Arbitration: One Size Doesn’t Fit All

Arbitration’s near-ubiquitous use in commercial contracts makes it appear to be a handy one-size-fits-all alternative to courtroom litigation for business disputes. Unfortunately, as with most things in the world of dispute resolution, looks can be deceiving. Here are several questions to ask when weighing whether arbitration will fit your particular business needs.

How important is the case?

As a general rule, the more important the case is to your business operations, the less likely you are to be content with the results of arbitration. Cases with the potential to involve significant questions of law are nearly always unsuitable for arbitration. When a clearly reasoned result is necessary, a courtroom trial may be a better choice. That being said, arbitration frequently proves effective to address routine, smaller cases involving basic consumer disputes.

What can you predict?

Will you have more witnesses in a hearing on the case, or will the other side? Who will be in control of the facts, and thus who will need less discovery to prepare its case? Who faces greater cost constraints? As noted in a series of earlier posts to this blog, arbitration rules vary materially and can significantly impact the discovery tools available, which in turn drive costs.

When predictions about preparation, discovery, and costs weigh in your favor, arbitration may be a more reasonable choice. For example, in a routine case involving a simple customer dispute, your business is more likely to be in control of the facts and to have the budget to address the questions easily—making arbitration a cleaner choice for your side.

But in any given commercial dispute, either side may need the full range of discovery to adequately prepare its case. Because discovery can be limited in arbitration, what may seem like a sensible cost-saving process may have significant unintended disadvantages when it comes to the ultimate objective: winning the case.

Can we limit class action exposure?

In American Express v. Italian Colors Restaurants, the U.S. Supreme Court held that an arbitration agreement that waives consumers’ rights to bring a class action lawsuit is enforceable.

However, the waiver needs to be express, simple, and conspicuous—not buried in jargon or in the fine print. It also is important to consider the relative value of waiving class actions versus undertaking one. For instance, what if the alternative is to face each disgruntled customer individually in arbitration? The sheer number of arbitrations you must undertake will likely swamp the projected cost savings of the process.

A related point: as noted in a recent post to this blog, the ability to obtain an enforceable class-action waiver through an arbitration clause is under attack on various fronts; the long-term efficacy of arbitration in limiting this exposure is unknown.

Is confidentiality important in this case?

Court cases are matters of public record. In arbitration, however, both the proceedings and the award are generally kept private. For this reason, arbitration may be preferable to trial, particularly in matters involving proprietary information, trade secrets or sensitive matters.

Which Arbitration Rules Will You Use?

The details you establish in your contract’s arbitration provision will, in most cases, control the proceedings. Specify how the arbitrators will be chosen, where the arbitration will be held, what discovery will be allowed, how long the process may take, and guidelines for confidentiality to control both information and costs.

In setting out the rules for discovery, be careful when choosing which set of arbitration rules will govern. Common choices include the American Arbitration Association (AAA) rules and the JAMS rules. The Federal Arbitration Act and the Uniform Arbitration Act may also affect which rules are “in play” in a particular jurisdiction.

AAA Rules

The AAA rules are popular in commercial and labor arbitration, including international disputes and non-binding arbitration proceedings. Their commercial arbitration rules are designed to accommodate large, complex commercial disputes and to expedite the process of settling these. The AAA also provides rules to govern construction industry arbitration, employment and labor arbitration, and international dispute resolution.

Optional appellate arbitration rules and specialized rules for non-binding arbitration, as well as a number of specialized codes and protocols for specific situations, make the AAA process a flexible option capable of accommodating a wide range of disputes. However, agreeing to AAA rules also means agreeing to a number of specifics regarding how the arbitration will be handled.

JAMS Rules

JAMS bills itself as one of the largest private arbitrators in the world. In some ways, its offerings parallel those of the AAA. JAMS offers comprehensive arbitration with the option to expedite, streamlined arbitration rules, and rules to govern class actions, employment, construction, international disputes, and consumer minimum standards. JAMS also offers specialized codes and protocols that target specific types of disputes.

Arbitration Laws

The Federal Arbitration Act and the Uniform Arbitration Act (included in the Revised Code of Washington, Chapter 7.04A) also affect which rules can be used in arbitration and how contractual arbitration provisions must be set out. They also affect the role arbitration plays in the litigation process as a whole. For instance, both federal and Washington state courts are allowed to order the parties to try alternative dispute resolution, including arbitration if appropriate, before a case proceeds to trial.

–Miles Yanick