Opinion

Don’t Understate the Advantages of Arbitration

Don’t Understate the Advantages of Arbitration

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“Left to pursue individual claims only a lunatic or a fanatic sues for $30,” Justice Stephen Breyer wrote in his dissent, when in 2011 the Supreme Court allowed an AT&T mandatory arbitration clause to preclude a consumer class action.

Fix San Diego Opinion Logo Shortly after the decision, the Arbitration Fairness Act was introduced in the Senate by Sen. Al Franken (D-Minn.). If passed, the act would eliminate forced arbitration clauses in employment and consumer contracts.

The shift to private adjudication is no doubt one of most dramatic and controversial shifts in the legal system. Across all industries and professions, mandatory pre-dispute arbitrations clauses — in which parties agree to have a panel of private arbitrators rather than a court decide disputes that may arise between them — have become a common feature of employment contracts.

Workers regularly sign away their right to take their employers to court for wrongful termination, discrimination, retaliation and wage-and-hour violations. Pre-dispute arbitration clauses are similarly pervasive in consumer contracts dealing with everything from electronics or cars to credit card and phone providers.

Critics of the shift to mandatory pre-dispute arbitration argue persuasively that arbitration may favor big business. Corporations and employers, after all, are often on the favorable end of a power imbalance. Arbitrators may favor them because they are repeat players, more sophisticated in how arbitration works, and responsible for ensuring the arbitrators are appointed to decide future disputes. And the shift to confidential and individualized proceedings may undermine the development of a robust body of law on important social issues.

But while arbitration is imperfect, the real question is how it fares compared with the realities — rather than our romantic ideals — of the courtroom.

Civil litigation is heavily backlogged. Arbitration can usually be scheduled much sooner than a trial and will normally be speedier and cheaper. Agreeing to arbitrate a statutory claim is not the same as forgoing substantive legal rights — rather it allows the parties to agree on a different forum.

Indeed, one of the basic requirements on which courts insist for an arbitration agreement to be enforced is the availability of all remedies that would otherwise be awarded in court.

Much of the arbitration hearings resemble a trial, with opening statements, witness examination and introduction of evidence, but there are important procedural differences.

The rules of evidence are relaxed and the formalities are reduced; some would say this may be a positive thing in light of the feeling of arbitrariness and lack of control litigants frequently experience when represented by lawyers in a formal adversarial trial. In its looser formalities, arbitration is not much different than other outside-of-the-courtroom negotiations and hearings.

Public agencies themselves, like the Equal Employment Opportunity Commission (EEOC), use informal dispute resolution methods to help private parties stay out of court. At the same time, even when arbitration is mandated by contract between parties, these same governmental bodies like the EEOC retain their independent investigatory authority and can bring the case before the court even as the private parties proceed with an arbitrator.

From the macro-perspective, arbitration means fewer written opinions and less public knowledge about market disputes, hindering the development of a robust body of case law about important policy issues such as consumer protection and employment discrimination. And yet, these very same concerns apply to settlements — the way the vast majority of cases actually end — which result in no decision but are intensely encouraged by the courts.

While the empirical evidence is still rather thin, it is questionable whether plaintiffs in fact fare better in court.

The conventional wisdom about arbitration is that we are likely to see more compromise decisions, in which plaintiffs win something as opposed to the all-or-nothing feel of court trial.

In other words, plaintiffs are more likely to win but will receive fewer straight-up jackpots in the form of large punitive damages that juries are known to award.

A study conducted by Ernst & Young found that consumers won more frequently in arbitration compared with lawsuits.

Another study in the employment context by the National Work Rights Institute found that the employee win rate was 20 percent higher in arbitration than in court.

In a third study, Cornell law professor Theodore Eisenberg compared the outcomes in court and arbitration in employment cases, finding that the win rates and levels of awards are statistically indistinguishable.

Over the years, the courts have developed a set of rules to help ensure arbitration provides a fair forum — especially in the context of imbalanced parties, such as business-consumer; landlord-tenant; employer-employer.

Agreements must ensure the selection of a neutral arbitrator (typically both sides are allowed one preemptory challenge as well as unlimited challenges for cause), a certain level of adequate discovery (even if less than the trial level), fair cost-sharing (in which the stronger party covers all or most costs) and the requirement of a written award.

These safeguards are important and we should continue debating and learning about what works best in our complex public-private systems of dispute resolution.

Arbitration reform could help solidify these court-developed safeguards and could bring back class claims to the arbitration path. But the advantages of arbitration should not be understated.

Orly Lobel is the Herzog Endowed Scholar and Professor of Law at the University of San Diego. She teaches and writes in the areas of employment law, intellectual property law, regulatory and administrative law, torts, behavioral economics, health policy, consumer law and trade secrets. Her current research focuses on innovation policy and intellectual property.

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17 comments
John Ross
John Ross

Companies requiring arbitration select and compensate the arbitrators. Arbitrators who find for customers are not selected for future arbitrations while those who find for companies continue to receive business and compensation. In what way could this ever be considered fair or even-handed?

John Ross
John Ross subscribermember

Companies requiring arbitration select and compensate the arbitrators. Arbitrators who find for customers are not selected for future arbitrations while those who find for companies continue to receive business and compensation. In what way could this ever be considered fair or even-handed?

Kelly Abbott
Kelly Abbott

Wait a sec. I thought you said that consumers lose 99.8% of cases in arbitration. Are you also saying trials outcomes are no different?

Kelly Abbott
Kelly Abbott contributormember

Wait a sec. I thought you said that consumers lose 99.8% of cases in arbitration. Are you also saying trials outcomes are no different?

William Richter, Jr.
William Richter, Jr.

The operative word here is "forced" as in "no choice." You can argue economics if you like but the simple fact is that there is no choice. This is just an end run around juries. And good luck asking to not have an arbitration clause.

William Richter, Jr.
William Richter, Jr. subscriber

The operative word here is "forced" as in "no choice." You can argue economics if you like but the simple fact is that there is no choice. This is just an end run around juries. And good luck asking to not have an arbitration clause.

Bill Bradshaw
Bill Bradshaw

The great advantage of arbitration is that it doesn't make class action lawyers rich while the plaintiffs get a check for $20. The bar hates this and will tell any lie necessary to discredit arbitration, e.g., that it's rigged against plaintiffs. The reality is that it's much quicker, much cheaper, and usually results in a satisfactory decision or settlement, unlike the spectacle of occasional multi-million dollar jury awards that come after years of litigation (and 30-50% for the lawyers).

Bill Bradshaw
Bill Bradshaw subscribermember

The great advantage of arbitration is that it doesn't make class action lawyers rich while the plaintiffs get a check for $20. The bar hates this and will tell any lie necessary to discredit arbitration, e.g., that it's rigged against plaintiffs. The reality is that it's much quicker, much cheaper, and usually results in a satisfactory decision or settlement, unlike the spectacle of occasional multi-million dollar jury awards that come after years of litigation (and 30-50% for the lawyers).

Maura Larkins
Maura Larkins

Wow. I just clicked on the link above provided by Mr. Richter on the Ernst & Young report. The Center for Responsible Lending tore the 2005 report to shreds. Why would a law professor use it to support her argument? Have no other studies been done? I personally believe that a settlement is an ideal outcome for a court case, but not so much for an arbitration case. The difference is that in court the parties are facing a public airing of facts and so the side that wants the truth hidden is more likely to settle. Arbitration can be a war of attrition with the stronger party having a huge advantage. A court case is often a war of attrition, too, but the sunlight of public scrutiny offers protection to the little guy in court.

Maura Larkins
Maura Larkins

Mr. Richter is right to question the data Ms. Lobel used to support her argument. The Ernst & Young report was based on a very small sample of cases most often involving credit card debt. We know that credit companies are happy to consolidate and reorganize debt at the drop of a hat because they want customers to continue buying and taking out loans. I just skimmed the report, but the cases listed on page 17 seemed very interesting. Clearly, we do need to dig deeper. I applaud Ms. Lobel for pointing out that arbitration makes the whole process more secretive, "hindering the development of a robust body of case law about important policy issues such as consumer protection and employment discrimination."

Maura Larkins
Maura Larkins subscriber

Wow. I just clicked on the link above provided by Mr. Richter on the Ernst & Young report. The Center for Responsible Lending tore the 2005 report to shreds. Why would a law professor use it to support her argument? Have no other studies been done? I personally believe that a settlement is an ideal outcome for a court case, but not so much for an arbitration case. The difference is that in court the parties are facing a public airing of facts and so the side that wants the truth hidden is more likely to settle. Arbitration can be a war of attrition with the stronger party having a huge advantage. A court case is often a war of attrition, too, but the sunlight of public scrutiny offers protection to the little guy in court.

Maura Larkins
Maura Larkins subscriber

Mr. Richter is right to question the data Ms. Lobel used to support her argument. The Ernst & Young report was based on a very small sample of cases most often involving credit card debt. We know that credit companies are happy to consolidate and reorganize debt at the drop of a hat because they want customers to continue buying and taking out loans. I just skimmed the report, but the cases listed on page 17 seemed very interesting. Clearly, we do need to dig deeper. I applaud Ms. Lobel for pointing out that arbitration makes the whole process more secretive, "hindering the development of a robust body of case law about important policy issues such as consumer protection and employment discrimination."

Chris Brewster
Chris Brewster

I concur. What I do not understand about this argument is this: If arbitration is better for the consumer and the merchant, why not make it an option? If they both prefer it, fine. It is the abridgement of the erstwhile right to pursue a claim in our judicial branch of government that irks.

Chris Brewster
Chris Brewster subscribermember

I concur. What I do not understand about this argument is this: If arbitration is better for the consumer and the merchant, why not make it an option? If they both prefer it, fine. It is the abridgement of the erstwhile right to pursue a claim in our judicial branch of government that irks.