award will be an outlier, and attributable more to principles of equity than legal norms.

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