Marc Randazza on Arbitration

Arbitration is a catch-all term for a broad category of “alternative” dispute resolution – meaning, a way of resolving disputes without going to court. In theory, this is supposed to make it faster and cheaper than going to court. But, in reality, not all arbitration is created equal.

Before you agree to arbitrate a dispute, you should understand the process and put your goals into perspective.

The first thing to recognize is that when you agree to arbitration, you may be giving up significant rights. Further, you may be submitting yourself to a dispute resolution process that is driven by something other than justice. We all realize that when you go to court, you can be at the mercy of the judge, and there are “bad judges” out there. But, in general, the process of selecting judges acts as a democratic filter on the truly bad ones. Sure, there are some who are political cronies, and others who have been shown to outright purchase their seats. But, in general, you should have confidence in the court system because it is at least governed by rules and constitutional principles.

Arbitration, on the other hand, is a private endeavor. Therefore, you wind up paying for a private arbitrator. That arbitrator is often not actually “chosen” by you, but rather you get stuck with a list to choose from, and you rarely get your first choice. That arbitrator then often gets paid by the hour. Do you really want someone making decisions about your important legal rights who has a financial incentive to make it as long and painful as possible?

Arbitration is often something you don’t even get to choose. Sometimes, terms and conditions actually compel you to resolve disputes by arbitration. Most employment contracts these days come with mandatory arbitration. Do you think you will have a fair playing field if you go to an arbitration company that competes for work with other arbitration companies? Think about it, if you have a dispute with your employer, the arbitrator knows that this is probably the only time you’ll ever be selecting an arbitrator. But, if your employer (or your employer’s law firm) does a lot of arbitration, the arbitrator knows where his bread is buttered. You likely don’t stand a chance.

Other problems with arbitration? The arbitrator is unaccountable. He can (and often will) ignore evidence, ignore the law, and simply issue lazy, incompetent, and downright crooked decisions. When that happens, you have no right to appeal, no way to influence that arbitrator’s re-election. You have nothing.

Does that mean that you should never agree to arbitrate? No, not at all. Arbitration can actually be a great thing. Arbitration is a great way to resolve an international dispute where the parties come from two different judicial systems. They can agree to an arbitration where neither party is disadvantaged by the case being in one country or the other. One of the first cases I ever worked on was a huge dispute between a Russian company and an American

company, and the parties agreed to have the arbitration in Sweden, before German judges. Everyone got treated fairly, and language barriers and judicial system differences did not influence the outcome.

Similarly, I handle a lot of international intellectual property disputes, and in those cases, the World Intellectual Property Organization offers arbitration services that can usually resolve a case in a very short time, with minimal expense. WIPO levels the playing field and helps to make the process more equitable. In fact, it is great when one side has a lot of money and resources, but the other does not. In a famous case I did where Glenn Beck tried to take down a satirical website, we never would have been able to resist if it hadn’t been in a playing-field-leveling arbitration.

Another time where I like arbitration is where the arbitration is non-binding. In fact, I serve as an arbitrator in a great program where the courts refer disputes over less than $50,000 to private arbitrators. The program only allows me to charge up to $1,000 at $100 per hour though – hardly making it a money-making enterprise for me. Why do I do it? Because it permits me to do public service. I actually love that the program doesn’t make it profitable, because the financial incentive is actually designed to make the arbitrator resolve things efficiently. And, if we make a mistake or do something inequitable, the parties have recourse – to bring it to a real judge, with a jury, and an appeals court above them. However, when an arbitrator makes a ruling in this program, he has an incentive to try and be as fair and reasonable as possible, so that the parties don’t feel like an appeal makes sense.

Finally, a place where I highly recommend arbitration is when there is a program that offers you something that a court simply can not give you. For example, on some consumer review sites, the arbitration programs give you the ability to remove objectionable content, if the arbitrator determines that it is false or misleading. In court, that would require you to get an injunction – but those are almost impossible to get on a preliminary basis, and even difficult to get after a trial.

Also, you can set rules that ensure that values that are important to you are respected in the arbitration. For example, my law partners and I have an arbitration agreement for any disputes that we might have. However, those arbitrations must be conducted by mutual friends as the arbitrators, and they are required to make decision that will not only resolve our disputes by legal and equitable principles, but they must also make decisions that will preserve the friendship. Try finding a court that will do that.

To conclude, arbitration is often a bad idea. If you’re going to agree to it, you should almost never agree to an employment arbitration, and never agree to arbitrate before JAMS or AAA (the two biggest commercial arbitration companies). While some of their arbitrators can be good, for the most part, they are motivated by anything other than doing right by the parties. Smaller arbitration companies, on the other hand, can be more reliable and trustworthy. Non-profit arbitrations, international arbitrations, or arbitrations with special rules for your special dispute, on the other hand, can often be a real godsend.