Beware the Extraordinary Expense of Arbitration

“Illusion is the first of all pleasures.”
– Voltaire

ACTUAL CASE HISTORY: Harlan had been a Certified Mortgage Banker for over ten years. He was well known in his industry, and had a strong following and ready “pipeline” of business. He’d accepted his present position two years earlier in large part because it offered him the opportunity to become an owner of up to five percent of the company if he stayed on for five years. While he didn’t have a formal employment contract, his employment terms were neatly laid out in his “hiring letter.”

Besides the terms of employment, Harlan’s hiring letter also required that any disputes between him and his employer would be resolved by arbitration. Harlan had always heard that arbitration of disputes was preferable to taking them to court because arbitration was supposedly less formal, took less time, and was less costly than traditional litigation in the courts.

Shortly after Harlan’s two-year anniversary with his employer, the company merged with a competitor. To Harlan it seemed the combined company would be a better place to work, because it had greater financial resources and offered a wider variety of mortgage loans. Unfortunately, a memo was distributed shortly after the merger advising all senior executives that their opportunities to become owners were no longer valid, as the “former company” no longer existed, and the new company would not permit such equity-ownership opportunities. Harlan was deeply disappointed, to say the least. Disillusioned, Harlan took a new job with a competitor, and because he viewed his loss of the ownership opportunity to be unfair, he retained our firm to start an arbitration.

Like almost all arbitrations, Harlan’s arbitration was before a private tribunal, that is, a for-profit company. (Many people are under the mistaken notion that arbitration organizations, like the American Arbitration Association, are not-for-profit groups.) To start Harlan’s arbitration, he had to pay a “case fee” of over $5,000 to file his case. Like almost every arbitration, the arbitrators in Harlan’s case charged him a lot of money for their services, often as much as $2,000 per day for each of three arbitrators. As happens in many arbitrations, the arbitrators require that they be paid a lot of money to be part of telephone conference calls, to study the case before the hearing (or trial) and to attend the hearing (or trial). Just to “study” his case before attending the hearing, the three arbitrators required a total of $72,000; if he didn’t pay it, he couldn’t have a hearing. For attending the hearing, which lasted three days, the arbitrators charged $24,000. Even the administrative personnel who worked for the arbitration organization charged “case administrative fees” of several hundred dollars for their time.

The end result of Harlan’s arbitration was that he easily won his case, and received a significant award against his previous employer, but most of his award had to be paid to the arbitrators and the arbitration organization.

LESSON TO LEARN: It costs about $200 to start a lawsuit, but as much as $5,000 to start an arbitration. You pay a state or federal judge nothing for his or her time; you must pay arbitrators tens of thousands of dollars for their time. It is in a judge’s interests to finish a case in a short amount of time; it is in an arbitrator’s interests to make a case last forever. These may be surprising, but in actuality that’s how arbitration works: the costs can be prohibitive and make your efforts to achieve fairness anything but.

In fact, many of the supposed advantages of the arbitration process are a thing of the past: While arbitration used to be quite informal, more and more arbitrators are acting even more formally than judges, requiring extensive motions, discovery and even legal briefs. In addition, it can take up to three months to get a panel of arbitrators to participate on a telephone conference call, whereas state and federal judges are usually available in a matter of days or weeks. Years ago, arbitrations were completed in a few months; these days, they can go on for years.

Arbitration organizations, such as the American Arbitration Association, are profit-making businesses, and arbitrators arbitrate to earn a living. Some arbitrators make a very handsome living doing so. We are more and more skeptical of the supposed advantages of arbitration, and more and more concerned about its prohibitive costs. For these reasons we are warning all of our clients of the high costs of arbitration, and advising that they give very serious consideration to either avoiding the arbitration process altogether, or insisting the arbitration costs be borne by their employers or, at the very least, capped.

WHAT YOU CAN DO: This is what we recommend all our clients do to avoid the increasingly prohibitive costs of the arbitration process:

1. Start off by resisting arbitration, itself. Whether or not you’re asked, always consider saying “No thank you” to arbitration of employment disputes. The agreement to use arbitration is supposed to be a voluntary decision to refrain from using the more traditional forum for dispute resolution: the courts. While employers can say, in effect, “No arbitration – then, no job,” if they find your skills, your knowledge, your business relations, and your potential of sufficient value, they will consider withdrawing the demand for arbitration.

2. If you must arbitrate, ask for choice among arbitration organizations. If arbitration is required as a means of resolving workplace disputes, you may have a choice or input into the choice of forum to be used. Arbitration (or, “alternative dispute resolution” as it is frequently called) is a highly competitive industry. Our clients have found the American Arbitration Association (“AAA”) to be the most expensive, by far, and for this reason we try to avoid it. In our judgment, newer, smaller arbitration companies tend to be less expensive, more flexible, and fairer. The best arbitration forum may be, simply, no forum at all, but the use of a mutually trusted person – perhaps a clergyperson – or a retired local judge.

3. Always ask “What are my costs in this process?” You have every right to ask about and know your potential outlays before going forward. Not asking “How much might this cost me?” is simply not wise. Likewise, you have every right to ask that your potential costs exclude certain items, or be capped, either by your employer or by the arbitration company used.

4. Seek employer payment of the “three big costs.” These are (a) the filing fees, which may rise with the amount in dispute, (b) what are politely called “administrative costs,” which are fees to “administer” your case, and (c) the arbitrators’ fees, which can rise to over $100,000; yes, we’ve seen that amount for one, single arbitrator. Once you submit yourself to this process, you submit yourself to these fees. Do you want to be the person who refuses to pay “the judge?”

5. Cap your overall costs: If you cannot get your employer to assume all arbitration costs, insist that your share of the costs be limited in some way, preferably with a “cap” of a certain dollar amount. Employers find limits like “an amount not exceeding 10% of the employee’s annual salary” to be persuasive.

6. Limit unnecessary measures in the arbitration process. You can also limit arbitration costs by limiting the arbitration process. Arbitration is supposed to be simple and streamlined. Ask that the use of these not be permitted: (a) legal briefs, (b) expert witnesses, and (c) formal, written motions (a legal word for “request for action”), or (d) lengthy, expensive, legal memoranda. Eliminating these should not limit your ability to give your complete side of the story.

7. Limit the number of arbitrators. Arbitration can be “judged” by one, two, three or more arbitrators. Simple sense dictates that one arbitrator means less difficulty arranging telephone conferences, less discussion of issues that may arise, no time for discussions among arbitrators, and less overall cost. It can take weeks, or even months, to get three arbitrators on the telephone to resolve procedural matters, or to set dates for the “hearing.” The process is much easier with a sole arbitrator.

8. Limit the overall amount of time. We’ve severely curtained arbitration costs by getting our adversary to agree that “In all events, the arbitration will be operated such that the final arbitrator decision will be rendered within sixty (60) days of the filing of the arbitration claim, and the parties, the arbitrator and the arbitration forum must agree to this provision.”

9. Reduce the expenses of the “Hearing.” What we call a “trial” in court, we call a “hearing” in arbitration. It can cost up to $1,000 per day to have a court reporter sit and record what is said by witnesses and what exhibits are presented as evidence. Many arbitrations are conducted without any recording of testimony, other than the arbitrator’s own notes. We prefer the use of a tape recorder, which is (a) low cost, and (b) gives a clear record of events.

10. Consider the “Unthinkable”: No Attorneys. Imagine this: both sides to an employment dispute sit down with a neutral, independent, mutually trusted person. Each offers their own side of “what happened,” and presents whatever documents and witnesses they’d like. Informal, low cost, flexible. That is what arbitration used to be. There’s no reason that it shouldn’t be that way, or can’t be that way again.

Cost is a kind of risk, and we always try to limit risk in our lives. These are not all of the ways you can avoid the prohibitively high costs of the arbitration process; you or your attorney can surely find others. In considering resolution of disputes, you must consider both “risks” and “rewards.” If you can limit the “risk” side of the equation, you are more likely to enjoy the “reward” side.

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Navigating the resolution of disputes is part of that process. It always takes care and prudence to avoiding costly errors and mistakes. Getting hit with unexpectedly high costs of arbitration is one of those “costly errors and mistakes” you can avoid. This is how.

Always be proactive. Always be creative. Always be persistent. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “reward” and eliminate or reduce employment “risk.” That’s what our SkloverWorkingWisdom™ is all about.

© 2006 Alan L. Sklover, All Rights Reserved.

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