Arbitration is not for everyone

by Kurt Schulzke on April 5, 2008

Illustrating yet again that a decisive majority — including the editors of the Wall Street Journal — can be wrong, 82 percent of respondents in a survey commissioned by the Obama campaign favored out-of-court arbitration over traditional courtroom litigation. The Wall Street Journal’s write up, “No Lawyers, Please,” notes that “most Americans do not want their day in court. Rather, they prefer cheaper and faster methods of settling arguments.” If cheap and fast are the criteria, why not just roll dice or bring back duels?

As is typical of legal journalism, the WSJ story grossly over-simplifies a complex question and amplifies urban myths about its subject matter. The first and most egregious is embedded in the petulant title, “No Lawyers Please.” The idea that arbitration is or should be routinely conducted without legal counsel is misguided. While arbitration can be conducted without the assistance of attorneys, it’s not a good idea except in cases that don’t mean much to the parties — the kinds of disputes that, in most states, can be taken to magistrate or small claims court by the parties themselves. But for such cases, arbitration is generally an unnecessary extravagance anyway. Lawyers will usually be involved on both sides of an arbitral proceeding and — unlike litigation — you’ll have to pay the arbitrator who in many cases is a lawyer.

Arbitration can — in the right circumstances — offer quality, quick dispute resolution at low cost. On the other hand, it can also drag on for years, be far more costly than litigation and produce grotesquely unfair results that never come to light. This is especially true when it is used as weapon by a large corporation against a relatively powerless consumer. I suspect that it is this feature of arbitration — its capacity to empower companies against consumers — that has the WSJ drooling over this silly study.

Over the years, I’ve been a proponent of arbitration in appropriate settings between parties who enjoy relative economic and intellectual parity. For example, in international commercial disputes, arbitration is vastly preferable to litigation because the 1958 New York Convention provides a fair process and enforceable results where litigation often yields the polar opposite. Arbitration is unquestionably better for resolving some labor disputes pitting powerful unions against similarly powerful companies.

I also routinely advise professional service providers — CPAs, attorney, appraisers and so forth — to specify arbitration in their client engagement letters because arbitration is far more likely to protect professional reputations than is litigation. But for the ordinary consumer, arbitration is likely to be a disaster because it can actually cost more, keeps bad news about the company private, and is easily “stacked” against the consumer by slanted arbitral panels. Despite all of this, Obama poll respondents — most of whom likely know next to nothing about arbitration or litigation — favored arbitration over litigation 82-15 percent. And these same people will be choosing a president. Yikes!