November 10, 2015

The New York Times featured an excellent three-part series on arbitration in the last several days. The pieces were written by Michael Corkery, Robert Gebeloff, and Jessica Silver-Greenberg, and they’re definitely worth an hour or so of your time. (Part I is Arbitration Everywhere, Stacking the Deck. Part II is In Arbitration, a ‘Privatization of the Justice System’. Part III is In Religious Arbitration, Scripture Is the Rule of Law.)

MRW has written twice on the subject of arbitration, in Arbitration. Mediation. Settlement Conference. Huh?—an informational piece—and, briefly, in A Funny Thing Happened On the Way to Arbitration. We’re due, however, for some commentary on this mostly abysmal aspect of the American dispute resolution system.

Arbitration amounts to private court. The parties pay the decision-maker. Discovery—the opportunity to gather information from the opposing party, and from third parties, is limited. Evidentiary rules may or may not apply. And, in almost every instance, no appeals are permitted.

Let’s cut out the part of the system which makes sense. I had a client who had a dispute with his prior attorney about a $1500 fee. We jointly agreed to pay a retired judge $250 to decide the matter, with each side providing a “no more than two page” memorandum, and a 15 minute phone call. Done! I also recall a dispute with a wedding planner in which the battle involved a few thousand dollars. I suggested a similar approach, with very limited process and a decision. (The planner ignored the suggested approach, but she did not sue, either.)

So, what’s wrong with arbitration in cases that really matter? Just about everything. First, experience has me convinced that arbitration often costs lots of money. Bigger cases will often have three arbitrators, and the people who arbitrate cases often charge at high rates. Further, they have no incentive to keep matters simple, so you often end up with sketchy rules … and plenty of fighting about how the case will proceed.

Second, and I did not always believe this, arbitrators tend to favor industry. Early in my career I did securities industry arbitration work for a regional stock brokerage. The arbitrators were top-drawer industry people. Some of my clients were … ahem, not! Customers got reasonable outcomes, mostly winning when they should have, and losing when their claims were unreasonable. I have not studied the issue carefully, but the NYT pieces and other reading tells me the system is not fair often enough.

I am not suggesting businesses don’t have an advantage in court. They do, for being rich and powerful in America has its advantages. However, and this leads to my third point, the courts are transparent. The losing party has a right to appeal and many appellate opinions are published. These two aspects of the process force some accountability on trial judges, whether they are deciding a case or instructing a jury. Unfortunately, that accountability is simply not present in the arbitration process. (A bad arbitrator won’t keep getting work, but that check on the system assumes widespread knowledge about outcomes, arbitrators, etc.)

The U.S. Supreme Court has never—that may be a bit strong, but maybe not—seen an arbitration case where it did not see fit to enforce the arbitration provision. And, in most cases, there’s a high degree of unanimity concerning arbitration. I think two factors explain why the Court favors arbitration. First, among the justices there’s almost no “in the trenches” civil litigation experience. They’re mostly professors and government employees. Second, and this applies primarily to the more conservative justices, arbitration tends to result in outcomes favored by business, and business does well in the Court generally. (For some thoughts on this subject, here’s The Illusion of a Liberal Supreme Court by Linda Greenhouse for the New York Times, from July 9, 2015.)

Arbitration is a well-entrenched part of the way we resolve our differences. And, in theory, it makes sense. Unfortunately, theory and practice diverge in too many instances. Arbitration is an excellent example of that phenomenon.


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