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Arbitration: A Comparison of the Pros and Cons

Jonathan A. Berkelhammer

By Jon Berkelhammer

The Federal Rules of Civil Procedure were designed to “secure a just, speedy, and inexpensive determination of every action and proceeding.” Fed. R. Civ. P. 1. Yet with the previously “accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief,” Conley v. Gibson, 355 U.S. 41, 45-—46 (1957), abrogated byBell Atlantic Corp. v. Twombley, 550 U.S. 544 (2007), coupled with the scope of discovery including not only relevant information, but also anything that is “reasonably calculated to lead to the discovery of admissible evidence,” Fed. R. Civ. P 26(b)(1), litigation has become anything but “just, speedy, and inexpensive.” With the advent of computers, smartphones, and tablets, the courts are on the verge of losing the war on holding down litigation costs. 

Perhaps as a result of the spiraling costs of litigation, along with its often less than unpredictable results, companies have looked for alternate ways to resolve disputes. Although arbitration may be one method of doing so, it is not a cure-all and certainly is not the right approach in all circumstances. Thus, before one drafts, agrees to, or seeks to enforce an arbitration agreement, it is worthwhile to recall the advantages and disadvantages of arbitration, particularly when compared to litigation.

A. Potential Benefits of Arbitration

When most think of the benefits of arbitration, particularly in the business world, the top of mind response likely is cost savings. While it is true that arbitration can be cost-effective, it provides other, worthwhile benefits as well. These include privacy/confidentiality, a swift resolution with sophisticated decision-makers, and flexibility.

1. Arbitration Costs

Arbitration does not necessarily require the use of an attorney. See AAA Commercial Arbitration Rules, Rule 26. As a result, there is the potential to reduce legal fess during the arbitration process. In some, repeat, small value claims where individual consumers or consumer goods are involved or for disputes between component parts suppliers and their purchasers, corporations could use in-house engineers or members of their in-house legal staff to arbitrate the dispute. Addressing technical difficulties that arise in an arbitration setting with in-house technical personnel, for example, can not only be cost-effective and efficient, but it also can retain the customer relationship that full blown litigation could rip asunder.

Discovery costs, one of the big ticket items in litigation, also may be reduced in arbitration. There generally is no right to discovery in arbitration. The American Arbitration Association, for example, leaves discovery to the discretion of the arbitrator to be determined at the preliminary hearing. AAA Commercial Arbitration Rules, Rule 22. Even when discovery is allowed, the documents to be produced are those [a] “not otherwise readily available to the party seeking the documents, [b] reasonably believed by the party seeking the documents to exist and [c] relevant and material to the outcome of disputed issues.” Id. Rule 22(b). Thus, the expanded concept of information “reasonably calculated to lead to the discovery of admissible evidence” Fed. R. Civ. P. 26(b), does not appear to apply. The discovery of electronically stored information still exists under this approach,. id., which can increase dramatically the cost of the arbitration. 

The Judicial Arbitration and Mediation Service (“JAMS”) is more liberal in its approach to discovery. Thus, JAMS provides that “[t]he Parties shall cooperate in good faith in the voluntary and informal exchange of all non-privileged documents and other information (including electronically stored information . . . relevant to the dispute or claim immediately after commencement of the Arbitration.” JAMS Rule, Rule 17. JAMS also permits the taking of one deposition as a matter of right with others in the discretion of the arbitrator. Id. While the JAMS Rules, allow for more discovery and, therefore, begin to increase the cost of arbitration, they nevertheless seek to strike a balance between the cost of the proceedings and the equal access to information. 

Arbitration does, however, have hidden costs that are not necessarily top of mind at the time of contracting. Thus, unlike the current $350 federal court filing fee, both the American Arbitration Association and JAMS charge both a filing fee and a final fee. These fees can range from approximately $1,500 for a small case administered by the American Arbitration Association to $1,000 plus ten per cent of the professional fees billed by JAMS. 

In addition, the parties must pay for the arbitrator. Depending on the number of arbitrators and their hourly rate, the parties may be paying upwards of $1,500 per day for the privilege of having someone decide their dispute. Judges and juries, on the other hand, are free.

2. Swift Resolution with Experienced Decision-Makers

One of the direct benefits of limited discovery is the time it takes to reach resolution of the dispute. Arbitrations often can be completed within 15 months of the initiation of the claim. Moreover, and perhaps more importantly, the arbitrator or arbitration panel must issue the decision within thirty (30) days of the close of the hearing. See JAMS Rules, Rule 24; AAA Commercial Arbitration Rules, Rule 45. Motions and non-jury decisions in the federal courts can languish for months on end before a decision is made. In addition, given the limited appeal rights from an arbitration award, the likelihood of appellate delays is reduced significantly. 

Also, many disputes may involve complex subject matter, such as construction or intellectual property, or may require special industry knowledge, such as finance or health care. Arbitration allows the parties to select as their neutral an individual with the specific skill-set necessary to understand and decide their dispute. 

3. Flexibility

Courts can be anything but flexible. Depending on the jurisdiction, court starts at 9:00; there is a morning break and an afternoon break, with a lunch recess in between. Your case starts when called and continues, generally without interruption, until it is over. Everyone, the attorneys, the witnesses, and the client representatives, is at the mercy of the court’s calendar. Arbitration, on the other hand, provides a more flexible approach. First, the parties can agree up front where to conduct the arbitration. The race to the courthouse can no longer play a part in the decision on how to resolve the dispute.

In addition, the parties have the opportunity to decide when the arbitration will be conducted. They can more easily accommodate their witnesses’ schedules, including those employee-witnesses who also are involved in conducting the normal business of the client. The schedules of the attorneys also can be taken into account.[1]

Moreover, the parties can define what claims will and will not be arbitrated and how that arbitration will be handled. For example, the parties can agree not to permit class action or multi-party arbitrations, see AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), including those where the claim is one for violation of the federal antitrust laws. American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2103). They also can specifically structure the discovery they want.

Finally, in addition to high low agreements, the parties can agree to a “baseball arbitration.” See JAMS Rules, Rule 33 (also called a “final offer” option). Under this approach, the award will be either the number demanded by the plaintiff or the number offered by the defendant. If the arbitrator is not informed of the two numbers, the award will be entered, but modified to represent the number closest to the arbitrator’s award. JAMS Rules, Rule 33(c). This approach lets the contracting parties cap their exposure and thereby add a measure of predictability to their business relationship.

4. Privacy

Arbitration is private. Unlike a complaint filed in the clerk’s office, the public is not generally made aware of the dispute. Thus, unless leaked to the press, the allegations of the parties to the arbitration as well as its resolution remain outside of the public eye. 

Similarly, to the extent discovery is permitted, depositions and subsequent testimony do not become a matter of public record. In addition, the public is not invited to attend the arbitration. The ability to privately resolve disputes outside the public eye, along with the protections afforded by the absence of bad publicity stemming only from the initial allegations of one party may be a significant factor in deciding upon arbitration. 

B. Potential Disadvantages of Arbitration

Although there are many benefits to arbitration, it is not without its disadvantages. These include the following, some of which more negatively impact defendants than claimants.

1. Enforcing the Arbitration Agreement May Be Costly

While there are cost-saving benefits to arbitration, the case has to get to arbitration before those benefits can be realized. Doing so may be costly and time consuming, thereby eliminating two of the advantages arbitration initially has to offer. 

Notwithstanding having entered an arbitration agreement on the front end of the relationship, the party with whom your client is having the dispute may nevertheless initiate a lawsuit in its local court. Getting that dispute to arbitration, however, may take an investment in both time and money. The Federal Arbitration Act “was enacted in . . . response to widespread judicial hostility to arbitration agreements.” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011); see also Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, 109 S. Ct. 1248, 1255 (1989) (stating that “[t]he FAA was designed ‘to overrule the judiciary’s long-standing hostility to enforce agreements to arbitrate’”) (quoting Dean Witter Reynolds, Inc. v. Byrd, 105 S. Ct 1238, 1241—1242 (1986)). It is not surprising to find that this hostility still exists, particularly where an individual consumer may be involved in a dispute with a national or multi-national corporation, see, e.g. AT&T Mobility LLC v. Concepcion, supra, or where a local plaintiff has brought suit against a foreign defendant. Home cooking is still alive and well in many jurisdictions. Litigation over whether there is a valid and enforceable arbitration agreement, as well as its scope, seemingly borders on the routine. Given the pace or backlog of some courts, resolution of the threshold question of whether the dispute must be arbitrated can take years to resolve. See Burton’s Pharmacy, Inc. et al. v. CVS Caremark Corp. 1:11—cv—0002 (where the Complaint was filed on January 2, 2011, and the motion to compel arbitration remains pending as of this writing).

2. Limited Discovery

Knowledge is power. If discovery is limited, the ability to fully assess the strength’s and weaknesses of the client’s case is diminished. Memories fade, and company witnesses may recall information in manner that reflects well on them as well as the company, but may not be entirely accurate. There is some truth to the belief that some of the most important evidence — both good and bad — is contained in the files of the adversary. It is in your client’s best interest to know both the favorable and unfavorable information. Whether that information can be accessed, however, is open to debate in an arbitration with limited discovery. 

3. Limited Applicability of the Rules of Evidence

Evidentiary rules exist for a reason. They are designed to weed out reliable information from unreliable information. These limitations often favor defendants in civil litigation. Arbitrators, however, are not bound by the rules of evidence. See JAMS Rules, Rule 22(d) (stating that “[s]trict conformity to the rules of evidence is not required”); AAA Commercial Arbitration Rules, Rule 34(a) (stating that “[c]onformity to legal rules of evidence shall not be necessary”). Arbitrators under some procedures may permit witness statements even where no cross-examination has occurred or will occur. See JAMS Rules, Rule 22(e) (providing that “[t]he Arbitrator may in his or her discretion consider witness affidavits or other recorded testimony even if the other Parties have not had the opportunity to cross-examine, but will give that evidence only such weight as he or she deems appropriate”). Moreover, even if a valid objection is made and sustained, the offending evidence already has been heard. We all know that there is no way to unring the bell, so the impact of that evidence is simply unknown.

4. There Is No Right to A Dispositive Motion

One of the most effective tools available to a defendant is a summary judgment motion. Summary judgment is also a cost effective mechanism, allowing the parties to forego the time and expense of a hearing. Dispositive motions, however, are not permitted as a matter of right in arbitrations. See AAA Commercial Rules, Rule 33 (stating that “[t]he arbitrator may allow the filing of . . . a dispositive motion only if the arbitrator determines that the moving party has shown that the motion is likely to succeed and dispose of or narrow the issues in the case”); JAMS Rules, Rule 18 (stating that “[t]he Arbitrator may permit any Party to file a Motion for Summary Disposition of a particular claim or issue, either by agreement of all interested Parties or at the request of one Party, provided other interested Parties have reasonable notice to respond to the request”). 

There is also a built-in disincentive toward granting dispositive motions. Arbitrators are paid by the hour. Disposing of a case early, therefore, has a direct impact on the fess of the arbitrator. Moreover, as noted above, some organizations charge based on a percentage of the fee earned by the arbitrator. Thus, permitting the filing of dispositive motions, much less granting them, may not be in the best interest of the arbitrator or his or her organization.

5. Victory v. Compromise

The inability to bring forward a dispositive motion plays into the notion that another name for arbitration is compromise. Those with claims of little merit may seek refuge in the low cost, speedy arbitration that will ultimately provide some reward at the end of the day. 

The view that arbitrators merely “split the baby” finds support in the rules of some of the major arbitration organizations. JAMS provides that “[i]n determining the merits of the dispute, the Arbitrator shall be guided by the rules of law agreed upon by the parties. In the absence of such agreement, the Arbitrator shall be guided by the rules of law and equity that he or she deems to be most appropriate.” JAMS Rules, Rule 24(c) (emphasis added). The American Arbitration Association provides that “[t]he Arbitrator may grant any remedy or relief that the arbitrator deems just and equitable within the scope of the agreement of the parties . . . .” AAA Commercial Arbitration Rules, Rule 47;  see also JAMS Rules, Rule 24(c) (stating in part that “[t]he Arbitrator may grant any remedy or relief that is just and equitable and within the scope of the Parties’ agreement”). In some circumstances, a compromise result may leave both parties dissatisfied.

6. Limited Appeal Rights

Court must confirm an arbitration award unless it was procured by “corruption,” “fraud,” “undue means” or where the arbitrators were guilty of misconduct or “exceeded their powers.” 9 U.S.C. § 10. The award also may be modified or corrected

(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.

(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.

(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.

The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.

9 U.S.C. 11. Moreover, unlike most matters for arbitration, the parties cannot contract for more robust appellate review. Hall Street Assocs. L.L.C. v. Mattel, Inc., 522 U.S. 576 (2008).

The ability to have a decision reviewed on appeal is of significant value to both parties. Parties certainly structure their relationship with an understanding of the applicable legal principles that will govern going forward. If those legal principles are misunderstood or misapplied, the nature of the relationship is changed. The inability to have appellate review, therefore, is of consequence. 

C. Conclusion

Arbitration is a tried and true alternate dispute resolution technique. It has the potential to provide for the swift and cost efficient resolution of claims. It is not, however, necessarily the best method for resolving disputes or the best method for resolving every dispute. Rather, before deciding to recommend to your client to use or enter arbitration agreements at the beginning of a relationship, or recommending that a dispute not currently subject to arbitration be arbitrated, the advantages and disadvantages of arbitration need to be considered and weighed. One size simply does not fill all litigants.

* This article was originally published in the October 2015 issue of the IADC Business Litigation Committee Newsletter.


[1] This type of flexibility also has its drawbacks. Gaps in the presentation of evidence allows for the loss of momentum in the presentation of the case. The story gets disjointed, and the fact finder may lose an important thread. While note-taking is important, it cannot capture all of the nuances that creep in and are built upon when the presentation of evidence is uninterrupted.

November 2, 2015 Jonathan A. Berkelhammer
Posted in  News