For years companies have made mandatory pre-dispute arbitration a boilerplate provision in all contracts, but they are now rethinking the use of mandatory arbitration in business-to-business, consumer class action and employment cases.
The reason: An increase in discovery, motions and appeals in arbitration practice has caused arbitration to lose its main attractions – speed, cost and finality.
“The reality is that arbitration is becoming more and more like litigation,” said Thomas Stipanowich, a law professor at Pepperdine Law School in Malibu, Calif., and expert on arbitration.
At the recent annual meeting of the International Institute for Conflict Prevention and Resolution, one member said “trial lawyers have hijacked arbitration.”
As a result, a growing number of companies are questioning whether arbitration is the most cost-effective way to resolve disputes in all cases.
“Corporate counsel are looking at arbitration clauses with more suspicion than they did previously,” said Joseph Wargo, a commercial litigator and partner with Wargo & French in Atlanta.
Added corporate litigator Greg Curtner: “Quite a number of companies have found arbitration to be a disappointment. Either they have modified their approach to it or have gone away from it entirely.”
Many law firms got into the arbitration business as the industry expanded and have influenced the way arbitration has developed.
“You get a lot of lawyers who say arbitration is just like litigation, but instead of doing it in front of a judge, you’re in front of three arbitrators. If lawyers on both sides think that way, what is their incentive to streamline the process?” said Helena Tavares Erickson, senior vice president of the International Institute for Conflict Prevention and Resolution.

‘Lesser of two evils’

Charles Morgan, former general counsel of BellSouth and currently managing director of FTI Consulting, said “most general counsel today would tell you arbitration is the lesser of two evils – not as bad as litigation, but still pretty unsatisfactory.”
The increase in procedures is one unwelcome change.
For example, the Federal Arbitration Act is much longer than it used to be and now addresses supervised discovery, said Stipanowich.
Additionally, the American Arbitration Association, said Wargo, has adopted rules that “make companies jump through more hoops in order to get a resolution,” particularly in consumer class action and employment arbitration proceedings.
The proliferation of motions practice – particularly on whether the arbitration clause should apply – also drives up costs.
Others complain that because arbitrators are paid by the hour, they are not inclined to resolve disputes quickly.
“Sometimes you get a panel of three arbitrators and they don’t have a whole lot else to do and they’re getting paid a pretty good hourly rate. They’ll ask both sides to waive the time limit, and then it’s off to the races,” said Curtner.
Some lawyers say the quality of arbitrators is going downhill.
“Frankly it’s becoming harder and harder to get qualified arbitrators to handle disputes. Anybody can hang out a shingle,” said Wargo, adding he prefers using a lawyer in the community as an arbitrator even if he foregoes a panel of arbitrators, because “I know what I’m getting.”
The finality of arbitration has been much-lauded, but the notion that arbitration awards are iron-clad and can’t be undone is no longer the case.
In some states, like New York and California, you have a greater chance of getting an award overturned, said Stipanowich.
In fact, a “minor cottage industry had developed in looking for conflicts of interest as a grounds for overturning an arbitrator’s award.”
The U.S. Supreme Court will decide this term whether the Federal Arbitration Act supersedes parties’ ability to elect standards for reviewing arbitration awards. Hall Street Associates v. Mattel, No. 06-989.

Changed landscape

A ruling by the California Supreme Court in 2000 has changed the landscape significantly in the way companies approach arbitration in the employment context, said Douglas Farmer, a labor and employment attorney and managing shareholder of the San Francisco office of Ogletree Deakins.
The court said employers must pick up the cost of arbitration beyond what the employee would have paid in court, regardless of outcome. Armendarez v. Foundation Health Psychare Services, Inc., 24 Cal. 4th 83 (2000).
Employees are also entitled to conduct “reasonable discovery” in arbitration, which can increase the cost, and it is no longer legal in California to exclude punitives from an arbitration damages award, Farmer said.
“What that has done is made employers think very carefully about imposing mandatory arbitration on employees,” he said, noting that companies are doing this on a case-by-case basis.
The two main considerations in deciding whether to impose arbitration clauses in employment contracts is jurisdiction and type of claims.
Employers in plaintiff-friendly jurisdictions may choose the cost of arbitration over rolling the dice with a jury.
“If you do business in a jurisdiction where cases are routinely resolved in favor of the employer, you would perhaps be better off from a financial perspective going forward with a case in court,” said Farmer.