Binding private arbitration is intended to be a speedy and efficient means for resolving disputes that would otherwise be litigated through the court system. There are numerous benefits to pursue this form of alternative dispute resolution, but also some drawbacks. This article addresses these pros and cons, as well as strategies and other considerations for compelling cases to arbitration.
THE PROS
Reduced Costs (Generally)
While private organizations that administer arbitration proceedings may charge higher administrative costs than the analogous filing fees in court, overall, parties have significant control over the cost exposure in arbitration. True, some arbitrators charge very high hourly rates: $800 per hour or more is not unusual. However, there are plenty of great arbitrators who charge much lower rates, and there are also statutes and rules in place intended to limit the need for too much involvement from the arbitrator.
If the parties cooperate with each other, agree on a reasonable discovery plan, and narrow issues where appropriate, the arbitrator’s role can be limited to a handful of status calls and then the evidentiary hearing (the equivalent of the trial). And even if confronted with an unreasonably aggressive opponent who seeks to unnecessarily complicate the case, a party can always fall back on the default rules, which significantly limit discovery and the gamesmanship that can be employed.
On balance, the overall defense spend is usually less in arbitration. Even if the costs to the arbitrator are more – even significantly more – than equivalent court costs, an overall savings can often be realized in the reduced attorney’s fees resulting from the more streamlined and efficient proceedings.
A Speedier Process
Time is another benefit of arbitration. The full life of a litigated case is usually two or more years, and sometimes well in excess of five, particularly when including the appellate process. Arbitration, by contrast, usually concludes within one year and, with a few narrow exceptions, appeals are not allowed.
Finality
With the exception of challenges to orders compelling arbitration, arbitrator disclosure violations, evidence of bias, or other exceptional circumstances there is no right to appeal a decision in binding arbitration proceedings. This adds to the time savings and encourages resolution. At the same time, this can also be viewed as a con (as noted below), given there is no right to appeal even a clearly erroneous decision if it does not otherwise trigger one of the narrow rights to appeal.
Avoidance of Runaway and Nuclear Verdicts
One of the biggest benefits of arbitration, especially in cases where uncapped damages are at issue, is that arbitrators are far less prone to issue extravagant awards. There is of course no jury, and therefore no risk of a nuclear or runaway verdict.
THE CONS
Lack of Formal Rules
Critics of arbitration argue that the lack of formal rules of evidence or discovery can lead to situations where parties are allowed to introduce an excessive amount of evidence, which can drive up the costs of the process. While these criticisms are valid, there are steps that can be taken to address them. For example, as noted above, the parties retain significant discretion and control over the process. Within reason, arbitrators often agree with whatever rules or processes to which the parties agree.
Lack of Appeal
As noted above, the general inability to appeal an arbitrator’s award is a pro to the extent it fosters finality, but it can also be a major drawback if the arbitrator simply gets it wrong. One cannot appeal an arbitration award simply because it is erroneous – a far more egregious error, usually in the form of a depravation of due process or similar rights, must be shown.
Concerns over Unwarranted “Compromise” Awards
Another criticism of arbitration is that the arbitrator may be inclined to “split the difference” and reach a compromise decision in order to avoid offending either party (or risking future business opportunities). This concern arises because arbitrators are often chosen by the parties themselves and may have ongoing relationships with them, perhaps as pertains to the arbitrator’s capacity as a mediator. As a result, some worry that the arbitrator may be more concerned with maintaining those relationships than with making a fair and impartial decision.
While this is a valid concern, most arbitrators take their role seriously and are committed to making a fair and impartial decision based on the evidence presented. Additionally, many arbitration agreements provide for the arbitrator to be selected at random (from a list of arbitrators qualified in the particular subject area). A randomly selected arbitrator often will have no prior relationship with either party.
Inability to Obtain Non-Party Deposition Testimony
Some jurisdictions (including California) prohibit arbitrators from compelling non-parties to sit for depositions. While arbitrators are permitted to compel non-parties to attend the arbitration hearing, this means that parties may not be able to obtain advance testimony from such witnesses – the equivalent of calling a witness for the first time at trial. That said, there is generally nothing prohibiting parties from informally interviewing non-parties to get a sense of their likely testimony (a major exception being medical providers, given HIPAA rules), and there also can be methods for compelling non-parties to deposition if the case originated with a trial court and then was compelled to arbitration (as opposed to being initiated in the arbitration setting from the outset). In the latter circumstance, the existence of the trial court action may provide subpoena power to the party’s attorneys to issue deposition subpoenas.
ENFORCING ARBITRATION AGREEMENTS
Often, a plaintiff will file a lawsuit in court despite the existence of an arbitration agreement. When that occurs, the defendant, after weighing the pros and cons, can ask the trial court to compel the matter to arbitration. If the request is opposed, it typically will assert that the arbitration agreement is unconscionable. Other commonly-asserted opposition arguments concern waiver and, in California, the “inconsistent rulings” doctrine. Each is briefly discussed below.
Unconscionability
Before a court will refuse to enforce an arbitration provision on this ground, it must find that it is both procedurally and substantively unconscionable.
Procedural unconscionability refers to the circumstances under which an arbitration agreement was signed. For example, an agreement to arbitrate may be found procedurally unconscionable if it was buried in fine print or presented in a confusing or misleading manner. Similarly, if an arbitration agreement is found within a contract of adhesion, that is, presented to one party on a take-it-or-leave-it basis, without an opportunity for negotiation or explanation, it may be found to be procedurally unconscionable. Where inconsistent sophistication or bargaining power of the parties appears to be at play, however, a contract of adhesion is not necessarily at issue. Rather, where a party opposes arbitration under the auspices of an apparent adhesion contract, the party trying to compel arbitration is well served to show that the opposing party had sufficient opportunity to reject the contract at the outset by, for instance, not using the services that are contingent on the contract.
Substantive unconscionability refers to the fairness and reasonableness of the actual terms of an arbitration agreement. When a court finds that an arbitration agreement is substantively unconscionable, it means that the terms of the agreement are so one-sided or oppressive that it would violate public policy or otherwise be too unfair to enforce them. For example, an agreement may be substantively unconscionable if it contains provisions that severely limit the rights or remedies of one party, but not the other. Such provisions may include clauses that unfairly allocate the costs of arbitration, limit damages, or require arbitration to be conducted in a distant or inconvenient location.
Waiver
When defendants are sued in court and want to compel the matter to arbitration, it is important they move relatively quickly. Taking too long, and especially engaging in any significant litigation activity, can result in an implied waiver of the right to compel the matter to arbitration. Recently, the U.S. Supreme Court ruled that, in the context of arbitrations governed by federal law, a plaintiff need not show that it was prejudiced by the defendant’s purported waiver. Thus, delay, alone, can demonstrate waiver. California has historically required prejudice, but that prerequisite is now on shaky ground in light of the Supreme Court’s decision. The law is constantly in flux on these issues.
Inconsistent Rulings
Some courts will refuse to enforce an arbitration provision if it will result in the risk of inconsistent rulings. For example, if there are multiple defendants, and/or multiple plaintiffs, and arbitration could be compelled only as to some of them, the result would be double-tracked proceedings in both court and the arbitration setting. In arbitration provisions governed by California law, for example, courts have discretion to deny arbitration on this basis. Provisions governed by federal law, however, are not so restricted, and courts – whether in state or federal proceedings – cannot deny arbitration in those cases due to a risk of inconsistent rulings.
CONCLUSION
Arbitration allows parties to take control of time, process, and costs. If the parties can work cooperatively, it can be an exceptionally efficient method for resolving disputes. And even if the parties do not work well together, arbitration still provides significant protection, especially in cases with high risk exposure, such as those involving the prospect for significant non-economic damages.
Please do not hesitate to reach out to a member of our team in determining if arbitration may be the right avenue to best resolve any disputes your business may encounter.