The Myths of Arbitration

7 Minute Read

10

MARCH, 2020

Why does the Supreme Court think arbitration is so great? From our perspective, the Court’s repeated praise for the comparative virtues of arbitration as an alternative to litigation can only be explained by the likelihood that the justices have never been sullied by exposure to any actual arbitration proceeding. Maybe we need a justice or two who has faced dispute resolution in a public forum but also private arbitration.

The Court’s recent arbitration decisions are at best naïve and at worst utterly misguided about the reality of arbitration. Let’s start with the April 2019 opinion in Lamps Plus, Inc. v. Verela: “In individual arbitration, ‘parties forgo the procedural rigor and appellate review of the courts to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.” A little more than a year earlier, the Court opined in Epic Systems Corp. v. Lewis that allowing class-wide arbitration without express consent of both parties “would ‘sacrifice the principal advantage of arbitration—its informality—and mak[e] the process slower, more costly, and more likely to generate procedural morass than final judgment.” The Court’s arbitration decisions are replete with such encomiums; reading those decisions, it’s a wonder why any businesses voluntarily turn to the courts. (Whether the Federal Arbitration Act should be interpreted to make it difficult for consumers to press claims in arbitration, or amended to lower the bar for such claims, is beyond the scope of this post. Unsurprisingly, we have thoughts on those issues too.)

Contrast the Court’s rosy view from high on Mount Olympus with the in-the-trenches perspective of Judge William G. Young, a senior federal district court judge in Massachusetts. Skeptical about the asserted superiority of arbitration, Judge Young’s opinion in CellInfo, LLC v. American Tower Corp. concludes with a section titled “WHAT WERE THEY THINKING? MYTHS AND REALITIES CONCERNING COURTS AND ARBITRATION?” that draws on scholarship and his own experience to conclude that

The litigation costs will be roughly equivalent, though the start-up costs of litigation are greater. So long as one party wants speed, the Massachusetts federal courts are markedly faster, 5-8 months start to finish. In arbitration, CellInfo and American Tower can cloak themselves in secrecy; in federal court they cannot. At the conclusion of arbitration, the parties will receive an award but no explanation and will have virtually no appellate rights. At the end of a federal trial the parties will get a thorough written decision and award. Each will have full rights to appeal to one of the finest appellate courts in America.

Which course is better? You be the judge.

“The litigation costs will be roughly equivalent, though the start-up costs of litigation are greater . . . . At the end of a federal trial the parties will get a thorough written decision and award. Each will have full rights to appeal to one of the finest appellate courts in America. Which course is better?”

For the most part, we not only agree with Judge Young’s critique, we think it doesn’t go far enough.

Costs: No one has to pay a judge (well, outside of a few state courts in Illinois and Mississippi). Arbitrators may be “expert adjudicators,” in the Supreme Court’s words, but when you want expertise, you’ll have to pay for it—by the hour. Even in very Midwestern Milwaukee, Wisconsin, experienced arbitrators often charge more than $600 per hour. If the arbitration agreement requires a panel of three, multiply accordingly. And the cherry on top is the filing fee. The American Arbitration Association fixed fees start at $1,550 and reach almost $15,000 for cases claiming over a million dollars. It costs $400 to file any lawsuit in federal court. Organizations like AAA and JAMS have created “cottage industries” promoting the concept to the detriment of the justice system.

Costs are also affected by the extent of discovery available in arbitration. Some arbitration agreements require the parties to exchange hearing exhibits and witness lists, but do not permit document requests, interrogatories, or depositions. Costs will be much lower under those agreements, but we think it’s a serious drawback when the only documents parties are required to show the other side are exhibits. Broad document discovery is a deterrent to dishonesty. And many agreements, like the one in CellInfo, provide for discovery near or equal to what is available in court, with full-blown document production and limited depositions. We doubt that discovery in such arbitrations is significantly cheaper than litigation. Plus, how often have you been in an arbitration where the parties ultimately stipulate to a broad range of discovery rights because we lawyers cannot help but use both the belt and suspenders for fear of leaving some document unreviewed, some witness undeposed?

Judge Young does not discuss an additional cost-related consideration: most arbitrators do not grant dispositive motions. One experienced arbitrator told us that we were free to seek summary judgment, but that as far as he was concerned, “the parties contracted for a hearing and they’re almost always going to get one.” (We had moved to dismiss and for reconsideration, and lost both of those motions only to later win at the hearing itself.) In an out-of-state arbitration, another experienced arbitrator told the lawyers not to bother moving for summary judgment unless it was based on a narrow legal issue that would resolve the whole case and didn’t require evaluating a long set of undisputed facts. One of the parties filed a traditional no-stone-unturned summary judgment motion, which was denied in a two-paragraph order. In both of these cases, the arbitrator ended up issuing an award in favor of the parties whose motions had been denied. The lesson: arbitrators conduct hearings, and they are not likely to grant dispositive motions without clear encouragement in the arbitration agreement. Parties who expect to save costs through quick dismissals or dispositive motions will probably not achieve those goals in arbitration, particularly where the lawyers propagate full-blown litigation procedures before an arbitrator.

Speed: Arbitration advocates emphasize how much faster it is. Often, they’re right. In a “rocket docket” district, however, litigation is likely to be complete within 8 or 9 months. Just ask anyone who tried a case in the Eastern District of Virginia or the Western District of Wisconsin in the old days. And the more discovery that is allowed under an arbitration clause, the less likely it is that arbitration will be faster. We’ll call this a coin flip.

Confidentiality: Parties who want to keep their disputes (and decisions resolving them) out of the public eye should choose arbitration. But as Judge Young noted, the confidentiality of arbitration is not necessarily beneficial to outsiders: “Who is to know if the arbitrators themselves commit improprieties . . . or counsel are lax, make missteps, or are frankly incompetent?” We’re skeptical that the public has an interest in knowing whether lawyers in arbitration were competent, but we recognize that public litigation (or the threat of it) has brought to light outrageous government, corporate, and individual conduct that would have been hidden from public scrutiny in arbitration. This is particularly egregious in the consumer rights area.

Review of Errors: This one is simple: arbitration doesn’t offer any. In fact, many arbitrations are resolved by one-sentence awards that contain no reasoning and no application of law. Even when parties contract for a written decision, even obvious legal mistakes cannot be corrected in court. Litigation is the only option for parties who want the important check on mistakes that the appellate courts provide.

Our advice is not that businesses and individuals who have a choice should avoid arbitration. It does offer potential advantages over litigation. But arbitration should only be chosen with eyes wide open. People who make their decisions based on the folklore of arbitration that appears in Supreme Court decisions are likely to be disappointed.