Badger: To arbitrate or litigate, that is the question

In my world of dispute resolution, one of the most basic questions is whether a particular business dispute should be resolved in arbitration or in a court of law. Like many of the questions I am frequently asked by clients, there is no simple answer that fits all occasions and situations.

Badger

This first installment of a two-part column outlines the principal considerations in determining what disputes are best suited to arbitration. The second part, coming in the Jan. 16 issue of Indiana Lawyer, applies these general principles to provide concrete guidance in the use of arbitration to avoid consumer class actions and in other “bet-the-company” commercial disputes.

The pros and cons of arbitration

Arbitration is sometimes touted as a potent remedy for the expense, delay and inherent uncertainty of litigation. Congress passed the Federal Arbitration Act in 1925 to facilitate arbitration as an alternative to litigation and to overcome judicial resistance to enforcing private agreements to arbitrate disputes. The Federal Arbitration Act reflects a national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts.

Arbitration, while useful, falls well short of being a cure-all. Arbitrators wield broad authority and discretion that is virtually unreviewable by a court of law. Matters such as the scope of discovery, amendment of claims and pre-hearing motion practice lie within the virtually limitless discretion of arbitrators. Furthermore, while parties to arbitration agreements may expressly confine the authority and discretion of arbitrators in arbitration agreements, it is virtually impossible to anticipate all issues or fully counter arbitrators’ wide discretion in both procedural and substantive matters.

The primary factors that should be considered in determining whether to favor arbitration are identified below. Each consideration may weigh for or against the use of arbitration in different situations.

Privacy. Arbitration is a strictly private process. Written submissions and proceedings in arbitration are closed to the public. Litigation in court is quite the opposite. All filings and proceedings in court are presumptively open to the public. Although protective orders are routine in commercial litigation, courts generally limit their protections to the use of information in discovery and will only rarely, and for the most compelling reasons, seal filings and proceedings from public view.

The privacy of arbitration is often advantageous, but can put an aggrieved claimant at a disadvantage. Negative publicity and unwanted attention of competitors and customers to grievances in a court of law may compel some businesses to compromise. Before agreeing to mandatory arbitration, businesses entering into contracts with well-known or publicity-sensitive companies should consider how publicity could provide them leverage in a future dispute.

Industry Expertise. Arbitration offers the parties the opportunity to specify the qualifications of the arbitrator(s) who will decide their dispute. Such qualifications may include relevant industry or technical knowledge that a judge, randomly assigned in court, is unlikely to have. When a dispute is likely to involve complex technical issues or an understanding of a particular industry or area of law or finance, then arbitration may advantageously bring such expertise to bear.

Finality. Unless otherwise specified in the parties’ arbitration agreement, an arbitrator’s decision is virtually unreviewable for errors of fact or law. Generally, no appeal is available from arbitrators’ decisions. The finality of arbitration is advantageous when a prompt and certain outcome, even if unfavorable, is preferable to an extended period of uncertainty and delay. However, when the stakes are very high, the unavailability of any appeal or substantive review leaves the parties without recourse if the arbitrator renders an adverse decision.

Well-defined procedures. Courts follow well-defined and predictable pre-trial and trial procedures and a well-developed body of law interpreting those procedures. Those procedures include the opportunity to test a claim on the merits without the time, expense and risk of an evidentiary hearing on the merits. Motions to dismiss and summary judgment provide the means by which disputes may be resolved completely, or at least substantially narrowed, through a motion to the court rather than a trial. In contrast, procedures in arbitration are not as specific and are subject to broad discretion of arbitrators. Dispositive motions in arbitration are less common and less likely to be successful than in a court of law. Consequently, arbitration is more likely to require the parties’ personnel to appear and testify in person at a hearing before the arbitrator or panel. The parties may mitigate this drawback of arbitration by specifying certain procedures, even adopting the Federal Rules of Civil Procedure, in their arbitration agreement. Yet, such rules and procedures are still subject to the broad discretion of arbitrators to apply.

No jury. Availability of a jury trial may be an advantage or disadvantage depending on a party’s perception of its case. Some claims have “jury appeal,” and some do not. Of course, juries are not available in arbitration. In court, the parties may waive their rights to a jury trial, but both sides must consent.

Expense. As a general rule, arbitration is less expensive than litigation. However, there are exceptions. Arbitration has certain additional costs that can come as an unwelcome surprise to business people who routinely include arbitration clauses in contracts. Courts are, of course, public institutions supported by taxpayers. In contrast, arbitrators must be compensated for their services by the parties. Consequently, in addition to their own attorney fees, the parties must pay the hourly fees of the arbitrator or multiple members of an arbitration panel. The arbitrators’ hourly fees can exceed the hourly fees of the lawyers. On top of the arbitrators’ fees, the parties may separately incur fees to the organization administering the arbitration. For example, in commercial matters in which $1 million to $5 million is in issue, the American Arbitration Association’s fee schedule requires payment of $12,450 in fees to the organization in addition to the arbitrators’ compensation.

“Baby-splitting.” There is more myth than fact to support the stereotype that arbitrators are “baby-splitters” who strive to reach outcomes somewhere between the positions advocated by the parties. The empirical research fails to show that resolving a dispute through arbitration compared to trial by judge or jury has any significant bias or effect on the ultimate outcomes of disputes. Consequently, “baby-splitting” is not a factor that should be considered when deciding whether or not to engage in arbitration.

In sum, arbitration offers some distinct advantages over litigation in court. However, arbitration is not without its drawbacks. Business owners and managers should confer with legal counsel and carefully consider the type of litigation risks they face and the advantages and disadvantages of arbitration in determining whether it is best-suited for their needs.•

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Mr. Badger is a member of Benesch Friedlander Coplan & Aronoff LLP’s Litigation Practice Group in Indianapolis and represents business clients in commercial litigation, arbitration and appeals. The opinions expressed are those of the author.