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Ten Things about Litigation that Arbitration Critics Won’t Tell You

by George H. Friedman* 

[republished from an earlier post]

The recent uproar over General Mills’ decision to adopt and later retract a new policy by which consumers, by engaging in activities such as downloading a recipe, or participating in a contest, or “liking” the firm on Facebook, would unwittingly be agreeing to arbitrate, has in my opinion caused some confusion over a crucial point: arbitration, as compared to litigation – especially class action litigation – is a far superior means of resolving disputes.  I touched on this briefly in my last blog post.  I thought I would expound on this topic, using the “Ten Things…Won’t Tell You” vehicle used by MarketWatch.com.

To be clear, the core issue in the General Mills flap was not whether arbitration is bad or unfair for consumers. The main problem was the lack of notice about the predispute arbitration agreement (“PDAA”), or as I described it, the “Hidden Arbitration Clause Trick.”  A related issue was whether a business should be able to require a consumer to arbitrate as a condition of doing business.  My previously expressed view is, “No, they should not.” This blog post addresses my concern that the controversy spurred by the General Mills problem has created a false impression that arbitration is bad for consumers and litigation is the way to go. With apologies to MarketWatch.com, I discuss below ten things about litigation that critics of arbitration won’t tell you.

1.  Actually, Litigation is Pretty Awful

Critics of arbitration like to point out what’s not good about arbitration, but you rarely hear them address the flip side of that coin: the downside of litigation.  Succinctly stated, litigation stinks.  It is costly, time consuming, and draining.  It almost always forces a consumer to travel somewhere to do a litigation.  It’s not so friendly for small businesses, either.  In many jurisdictions, a corporate party is required to retain counsel.  Arbitration tends to be the polar opposite, fast, economical, and fair.

2.  We like to Denigrate Arbitration, but it’s Actually Pretty Fair 

In extolling the upside of litigation, arbitration’s critics often paint arbitration as a form of second-class justice.  This is simply not the case.  Says who? Besides me, the Supreme Court says so.  In overturning its own anti-arbitration ruling in Wilko v. Swan[1]issued 36 years earlier, the Court in Rodriguez v. Shearson/American Express, Inc.[2]said “To the extent that Wilko rested on suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants, it has fallen far out of step with our current strong endorsement of the federal statutes favoring this method of resolving disputes. Once the outmoded presumption of disfavoring arbitration proceedings is set to one side, it becomes clear that the right to select the judicial forum and the wider choice of courts are not such essential features of the Securities Act…”  Two years later in Gilmer v. Interstate/Johnson Lane Corp.[3] the Court evaluated whether arbitration was a fair process, and concluded it was.  In ordering arbitration of a claim involving the Age Discrimination in Employment Act, the Court reviews at length the arbitration process, and concludes that it is “fair” (fair process, right to counsel, right to pick arbitrators, fair panel, fair amount of discovery, written award).

And where an arbitration program runs afoul of the fairness standards established by the Court, the Code of Ethics for Arbitrators in Commercial Disputes, and the Consumer Due Process Protocol, the courts will not enforce the arbitration agreement.  See for example, Hooters v. Phillips,[4] where the U.S. Court of Appeals for the Fourth Circuit held “the promulgation of so many biased rules – especially the scheme whereby one party to the proceeding so controls the arbitral panel — breaches the contract entered into by the parties. The parties agreed to submit their claims to arbitration– a system whereby disputes are fairly resolved by an impartial third party. Hooters by contract took on the obligation of establishing such a system. By creating a sham system unworthy even of the name of arbitration, Hooters completely failed in performing its contractual duty.”  In short, the arbitration process is fair and is not an inferior form of justice.

3. You May Never Get Your Day in Court

Arbitration’s detractors like to tout the benefits of a trial by jury, and criticize arbitration for denying consumers their Seventh Amendment right to trial.  But is that so?  The right to a jury trial can be waived, which is what happens when there is clear, mutually-agreed-upon agreement to arbitrate. Also, almost 100% of civil lawsuits never go to trial. That’s right, between motions to dismiss, summary judgments, settlements, and other events that happen in court cases, almost no cases go to trial.  Don’t take my word for it.  The American Bar Association conducted a major study of this issue.  How did it come out?  Here’s a spoiler alert: the title of the article describing the results is The Vanishing Trial.  The ABA reports that only 1.8% of civil actions actually went to trial, meaning 98.2% did not.  A later survey upped this to 98.8%. In state courts, the National Center for State Courts reports that civil jury trials now represent 0.6% of all dispositions.  So much for your day in court.  By contrast, arbitrators are trained to allow the parties to present their case, and some arbitration rules[5] severely limit motions to dismiss.

4.  If You Manage to Get Your Day in Court, it’s going to Take Forever

The anti-arbitration folks tend to gloss over this inconvenient truth: crowded court calendars, limited court resources, and the preference given to criminal matters, means it takes a very long time for a civil action to be concluded if the parties defy the odds and actually get a trial.  According to the U.S. Bureau of Justice Statistics, the typical processing time averages at least 2 years; many cases take much longer.  Contrast that with arbitration, where the typical processing time is measured in months, not years.

5.  Be Prepared to Disrupt Your Life to Litigate

In promoting the upsides of litigation, arbitration deniers usually fail to mention that, generally speaking, the consumer often has to schlep (Yiddish* for lug or drag) themselves and perhaps their counsel to a hearing, even if it’s relatively close by. This can be both expensive and disruptive to both lives and businesses, as I’ve previously blogged.  In arbitration, the parties can provide for video or telephonic hearings, and sometimes, the arbitrator can determine to do so over a party’s objection.  Most arbitration providers subscribe to the Consumer Due Process Protocol which provides in Principle 12:

“All parties are entitled to a fundamentally-fair arbitration hearing. This requires adequate notice of hearings and an opportunity to be heard and to present relevant evidence to impartial decision-makers. In some cases, such as some small claims, the requirement of fundamental fairness may be met by hearings conducted by electronic or telephonic means or by a submission of documents. However, the Neutral should have discretionary authority to require a face-to-face hearing upon the request of a party.”

A good model is that offered by Arbitration Resolution Services (“ARS”), on whose Board I sit.  The ARS model is cloud-based, with the entire arbitration or mediation process being conducted online via the Web. The ARS rules governing consumer disputes assume that cases will be decided by a telephonic or video hearing, but if a party wants to have a hearing, they can require one.

6.  Class Actions Benefit the Lawyers, Not Individual Consumers 

Those opposed to arbitration often note that many PDAAs expressly bar individual consumers from participating in a class action, which they view as a bad thing.  First, we should take note of the fact that the United States Supreme Court says class action waivers are OK.[6]  Second, class action litigation is not the consumer’s best friend, with the typical payout being cents on the dollar or a discount coupon.[7]  In arbitration, parties have the opportunity to recover their entire loss. The attorneys, on the other hand, do quite well[8] in class action litigation.

7.  Discovery in Court is Awful, and you really can get Adequate Discovery in Arbitration

An often heard criticism of arbitration is that the parties are unable to obtain discovery in arbitration.  A closer examination of the process shows that, consistent with the expedited nature of arbitration, there is indeed some level of discovery in arbitration.  First, the discovery process in court (essentially, prehearing exchanges of evidence as well as depositions) is a grueling, expensive, long process.  It becomes really expensive when one considers the cost of attorneys and court reporters who attend depositions, and the expense of producing documents.  The latter has two costs: the actual cost to produce and the hidden cost of disruptions to business.  Arbitration strikes a nice balance with some level of discovery written into the rules, along with clear notice that full-blown, litigation-like discovery is not countenanced. And arbitrators are authorized to resolve discovery disputes that arise between the parties. In short, discovery in arbitration is available to the parties through: 1) rule-based exchange of documents and/or information; 2) arbitrator-issued discovery directives; and 3) enforcement of orders issued by the arbitrators to parties (for example, arbitrators can preclude defenses or assume the validity of issues when a party disobeys a discovery order).

8.  Litigation Really Costs much more than Arbitration 

Those critical of arbitration like to point out that arbitration fees can be as much as or more than court filing fees, and that as a result, it’s not such an economical process.  This would actually be true if: 1) time had no value and 2) lawyers didn’t charge for all the work they put into motion practice, pretrial discovery (and the attendant costs and expenses), and appeals. I’ve already addressed the first two points.  On the latter, the Federal Arbitration Act, 9 U.S.C §§ 1 et seq., as well as state arbitration laws, provide for very limited court review of arbitration decisions, rendering arbitration awards essentially “final and binding.” Contrast this with litigation, with the opportunity for extensive appeals.  So, factoring in the direct and indirect costs of litigation, arbitration is much more economical.

9. We like to say Arbitrators Tend to Split the Baby in Half, but that’s Not Really So

Arbitration critics frequently say that arbitration is not necessary, because in the end arbitrators will end up splitting the baby. To that I respond “King Solomon didn’t split the baby and neither do arbitrators.”  Research shows that arbitrators are actually quite decisive, tending to award in favor of one party or another.  Moreover, as arbitration is forum of equity, arbitrators can award relief to a consumer, not because they proved the other side was legally liable, but rather as a matter of equity.  Courts, in contrast, are generally constrained to rule as a matter of law.

10.  The Strict Rules of Evidence Don’t Really Make Litigation Better than Arbitration

The reality is that, while the strict rules of evidence need not apply in arbitration, the process is not a free-for-all.  In fact, arbitrators are generally more sophisticated than the average juror; most are highly educated, experienced and successful, and at some arbitration fora such as ARS, arbitrators must also be an attorney. When presented with news clippings or otherwise immaterial evidence, arbitrators generally reject them.  On the other hand, arbitration rules and laws require arbitrators to accept relevant and material evidence.  This strikes a nice balance: worthless evidence can be rejected, but relevant, material evidence will not be precluded because of an evidentiary technicality.

Conclusion

As I’ve previously opined, arbitration must rest on a mutual agreement to arbitrate that is clear and unequivocal.  If so, the benefits of arbitration and negatives of litigation are many and real, as this blog demonstrates.  That great baseball philosopher, Casey Stengel, was prone to make sometimes unbelievable statements.  When confronted by a skeptic, he was known to reply, “No, it’s the truth.  You can look it up.”  With apologies to Casey, keep this blog post handy.  When you someone questions the above downsides of litigation, waive this article in front of the offender and say, “No, it’s true.  Here, you can look it up!”


* Some of the points made here were contained in an article I co-authored, titled Ten Truisms About SRO Securities Arbitration – That Aren’t True, Securities Arbitration 2001, p. 123 (Practicing Law Institute, Pub.; D. Robbins, ed.).

[1] 346 U.S. 427 (1953), available at http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?friend=kmarx&navby=volpage&court=us&vol=346&page=436 <visited 5/4/2014>.

[2] 490 U.S. 77 (1989), available at http://www.law.cornell.edu/supremecourt/text/490/477 <visited 5/4/2014>.

 [3] 500 U.S. 20 (1991), available at http://supreme.justia.com/cases/federal/us/500/20/case.html <visited 5/4/2014>.

 [4] 173 F.3d 973 (4th Cir. 1999), available http://law.justia.com/cases/federal/appellate-courts/F3/173/933/547937/ <visited 5/4/2014>.

[5] See, e.g. FINRA Rule 12504.

[6] See, e.g., AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011), available at http://www.supremecourt.gov/opinions/10pdf/09-893.pdf <visited 5/4/2014>.

[7] See, e.g., Class Action Suits Benefit Few but Attorneys, available at http://news.investors.com/ibd-editorials-perspective/022013-645120-high-court-to-decide-whether-arbitration-hurts-consumers-rights.htm?p=full <visited May 4, 2014>.

 [8] See, for example, $544.8 Million in Attorneys’ Fees Awarded in Credit Card Class Action (Jan. 17, 2014), available at http://www.lexisnexis.com/legalnewsroom/financial-fraud-law/b/blog/archive/2014/01/17/544-8-million-in-attorneys-fees-awarded-in-credit-card-class-action.aspx <visited May 4, 2014>.