The majority of private sector, nonunion workers and e-commerce transactions are subject to arbitration agreements, which require litigating disputes in private, often confidential, proceedings, rather than in courtrooms.1 Paired with waivers of the right to bring class actions, arbitration agreements often suppress claims altogether.2 A series of Supreme Court decisions upholding arbitration of virtually all consumer and employment law claims pursuant to the Federal Arbitration Act3 (FAA) and fortifying the statute through a sweeping preemption regime have allowed arbitration clauses to flourish.4
This Note proposes that states and municipalities seeking to limit the impacts of forced arbitration turn to an alternative route that circumvents preemption altogether: the market participant doctrine. Under the market participant doctrine, when states act pursuant to proprietary rather than regulatory interests — such as when purchasing goods and services on the market — their actions are not subject to preemption absent a clear statement of congressional intent.5 Limiting the use of forced arbitration against the employees who deliver government services and the people who consume them aligns neatly with states’ proprietary interests in ensuring business partners provide safe, efficient, and lawful service delivery. This Note thus renews and builds on calls for experimentation in state procurement initially proposed by the National Consumer Law Center in 2015.6
Part I provides a brief overview of how the Supreme Court’s broad interpretation of the FAA has frustrated state efforts against forced arbitration.7 Part II traces the origins of the market participant exception, from its birth in the dormant commerce clause cases to its application in the National Labor Relations Act8 (NLRA) context.9 Though the Court has never considered the doctrine’s application to statutes other than the NLRA, circuit courts have applied it to various other federal statutes.
Part III argues that the market participant exception, rooted in general principles of federalism, should also apply to the FAA. Labor scholars might demur, however, that this exception is of limited utility in light of its narrowness in the NLRA context.10 This Note further argues that, because the FAA does not create a highly centralized regulatory regime like the NLRA does, market action should be defined more broadly under the FAA in order to permit states greater flexibility.
Part IV offers two case studies for how states can develop arbitration-limiting procurement requirements appropriately tailored to proprietary needs. First, transportation gig work in state contracts offers an archetype of a public-private partnership in which limiting forced arbitration ensures safe and lawful service delivery. Second, much like private entities that excised arbitration clauses under public pressure during the #MeToo movement, states, too, should be free to prohibit service providers from imposing arbitration against consumers and employees in analogous contexts, such as civil rights claims.
Absent congressional action, few viable pathways remain for states to limit forced arbitration. But states that seek to protect employees and consumers have a potentially powerful tool in the market participant doctrine, with valuable precedent and lessons from its application to other federal statutes. In the face of the Supreme Court’s growing skepticism toward broad preemption regimes,11 the market participant exception to the FAA is emerging as a constitutionally rooted, politically feasible tool that states should experiment with to continue testing the boundaries of the FAA preemption regime.
I. The Rise and Rise of the FAA
The FAA states that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”12 In 1925, Congress passed the FAA to ensure enforcement of arbitration agreements between merchants and facilitate efficacious dispute resolution outside of a purportedly crowded court system.13 Corporate proponents emphasized two key limitations in congressional hearings14: first, the Act was intended to apply only in federal courts, not state courts; and second, the Act did not apply to employment contracts.15 These limitations, however, were not embodied in the text of the statute because Congress did not foresee how dramatically the Commerce Clause would expand post–New Deal.16
But in the 1980s, the Court disregarded these limitations and began expanding the FAA well beyond its intended breadth to declare the statute a “liberal federal policy favoring arbitration.”17 Although the statute was intended to apply to “merchant-to-merchant arbitrations, never merchant-to-consumer arbitrations,”18 the Court ignored the FAA’s pre–New Deal context and upheld arbitration clauses even in civil rights19 and employment20 cases. The Court also ignored congressional intent that the FAA should apply only in federal court — as Justice Thomas has repeatedly criticized in his dissents.21
While expanding the FAA’s substantive reach, the Court also built an airtight preemption regime. In Southland Corp. v. Keating,22 Chief Justice Burger held that a California law prohibiting franchise agreements from imposing arbitration was preempted because it frustrated the FAA’s purpose.23 The Court then began preempting any state policies that “place arbitration clauses on an unequal ‘footing’” with other contract clauses.24 While Justice Scalia initially criticized Southland as an “unauthorized eviction of state-court power,”25 he later delivered a significant blow to states by upholding waivers of class actions, which prohibit claim aggregation in favor of one-on-one arbitration26 — even when the cost of bringing an individual claim far outweighs the potential recovery.27 Under the Court’s precedent, then, an arbitration agreement may deprive a plaintiff of a remedy altogether, since “[t]he realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”28
Empirics belie the Court’s claim that arbitration is merely a more “efficient, streamlined” option for dispute resolution.29 From 2010 to 2012, the Consumer Financial Protection Bureau estimated that consumers only initiated an average of 411 arbitration claims per year, and of these, around 25 claims a year sought $1,000 or less — compared to the more than 30 million Americans eligible for class action relief per year.30 In employment, arbitration clauses are estimated to have eliminated up to 98 percent of claims altogether.31 Arbitration, then, is not so much about efficiency as it is about evading accountability.32 There is no empirical evidence to suggest that arbitration’s purported efficiencies have passed cost savings to consumers, either.33
Even if a plaintiff successfully files for arbitration, disturbing democratic legitimacy concerns remain.34 Arbitral fora may have limited rules of discovery and evidence, minimal appeals processes, and potentially biased private arbitrators,35 and the private, confidential setting enables corporations to hide wrongdoing, dodge public accountability, and isolate plaintiffs.36 Arbitral decisions do not set legal precedent, threatening to signal “the end of law” altogether in consumer protection and employment.37 The social cost is further compounded through the loss of the expressive, disciplining function of public adjudication.38
The Court brushes these criticisms aside as “generalized attacks on arbitration” better directed to Congress.39 Corporations, meanwhile, have taken advantage of this wall of precedent: the share of private-sector, nonunion workers subject to arbitration grew from 2 percent in 1992 to nearly 60 percent in 2018 and is projected to reach 80 percent this year.40 That arbitration agreements enable corporations to steal wealth with relative impunity41 is all the more disturbing when juxtaposed with data showing they are more common among low-wage workers, and thus disproportionately target women and African Americans.42
State courts and legislatures have tried and failed to limit arbitration clauses by imposing disclosure requirements,43 permitting workers to reject clauses without fear of job loss,44 and declaring the pairing of forced arbitration with class waivers unconscionable.45 Few paths remain: states may use their own finite resources to bring suit,46 regulate the procedure of arbitral fora,47 and protect workers outside the FAA’s reach.48 But under the heavy burden of precedent, states have limited power to pass affirmative laws limiting the reach of arbitration. This invites the question: is there a way to circumvent preemption altogether?
II. The Origins of the Market Participant Exception
The market participant exception holds that preemption applies only to state regulatory action — unless Congress manifests a clear intent to preempt state proprietary action.49 This doctrine first arose in the dormant commerce clause context in an era of limited Commerce Clause power. But even as Congress’s powers under the Commerce Clause expanded, the clear statement requirement to preempt state market action has persisted in the Supreme Court’s NLRA precedent. Circuit courts, taking cue from the federalism principles in which the exception is rooted, have applied the doctrine to various other federal statutes.
A. Dormant Commerce Clause Roots
The Supreme Court first articulated the market participant doctrine in a series of dormant commerce clause cases in the 1970s and 1980s. The dormant commerce clause restrains states from enacting economic regulations that discriminate against or burden interstate commerce absent congressional approval.50 In Hughes v. Alexandria Scrap Corp.,51 the Court considered a Maryland statute that doled out a subsidy to in-state processors for hauling junked cars but made it significantly more difficult for out-of-state processors to access the subsidy.52 The Court upheld the statute, despite its pro-Maryland tilt, because the state itself had entered the scrap market as “a purchaser, in effect, of a potential article of interstate commerce.”53
The Court later refined this doctrine to a succinct principle: a state participating in a market, as opposed to regulating it, is free from the Commerce Clause’s negative implications because “[t]here is no indication of a constitutional plan to limit the ability of the States themselves to operate freely in the free market.”54 Under this exception, the Court upheld a South Dakota policy to sell state-owned cement only to state residents55 and a Boston requirement that publicly funded construction projects employ a certain share of bona fide city residents.56
The market participant exception faced a shaky start. Justices divided sharply over the doctrine’s limits.57 The limits of the Commerce Clause, too, were in flux. On the same day that Hughes expanded state power, the Court limited federal power by declaring in National League of Cities v. Usery58 that Congress lacked the power to mandate a minimum wage for state employees engaged in “traditional government functions.”59 Usery was overturned only nine years later60 — but the market participant exception remained.61
B. Shift to Federalism in NLRA Case Law
Shortly after Garcia was decided, the Court made clear that the market participant exception not only survived the overturning of Usery but functioned as a general principle that a state does not offend “preemption principles” when acting as a proprietor.62 In the following twenty years, the Court clarified the hazy line between regulatory and proprietary action as applied to the NLRA.
The NLRA is the only context in which the Court has considered whether the market participant exception applies to affirmative federal legislation. In Wisconsin Department of Industrial, Labor & Human Relations v. Gould,63 a Wisconsin statute prohibited the state from doing business with entities that had violated the NLRA at least three times within five years.64 Wisconsin argued preemption did not apply because its bill was a proprietary exercise of state spending power, and, referencing the dormant commerce clause cases, “evenhandedness as a matter of federalism . . . requires that states operate as free from federal constraint as a private company.”65 A unanimous Court hinted that market participation might possibly escape NLRA preemption, while also cautioning that “government occupies a unique position of power” and cannot be treated exactly the same as a private party.66 Regardless, the statute at hand could not “plausibly be defended as a legitimate response to state procurement constraints or to local economic needs,”67 as Wisconsin conceded that it had a regulatory purpose of enforcing labor law — a role strictly reserved for the National Labor Relations Board (NLRB) as “a comprehensive regulat[or] of industrial relations.”68
The Court definitively confirmed that the market participant principle applies to the NLRA in Building & Construction Trades Council v. Associated Builders and Contractors of Massachusetts/Rhode Island, Inc.69 (Boston Harbor), which upheld a Massachusetts procurement requirement that all contractors on Boston’s $6.1 billion, ten-year harbor cleanup project sign a labor peace agreement requiring all work be done under a union contract featuring a no-strike clause.70 The Court emphasized that “pre-emption doctrines apply only to state regulation”71 — and state proprietary action “with no interest in setting policy” is not regulation at all.72 As evidence that the bid specification was more proprietary than regulatory, the Court agreed it was tailored to a particular job (albeit a very large one), with an interest in completing the job “quickly and effectively.”73
On the other hand, the Court rejected that a California statute prohibiting private recipients of state funds from using those funds to encourage or prevent union organizing was proprietary rather than regulatory.74 The state’s argument that it merely sought to promote neutrality with regards to unionization via a narrow use restriction was unavailing.75 The strict reporting conditions, civil liability for commingling funds, and carve-outs for certain pro-union activities all indicated that the statute reached beyond California’s sovereign, proprietary interest to instead impose punitive sanctions — much like the Wisconsin statute in Gould.76
Put together, the cases impart three lessons for distinguishing regulatory and proprietary action. First, the determination is functional, not formalist: leveraging police power versus spending power or use versus receipt restrictions is irrelevant. Second, states must demonstrate a credible nexus between their actions and a proprietary purpose tailored to issues they face in the relevant market; blanket legislation that applies across markets may be more difficult to defend as proprietary.77 Third, although the Court does not accept the state’s stated purpose at face value, the focus is on purpose rather than motivation. Put differently, Boston’s bid specification may have been motivated by a pro-union tilt, but its stated purpose of labor efficiency survived the Court’s scrutiny because its actions were narrowly tailored to that purported purpose.78 In the nearly forty years since it began applying the market participant exception to the NLRA, the Court has not considered its import to other federal legislation.
C. The Doctrine in the Circuit Courts
Taking cue from the Court’s statement that “[i]n the absence of any express or implied indication by Congress that a State may not manage its own property when it pursues its purely proprietary interests, and where analogous private conduct would be permitted, this Court will not infer such a restriction,”79 circuit courts have applied the market participant doctrine broadly. The Sixth and Ninth Circuits have definitively held the exception applies to the Employee Retirement Income Security Act of 197480 (ERISA), while the Third Circuit has assumed as much without deciding.81 Circuit courts have also applied the exception to the Telecommunications Act of 199682 and the Federal Aviation Administration Authorization Act of 1994,83 though they have never considered arguments that the exception should shield against FAA preemption.
To determine whether state action is proprietary, circuit courts leverage the two-part framework from Cardinal Towing & Auto Repair, Inc. v. City of Bedford.84 First, the state action must “essentially reflect the [governmental] entity’s own interest in its efficient procurement of needed goods and services, as measured by comparison with the typical behavior of private parties in similar circumstances.”85 Second, the “narrow scope of the challenged action” must “defeat an inference that its primary goal was to encourage a general policy rather than address a specific proprietary problem.”86
States can offer an array of evidence to respond to these inquiries. On the first prong, states might point to private parties that do, in fact, leverage similar contracting requirements.87 This is not a strict requirement, though, as courts consider, hypothetically, whether a private entity might invoke similar interests should it enter an analogous private contract.88 States may also offer expert testimony regarding the proprietary benefits they anticipate such requirements will offer.89 For example, even in Boston Harbor, where the state made only general assertions about convenience and lacked record-specific findings that a labor peace agreement would result in greater efficiency, the Supreme Court nonetheless upheld the requirement.90 And states need not get a “good deal” out of the particular procurement requirement, as this would unduly “impose economic rationality on state contracting decisions.”91
The Cardinal Towing test is applied with varying rigor. The Sixth Circuit, for example, found a Cincinnati ordinance preferencing “contractors who provide health care and retirement benefits” was proprietary because such contractors may be “less likely to experience significant employee turnover, improving the stability and overall quality of a project.”92 A court taking a harder look might have found this connection between benefits and project quality as somewhat tenuous. In the Sixth and Ninth Circuits, satisfying either prong of Cardinal Towing is sufficient, whereas the Fifth Circuit examines both prongs.93 And other circuits may recite the Cardinal Towing test as more of a general principle without explicitly considering whether each individual prong has been satisfied.94
If the state is found to be acting as a market participant, then the court turns to the broader legal question of legislative intent: Did Congress intend that the federal statute at issue preempt state proprietary action, looking to statutory text and purpose?95 Circuit courts have found that express statutory provisions claiming to preempt “[s]tate laws” that “hav[e] the effect of law” do not apply to proprietary action — since such action by definition lacks the force of law.96
A particularly pertinent example of the market participant exception arose in a case concerning the Clean Air Act97 — and it is also the closest the Supreme Court has come to acknowledging the doctrine’s application outside the NLRA. A California agency mandated that vehicle fleet operators comply with certain stringent emissions requirements, and diesel-fueled engine manufacturers challenged the rules as preempted by the Clean Air Act.98 The Supreme Court rejected the state’s argument that the rules were outside the statute’s scope altogether — but writing for an 8–1 Court, Justice Scalia cautioned that this did not necessarily mean the state regulations were “pre-empted in toto”99: the district court was to consider arguments not presented, including “whether some of the Fleet Rules (or some applications of them) can be characterized as internal state purchase decisions (and, if so, whether a different standard for preemption applies).”100
On remand, California argued its actions were not subject to preemption under the market participant exception — and the Ninth Circuit agreed, insofar as applied to “the procurement behavior of state and local government entities.”101 Even after the Supreme Court clarified the Clean Air Act’s wide preemptive scope, California, like UPS and FedEx — both of which the court analogized to as private entities taking measures to reduce pollution — could set purchasing requirements, circumventing preemption.102
III. Applying the Market Participant Doctrine to the FAA
The market participant exception is a general interpretive principle of federalism and should apply evenly to the FAA, as the statutory language and purpose of the FAA establish that Congress did not intend to preempt state market action. This Note further argues that the protective breadth of the market participant exception is broader than that of the NLRA; put differently, a wider range of action should be considered proprietary pursuant to the FAA compared to the NLRA.
A. No Congressional Intent to Preempt Proprietary Action
Since preemption applies only to regulatory action, when examining a federal statute, we begin with the presumption that state proprietary action is not subject to preemption; “[o]nly if a statute evinces an intent to preempt such proprietary actions by a state or local government is the presumption overcome and the action preempted.”103 Examining the text, legislative purpose, and precedent surrounding the FAA makes clear that Congress manifested no such intent — and accordingly, state proprietary action is not preempted.
The text of the statute states only that a contractual agreement to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”104 Some circuit courts have found the market participant exception persists even to federal statutes bearing express preemption provisions,105 and the case for the FAA is even stronger: the statute contains no express preemption provision, “nor does it reflect a congressional intent to occupy the entire field of arbitration.”106 As explained in Part I, the legislative history of the statute, too, makes clear that the FAA was not intended to preempt state law at all and was intended to apply only in federal court, with a particular focus on diversity actions.107
It would be problematic for the Supreme Court to now begin taking seriously the FAA’s text and legislative history, given that for forty years the Court has essentially ignored this evidence to establish a broad preemption regime. Nonetheless, even the broad FAA preemption regime is not unlimited. For example, the Court in 2022 looked to the FAA’s exclusion of “employment of seamen, railroad employees, or any other . . . workers engaged in foreign or interstate commerce” to find that certain airport workers who load cargo are outside the statute’s reach.108 Thus, the Court is willing to limit the FAA to its text, to the extent the conclusions do not conflict with the existing line of precedent.
No such conflict arises from applying the market participant exception to the FAA: even if the FAA is interpreted as having a broad preemption regime, that does not mean that the statute preempts action that is not “state law” at all. Indeed, the Court similarly faced a long-established, notably broad preemption regime under the NLRA when it considered arguments under the market participant exception in Gould and Boston Harbor.109 The Court has never considered the FAA’s application to state procurement decisions or other actions that could be construed as public-private interactions in the market. Moreover, Justices Thomas, Gorsuch, and Kavanaugh have expressed skepticism over broad implied preemption regimes.110
Cynics might point out that the Court’s supposed trend of limiting implied preemption based on textualism never seems to apply to the FAA in a manner that favors workers and consumers.111 And the Court’s conservative politics might lead to asymmetric application of this distaste for preemption. But this may present one of the rare occasions in which liberal and conservative Justices alike can agree on a textual interpretation of the FAA that raises no conflict with precedent.112 In any case, these recent discussions highlight the timeliness of state and local attempts to leverage the market participant exception against the FAA’s preemptive reach.
The market participant exception also aligns with the Court’s general admonition that agreeing to arbitration — and the concomitant choice not to agree to arbitration — is “a matter of consent.”113 Critics might protest that private entities contract directly with workers and consumers, whereas state procurement decisions are externally imposed onto the contracting parties. First, private corporations do exercise control over the consumer and employee relationships of their third-party contractors.114 And second, this criticism is orthogonal to the very principle underlying the exception: that when a state acts as a market participant, it steps into the shoes of a private actor. “Given the volume of, and obvious need for, interaction between the government and the private sector,” states must be able to set the parameters of third-party consumer and employee relationships.115 Under the FAA, private parties may decide whether to impose arbitration agreements against their vendors or other service providers; states, too, should be free to structure their conduct in the marketplace as they wish.
B. The Case for a Broader Exception
Congressional intent proves that the market participant exception should apply to the FAA — but how broad should that exception be? Labor scholars have pointed out that the exception for proprietary state action is fairly limited in the NLRA context, in part because of concerns that the “proprietary exception, taken to a logical extreme, would swallow the entire preemption regime.”116 Individual judges, too, may vary in the narrowness of tailoring to proprietary interests.117 This Note argues that since the exception, much like preemption, hinges on congressional intent, determining its breadth also requires a statute-specific analysis. And, inferring from the Supreme Court’s reasoning of the preemptive reach of the NLRA, the FAA should actually have a broader exception for state proprietary action. In other words, some state action that might not qualify as proprietary in the NLRA context should be considered proprietary in the FAA context.
This argument is ambitious, but not without precedent. As discussed in Part II, when facing a market participant exception claim, circuit courts frequently first determine whether the state action even qualifies as proprietary before considering whether the exception applies to the statute at hand. Judges likely prefer this approach because by first determining whether the action qualifies as proprietary, the court can avoid unnecessarily interpreting a federal statute and instead hook its proprietary-versus-regulatory logic onto the Supreme Court’s NLRA precedent. But this standardized approach, in which the acceptable universe of what constitutes proprietary action is defined with respect to Supreme Court precedent in NLRA cases, is arguably backward: just as preemption itself is a statute-specific analysis, the scope of what constitutes permissible proprietary action should also vary by statute.
It might be intuitive to think state action should objectively and factually be differentiable as either proprietary or regulatory, but the scope of these categories inherently requires reflecting on statutory text and purpose to understand whether the state action at issue is sufficiently narrow or has a legitimate purpose. This logic is seen in the NLRA cases themselves. The Supreme Court’s tightly circumscribed approach to scrutinizing state proprietary action in the labor context reflects the highly federally controlled nature of the American private labor regime. When it first confronted the question of the market participant exception in Gould, the Court emphasized that the NLRA, which not only cemented the rights of workers to engage in collective action but also created the NLRB, “was designed in large part to ‘entrus[t] administration of the labor policy for the Nation to a centralized administrative agency.’”118 Thus, Wisconsin’s “three-strikes” rule prohibiting habitual NLRA violators from doing business with the state was invalid because the federal regime already created both a substantive and procedural regime to punish NLRA violators.119 The breadth of the NLRA, then, informed whether the Court was willing to accept that the state’s action was proprietary. Even in the Court’s most recent market participant exception decision, the analysis of whether California’s statute was proprietary in scope was intertwined with a close reading of the NLRA’s protections of employer speech.120 In other words, as in typical preemption analyses, the federal statute must inform the analysis of whether the action is proprietary.
Unlike the NLRA, the FAA reflects no such “interrelated federal scheme of law, remedy, and administration”;121 there is no individual federal agency responsible for regulating arbitration, little federal regulation of the details of carrying out arbitration, and no punitive regime for managing violations.122 Even under the Court’s expansive statements that the FAA embodies a “liberal federal policy favoring arbitration” and that arbitration agreements need to be “on an equal footing with other contracts,”123 ultimately, the FAA simply provides that for certain workers, arbitration agreements must be enforced if parties have agreed to them — absent invalidation by generally applicable principles such as unconscionability, fraud, or duress.124 Compared to the NLRA, and the commensurate congressional intent to ensure the labor regime is under tight federal control, no such intent is found under the FAA. A broader range of state action, then, should be “proprietary” through the lens of the FAA, commensurate with congressional intent.
While the entire proposition that the market participant exception should apply to the FAA is untested, this particular argument about the doctrine’s breadth is all the more unconventional, since most circuit courts have taken rote, one-size-fits-all approaches to defining what constitutes proprietary action.125 But the Ninth Circuit has explicitly recognized the unwarranted rigidity of this approach: “Due regard for congressional intent . . . might require [a court] to employ a definition of protected state ‘proprietary action’ different from the two definitions adopted . . . for purposes of preemption under the NLRA.”126 There may also be concerns that the doctrine, if too expansive, might overly restrict congressional power by imposing a clear statement rule on an unsuspecting Congress.127 Still, this Note encourages states and local governments to raise this theory (which is rooted in statutory interpretation, as preemption arguments familiarly are) as a manner of testing the limits of the exception in the context of arbitration.
IV. States’ Proprietary Interests in Prohibiting Forced Arbitration
This Part suggests legitimate proprietary interests that a state may invoke in limiting business partners from mandating arbitration against both the public who consume the services that these businesses provide on behalf of the government and the employees responsible for delivering them. First, this Part illustrates through a case study of transportation gig work — which has proliferated in public-private partnerships — how safety and transparency can be legitimate proprietary interests. Second, this Part considers proprietary interests that may arise across industries in limiting arbitration in civil rights claims to drive uptake of government services — just as private actors have with arbitration in sexual harassment.
A. Transportation Gig Work
As part of the inquiry into whether a particular state action is proprietary rather than regulatory under Cardinal Towing, courts look to the scope of the action, including if the action is tailored to a specific market or project.128 Thus, states seeking to limit the impacts of forced arbitration might begin by targeting specific public-private partnerships that involve fraught relationships with workers and consumers. This Note suggests looking to public-private partnerships within the gig work transportation industry — notorious for skirting regulation.129
Transportation network companies130 like Uber and Lyft have proliferated in government contracts, with services ranging from providing transportation services for traveling government employees131 to adopting traditional state functions as subsidized public transit services for the general public.132 In cities across the United States, such “transportation-as-a-service” programs may entail private “first/last-mile” service providers to fill gaps in existing public transportation infrastructure, supplemental services following route reductions, or services reserved for certain groups of citizens, such as the elderly.133 Public-private transportation partnerships may be prevalent even in locales that have long rallied against tactics gig work companies have used to skirt regulation.134
Transportation network companies have also entered the school and youth transit industry. In the face of national bus driver shortages,135 the gig work company HopSkipDrive partnered with schools, including public schools, to offer a service through a mobile phone application connecting “CareDrivers” paid per ride with parents arranging transportation for children as young as six years old to access school or afterschool care.136 Rather than taking rides on demand, CareDrivers can also choose to do specific routes every day as part of a “RideSeries”; in other words, some local governments have outsourced school bus services to gig work companies.137 In certain cities, HopSkipDrive also provides rides to particularly “vulnerable children,” including those in the foster care system and students with disabilities.138
Outsourcing of public services to third-party providers has been shown to have negative socioeconomic impacts in pursuit of elusive efficiency gains.139 Combining outsourcing with forced arbitration only magnifies these concerns. HopSkipDrive, Lyft, and Uber impose mandatory arbitration and class action waivers against consumers and drivers.140 The transportation services that these companies provide on behalf of the government, including to young children, seniors, and individuals with disabilities, are likely to give rise to disputes regarding the safety of both the riders as well as the drivers.141 As explained in Part I, there is overwhelming evidence that the claim-suppressive effects of arbitration allow businesses to avoid accountability for legal wrongdoing — particularly low-value, high-volume theft from workers and consumers;142 confidential fora, moreover, shield defendants from public scrutiny and class waivers isolate plaintiffs.143 It is not difficult to envision how claim suppression in transportation service delivery may raise concerns among the public who consume these services. Parents would likely hesitate to entrust their children to a service provider that is insulated from the consequences of legal misdeeds, whether those be failing to pay drivers legally owed wages or sharing children’s private information. This is doubly disturbing when even the information regarding other alleged legal violations, perhaps pursued by other parents who share similar concerns, is suppressed from the public due to forced arbitration clauses.
States may fairly prohibit these private partners from imposing mandatory arbitration based on proprietary interests in safety and transparency. By limiting arbitration in public transportation, a state can ensure that consumers and drivers have access to information regarding the risks of using the services and that citizens can then hold the government and the companies accountable when these services may be endangering riders, exploiting workers, or otherwise violating the law. These proprietary interests fit neatly under Cardinal Towing, as there is a direct connection between limiting arbitration and driving uptake of government services.144 By focusing on issues particular to this industry, the narrow tailoring, too, would point to a proprietary rather than regulatory interest.145 Importantly, the government’s interest in efficient procurement of needed goods and services “does not necessarily mean ‘cheap’ procurement, but rather ‘procurement that serves the state’s purposes.’”146 And to reiterate, there is no economic rationality requirement.147 Gig work in outsourced public transportation services, then, provides an ideal test case for states and municipalities.
B. Antidiscrimination as a Proprietary Interest
Whereas the previous section examined a particular industry, this section steps back to consider proprietary concerns that may exist across markets and proposes that states may tailor procurement practices to address substantively concerning applications of arbitration to antidiscrimination and other civil rights claims. Like private businesses, states have an interest in limiting arbitration in this arena to avoid public backlash, ensure legal compliance, and drive uptake of government services.
It is helpful to reiterate that the principle behind the market participant exception is that local and state government should be able to make decisions in the market, free of preemption, just as private actors can.148 And indeed, one way states can justify their actions as proprietary is by pointing to analogous measures that private companies are taking.149 Thus, when considering what legitimate proprietary interests a state may invoke in the context of limiting private partners from forcing arbitration, it is helpful to understand why businesses, looking across different markets, might choose not to use arbitration clauses.150
In recent years, some corporations have publicly opposed forced arbitration. Many did so after the #MeToo movement, which laid bare the silencing, isolating, and claim-suppressive effects of confidential, forced arbitration in workplace sexual harassment and misconduct claims.151 “Secret settlements,” often facilitated through arbitration and other alternative dispute resolution processes, silence individuals who experience sexual harassment and assault in the workplace and allow perpetrators to avoid public scrutiny.152 The silencing effects of arbitration and other confidential dispute resolution mechanisms caused public blowback against an impressive array of institutions, including the U.S. Olympic gymnastics team, the National Football League, Fox News, and Uber.153
Corporate actors across markets, including Facebook, Airbnb, eBay, Google, Wells Fargo, and private law firms, faced public protest154 and ultimately changed their arbitration policies. The scope of these changes varied: Facebook removed forced arbitration only of sexual harassment and misconduct claims rather than all claims;155 Google eliminated arbitration of all kinds of claims but only with respect to its own employees and not to the many independent contractors employed by outside firms;156 and Amazon eliminated arbitration for all customer disputes.157 Years after many corporations had already taken action, Congress prohibited forced arbitration of certain sexual assault claims.158
Looking to this broad public movement to eliminate forced arbitration in sexual assault and harassment, states may — like private actors — seek to limit forced arbitration as well. A state might invoke proprietary interests in avoiding public blowback and increasing the service provider’s compliance with the law due to increased transparency, which again intersects with a state’s ultimate “private interest” in ensuring appropriate uptake of good-quality services. Where a private actor during #MeToo likely took into account the tradeoff between money spent in litigation and short-term profit losses from public pressure and boycotts, a state should fairly be able to invoke such analogous interests as public consumption of government services as well.
A court might be particularly skeptical of a proprietary interest worded as “legal compliance” whereas it may be more open to quality service delivery as a propriety interest. After all, in Gould, the Supreme Court established that a state has no proprietary interest in ensuring that the businesses with which it transacts follow labor laws.159 But this does not necessarily mean that states can never claim a proprietary interest in ensuring business partners abide by certain laws under the market participant doctrine. Indeed, private actors’ removal of arbitration agreements under pressure from #MeToo was in part due to concerns about increasing their own employees’ fidelity to the law. In other words, by forcing claims from a private, confidential forum to a courtroom, sunlight became a disinfectant against sexual harassment. The removal of arbitration agreements was not an end in itself, but a tool to reduce the prevalence of sexual harassment and to stop shielding the identity of those perpetrating sexual assault — making the workplace safer and more legally compliant, and in turn, the employer more appealing to current and potential employees and consumers. Thus, ensuring a business partner abides by the law is by no means only a “regulatory” interest that the state can hold, but a legitimate proprietary interest for market actors.
Given that interests in legal compliance exist across markets, a court may also struggle to find limiting principles. One way a state might achieve this narrowing and overcome judicial skepticism is by limiting arbitration only in certain types of claims — such as civil rights and antidiscrimination suits. The use of forced arbitration in such suits is likely to invoke the most concerns from the public and be most susceptible to comparisons to the #MeToo movement to eliminate arbitration agreements. Indeed, a similar movement to prohibit forced arbitration in racial discrimination claims has been growing in recent months.160 Despite the racial justice protests that continued throughout the pandemic, as of yet, “no major employer has said it would stop using mandatory arbitration pacts to keep workplace racial bias accusations out of court.”161 But it is reasonable that a state acting in the market may, reacting to waves of public backlash, require certain business practices of its partners.
Conclusion
For local governments seeking the next frontier in the fight against forced arbitration of worker and consumer claims, the market participant doctrine offers a path that is at once novel to the FAA yet rooted in general principles of statutory interpretation and federalism, and replete with decades of learnings from the NLRA and other federal statutes. And while this Note encourages starting small, higher-value contracts, like those in public infrastructure projects, also benefit from improved labor conditions and reduced turnover.162 Though the market participant doctrine is not a panacea to the deleterious impacts of forced arbitration, it offers significant opportunity as state and local government spending exceeds $3.5 trillion annually.163 That said, the doctrine has limits; states must point to anticipated benefits or commensurate private action to demonstrate narrow tailoring to a proprietary interest — even as purity of motivation is not necessary.
Criticism of this doctrine, driven by fear of its potential breadth, might be redirected to target its surrounding context: the doctrine exists because of public sector reliance on outsourcing. Paired with this dependence is a commensurate reduction of full-time public sector jobs, which are associated with a higher caliber of wages, benefits, and union protections.164 Absent a more robust public sector, it is reasonable to expect, then, that governments bear a proprietary interest in the labor practices of these critical private sector partners. Moreover, at a time when corporate power governs citizens as much as states do, and consumer-constituents force businesses to make commitments to the public that transcend short-term profit motives, “notions of what constitutes rational market behavior are changing, and cannot be divorced from public policy goals.”165 A doctrine that validates government action by looking to private sector action might appear concerning — but this Note proposes that the market participant doctrine has the flexibility to adapt and grow as corporate power grows.
The line between proprietary and regulatory action is perhaps even thinner than it was nearly forty years ago when the Supreme Court first drew the distinction under the NLRA — but circuit courts have continued to make the market participant exception workable across several federal statutes. States and local governments should continue to experiment against forced arbitration by exploring the market participant doctrine as a way around the Supreme Court’s wall of precedent.