When signing a job contract, checking into a hotel, or signing a contract to a nursing home, the small details (usually in the middle of the paperwork) can prove the most important part of any agreement. Dispute resolution clauses are often brushed aside because, why read about unpleasant legal proceedings when compensation and benefits clauses are front and center on page 1? Arbitration agreements in contract ditch the traditional black robes and gavels of traditional court cases, in favor of a faster, more efficient resolution process decided by a private third-party. Arbitration can also lessen the role of government in private transactions.
Because of the controversy involved in clients and consumers “waiving” traditional due process, arbitration cases have proven popular in state and federal Supreme Court (SCOTUS) cases. In the next SCOTUS term (beginning in October), 4 percent of cases are slated to be about arbitration. Shockingly, this is the same percentage of SCOTUS cases devoted to intellectual property last year. Recent state high court decisions exclusively focus on arbitration cases related to nursing homes, with most upholding the enforceability of these private clauses.
But, these decisions have come with considerable pushback. A growing chorus of state and federal lawmakers have voiced disapproval with the nation’s arbitration system, claiming that rules are stacked against consumers and outcomes are tilted in the favor of corporations. Congressional efforts to repeal arbitration limits imposed by the Consumer Financial Protection Bureau and Centers for Medicare & Medicaid Services have been criticized as nixing important protections for nursing home residents.
On the surface, skeptics of private arbitration have a reasonable case. Arbitration clauses are often buried deep inside of consumer contracts, written in legalese that most customers won’t bother to read. It wouldn’t be too surprising, then, if the corporation included arbitration terms that limited consumers’ ability to get a favorable verdict in the event of an exploding cell phone or defective software. Additionally, corporations can shop around for the right arbiter, allowing for the concern that arbiters may market themselves as the most pro-corporate.
But this has an important flip side that benefits consumers. Firms undergoing arbitration typically save 60-70 percent in legal fees and discovery costs compared to going through (backlogged) state and federal courts. Wronged customers and employees needn’t keep lawyers on retainer in arbitration cases, since disputes are resolved far more quickly. And, just as increased costs for firms invariably lead to higher costs for consumers, lower costs through arbitration means potentially lower costs for consumers.
But, there is the issue of fairness. As University of North Carolina (UNC) Law Professor Mark Weidemaier points out in his review of the evidence, the data is not all that conclusive. Generally, surveys comparing outcomes in arbitration proceedings and ”comparable” court cases find that plaintiffs (ie. consumers, employees) have similar or higher win rates under arbitration. But at least in civil-rights cases, corporations have to fork over lower awards under arbitration. Arbitration proceedings, then, are not clearly stacked against the little guy.
But comparing win-rates and average awards under the two systems isn’t exactly a straightforward process. Firms opting for arbitration clauses may have completely different characteristics than firms willing to give the courts a try.
A study of telecommunication firms found that firms opting for arbiters had significantly more in-house dispute mediation resources than court-friendly firms. Arbiter-reliant firms made more use of management appeal boards and ombudsmen to ensure that employees don’t take their grievances to the private court.
This may lead to a filtering effect, where companies try to deal with valid, worrisome claims before lawyers get involved. The average arbitration case filed against an employer, then, may be less legitimate than the average court case. Plaintiffs in arbitration proceedings also tend to have lower income than plaintiffs in government courts, further confounding comparisons. Since award size seems to go hand-in-hand with income, lower awards in arbitration are not all that surprising. Finally, arbitration’s relatively speedy process means that any award based on back-pay will necessarily be smaller.
While summing up two decades’ worth of research is tricky, the basic findings are straightforward. Plaintiffs will find the win-rates favorable under an arbitration regime, but can enjoy more lucrative wins in the court system. Accounting for differences in firms, employees, and consumers would probably make arbitration look even more pro-plaintiff. And, unlike the data on outcomes, the evidence on efficiency gives arbitration the edge on time and cost savings. When considering new rules and legislation targeting arbitration, regulators and lawmakers need to consider the substantial body of research on the issue.
If employers, employees, and shoppers alike want to embrace a faster, cheaper court system that deliberates fairly, Washington shouldn’t get in the way.
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