Gary Marshall's Technology Law Blog

Arbitration is very popular as an alternative to lawsuits for settling disputes. I do not understand why. I do not like binding arbitration clauses and try to discourage my clients from using them. I believe that they have many more disadvantages than advantages.

Arbitration is perceived as less expensive than litigation. This is only marginally true. In both cases the parties need to hire attorneys, conduct discovery, prepare their cases for trial, and present their case to a decision maker. The rules of arbitration tend to be more flexible than the rules of court, so evidence issues can occasionally be dealt with in a less costly manner. This is the only true cost savings of arbitration over litigation.

But the same results can be achieved in litigation when both parties cooperate with each other over evidence issues.

Where the parties are not cooperative, the resultant battles can be expensive whether in litigation or arbitration. In fact, the flexibility of arbitration rules can make arbitration more expensive than litigation in some cases. The rules of arbitration are very short and general. There is very little written guidance on what the rules mean. Therefore, it is easy to dispute how to interpret the rules. On the other hand, the rules of court are very detailed, and are likely to cover most situations. In addition, there is much case law exploring the various finer aspects of the court rules. Parties are less likely to have a dispute over court rules.

By way of example, in a recent case that I was involved in, on a particular issue each side was to present a three-page argument. I did. The other side used a small font and almost no margins to fit their argument on to three pages. It was really over a four-page argument if formatted normally. I complained. I was told that because there were no rules in the arbitration on page format, the opposing party’s submission was acceptable. In the courts in which I practice there are specific rules on page format. This kind of cheap trick could not have been used.

There are other disadvantages to arbitration. First, discovery is limited in arbitration. This can help the party who controls most of the information, and can hurt the party that does not have independent access to the key information. Typically, the party who has committed the wrong has better access to information about the wrong than the party that was victimized by the wrong. The limited discovery in arbitration tends to help the wrongdoer.

Arbitration also produces poorer decisions than litigation. I find judges make somewhat arbitrary decisions. But arbitrators are far worse. A typical arbitrator is a practicing attorney who handles only a few arbitrations a year. Judges are used to dealing with all types of people. Where appropriate, they are willing to make a ruling that is entirely one-sided. Arbitrators, on the other hand, as a general rule, are not as experienced at making decisions affecting other people. They tend to give everyone the benefit of the doubt. They also try to please everyone. So, with an arbitrator you are likely to end up with a compromise ruling, even when such a ruling is not called for. These factors favor the wrongdoer over the victim.

An arbitrator’s rule is final. There is no appeal, not even a request for reconsideration. This reduces cost and shortens the time to final judgment. But it also means that obvious mistakes of law or fact cannot be corrected. This has happened in at least one of my cases. It was very frustrating to my client and me.

The filing fee for starting a lawsuit in court is usually only a few hundred dollars. That is the only fee the parties must pay. The taxpayer picks up the court salaries and other expenses. But in arbitration the parties have to pay for everything. I recently concluded an arbitration where the arbitration fees alone were about $25,000 for each side.

There are of course advantages to an arbitration. An arbitration usually takes much less time from the start of the case until the trial/arbitration judgment. Because there is no appeal, that is the end of the case. In arbitration the parties can pick the arbitrator. This can be helpful if the case requires a judge to have a particular expertise. Arbitration proceedings are private. There is no public record of the arbitration. All evidence submitted to the arbitrator is private. In a court case, usually everything that is submitted to the court at any time is a public record that is accessible by anyone.

Even without a binding arbitration clause, the parties are free to use arbitration if it seems to be a good way to settle a particular dispute, and if both parties agree. When a dispute is over relatively small amounts of money and the parties are behaving fairly reasonably, they can always agree to forgo expensive litigation and use less expensive arbitration instead.

Arbitration might make sense in certain other cases. I have heard that a telephone company that was supplying services to its business customers had a unique arbitration clause. Any disputes over bills had to be submitted to arbitration. If the telephone company won, the customer was free to file a lawsuit to rehear the case. If the customer won, the judgment was final. The telephone company could not appeal. Most disputes were about a small sum of money, usually $5,000 or less. The telephone company was more concerned with keeping its customers satisfied than in winning lawsuits. It also turned out that when customers lost, they rarely refiled in court. They wanted an opportunity to be heard, and once that happened, they were willing to move on.

But where the amount of money at stake is great and/or the parties have become polarized in their positions and are not getting along at all, the resultant battle tends to be very expensive, whether it is fought in the courts or by arbitration. The result will be fairer in litigation.