Arbitration Redux

You may recall I wrote on the pros and cons (mostly cons) of arbitration versus court litigation. A return to this issue is timely now, as Congress considers proposed legislation to limit mandatory arbitration provisions in consumer and employment contracts. In my view, this is an overreaction.

By Philip G. Kircher

An overreaction to a handful of situations where arbitration provisions have been manipulated to be something less than fair to consumers and employees.

To start, a historical context here is important. Enacted in the '20s, the Federal Arbitration Act was intended to facilitate disputes between sophisticated businesses. The landscape has dramatically changed. In the last decade, the U.S. Supreme Court decided a series of cases that extended the reach of the act to consumer and employment disputes.

Insuring Public-Private Construction (11/01/11)
Second Thoughts About the China Market (07/11/11)
Federal Flood Insurance Program Gets Extension (01/24/12)
When the Birds Bring Down the Planes (07/19/11)
Immunity Bites ... for Shark Victims (07/19/11)

And, in recent years, consumers and employees have had little to no bargaining power, forced to accept mandatory arbitration provisions regardless of whether they were fair or not. In their haste to get necessary medical care, buy a car, obtain a credit card and so on, consumers and employees don't appreciate the significance of the fine print that strips them of the right to have juries and judges resolve their complaints. They essentially relinquish potential leverage to negotiate against arbitration clauses that eliminate statutory rights, ban class actions and require arbitration hundreds of miles from their homes.

Private arbitration has always, and justly, had a place in the commercial arena where sophisticated companies have a mutual interest in cheap and speedy dispute resolution. But, as I wrote several columns ago, arbitration is not always what it is intended to be in terms of cost and efficacy for businesses. In many cases, it has become almost as expensive and time-consuming as court litigation. Considering that important rights such as jury trials and appeals are sacrificed, slow and costly arbitration is not so attractive.

Consumer and employment disputes, which are almost always minor in nature, similarly lend themselves to a quick and cheap dispute resolution mechanism such as arbitration. Arbitrations help unclog our overworked civil court systems and make way for consideration of social policy cases that deserve careful evaluation by judges and juries. However, where important civil rights or consumer rights are concerned, the transparency of our civil justice system may be preferable to nontransparent, private arbitrations.

Yet, as corporate America increasingly turns to private arbitration to settle complaints, and a few companies have instituted seemingly draconian arbitration clauses, we're hearing reports of unfair practices. In one case, the arbitrator quoted a portion of the contract in support of his decision--but the quoted language was nowhere in the contract. In another case, an arbitrator found against a middle-management employee in a discrimination case, and then ordered her to pay the arbitrator's bill of $16,000 and the employer's legal fees of $207,000. What's more, there is a growing cynicism that large employers, financial institutions and retailers have so much repeat arbitration business that arbitrators tend to favor them because they know a good customer when they see one.

Hopefully, Congress can author a balanced bill that allows arbitration to resolve consumer and employee complaints while also outlawing the more draconian provisions that have engendered the publicity leading to the proposed legislation. A flat-out ban would be ill-advised--there is a place for private arbitration in the consumer and employment worlds.

PHILIP G. KIRCHER is co-chairman of the commercial litigation department at the law firm of Cozen O'Connor.

October 15, 2007

Newsletter Sign-up