Arbitration FAQs

FREQUENTLY ASKED QUESTIONS ABOUT ARBITRATION

How is arbitration different from litigation?

Arbitration is cheaper, faster and more effective than litigating in the court system, which is overburdened and is expensive and complex to navigate.  For that reason, federal law and policy have encouraged arbitration for more than 80 years, since Congress passed the Federal Arbitration Act in 1925.  Three U.S. Supreme Court Justices (Kennedy, Breyer and Ginsburg) have written opinions that endorse the benefits of arbitration.

Why do so many businesses prefer arbitration to settle disputes with their customers and employees?

Businesses, employees and consumers all benefit from arbitration.  Businesses do not gain an advantage in the form of better outcomes.  In fact, the evidence shows that plaintiffs do as well, if not better, in terms of recovering damages in arbitration.  Both parties benefit from reduced transaction costs for resolving disputes.  That means more money in plaintiffs’ pockets. 
Why are arbitration clauses often “mandatory?”    

Experience demonstrates that if both parties don’t agree to arbitration beforehand, they are very unlikely to choose it once they are locked into a dispute.  Lawyers – both plaintiffs’ lawyers and members of the defense bar – are predisposed to prefer the more adversarial court system, and both make more money when proceedings are longer and more protracted.  It is a matter of common sense:  Once the lawyers get involved, parties are not likely to agree to anything.
 
And in the context of a particular dispute, there may be a tactical incentive for one side or the other to pursue litigation.  For example, if it is a small dispute, a consumer will likely prefer the cheaper and faster advantage of arbitration.  But a business would likely feel that it would have the upper hand in court because it will be hard for the consumer to find a lawyer who will take their small case.    

Why can’t businesses provide a choice between arbitration and litigation? 

It is extremely expensive for a business to maintain two alternative systems for dispute resolution.  The duplicative administrative expenses would wipe out the cost savings of arbitration.  Remember, we are talking about businesses with tens of millions of customers and tens or hundreds of thousands of employees. 

Which is better for consumers and employees, arbitration or litigation?

Arbitration is better.  Studies show that arbitration offers either comparable or more favorable financial outcomes than litigation, but costs less and takes less time.  Consumer arbitrations before the American Arbitration Association, for example, take four to six months on average to get to an award – about one quarter of the time it takes for a civil case in federal court to reach trial.  It is also simpler and less antagonistic than litigation.  Consumers and employees achieve real recoveries in arbitration, as well.  One employee who represented himself in his arbitration in 2005 walked away with an award of over $2 million.  In another recent case, a woman in California was awarded $9 million in an arbitration against her health insurer.

What would be the impact of legislation banning pre-dispute arbitration agreements?   

The legislation under consideration would wipe out hundreds of millions of existing agreements, and would likely eliminate arbitration altogether.  Because companies cannot afford the expense of duplicative systems for their millions of customers, they would simply jettison arbitration rather than put in place structures for both litigation and arbitration.   

Most importantly, consumers and employees with individualized claims of less than $60,000—a category that includes most claims—will be left without any remedy at all.  Studies show that plaintiffs’ attorneys working on contingency generally require at least that much in potential damages before taking a case.  With only court as an option and no access to counsel, these individuals will not be able to pursue their claims.  Most consumers and employees will be worse off under this legislation.

Don’t arbitration agreements often force consumers to travel and pay high fees if they bring a case against a company?

No.  The vast majority of arbitration agreements do not impose those types of conditions.  Courts can and routinely do invalidate arbitration agreements that impose high fees or that force a consumer or employee to travel to an inconvenient location.  In fact, under many arbitration agreements, a consumer does not have to leave her home or office to attend a hearing.  Instead, if she wants, she can participate in arbitration by telephone or even by simply submitting documents.  That is one of the reasons that transaction costs are so much lower in arbitration than in litigation for both parties.

Don’t businesses usually win arbitrations?

No.  Consumers and employees do as well or better in arbitration than they do in court in similar cases.  A study by the National Workrights Institute found that employees were 20% more likely to win in arbitration than in court.  And a California study found that consumers in that state won 65.5% of arbitrations against businesses, compared to 61% of lawsuits across the nation.  Both consumers and employees have recovered sizeable awards in arbitration, as well – whether $3 million in a securities arbitration against a broker, or $4 million, including punitive damages, in a consumer arbitration against a termite company.  The reality is that both sides win in arbitration.  The outcomes of arbitration favor consumers and employees, but businesses also benefit because they do not have to go through the time and expense of court litigation. 
 
Isn’t it difficult if not impossible to appeal an arbitration decision?

Those who say that arbitration awards cannot be appealed are exaggerating what the law says.  In fact, arbitration decisions can be appealed if the arbitrator was biased, for example, or if the award exceeded the arbitrator’s power or was in “manifest disregard” of the law.  But it is true that arbitration is more final than litigation in a trial court.  That actually benefits all parties to an arbitration.  The winner – often a consumer or employee – doesn’t have to endure years of costly appeals before the judgment is paid.  For consumers and employees, that means getting their money – or being reinstated to their job – years earlier than if they were litigating in court.  And studies suggest that when court cases are appealed, businesses are far more likely to win than employees.

More importantly, courts aggressively review arbitration provisions to ensure that they afford consumers and employees a fair process.  Courts do not hesitate to strike down arbitration provisions that impose high costs; impose potentially biased arbitrators or arbitration administrators; require that arbitration take place in an inconvenient forum; limit available remedies; or provide insufficient discovery.