The United States litigation process is both expensive and time-consuming. That is why many individuals who find themselves in a legal dispute will face the possibility of arbitration.
Arbitration is handled outside of the traditional court system. In this alternative process, an arbiter is a qualified decision-maker – often a lawyer or a retired judge – who hears both sides and issues a decision.
Nearly 8 million cases have gone through arbitration since the Federal Arbitration Act passed in 1926, according to the American Arbitration Association. The act established that arbitration decisions as “valid, irrevocable and enforceable.” Following arbitration, parties are prevented from subsequently entering the dispute into the traditional court system.
The Arbitration Process
Generally, arbitration occurs between two parties who are citizens of a country where the arbitration is performed. There is also international arbitration, where two foreign parties find a neutral forum for dispute resolution in another country.
Compared to traditional court procedures, domestic arbitration follows a simpler process.
“Arbitration (requires) much less discovery, fewer depositions, and a hearing that wouldn’t be dissimilar to a judge trial in federal court,” explains Luke Sobota, partner at the law firm Three Crowns and lecturer at Harvard Law School. The hearing is likely to include “opening arguments, closing arguments, and cross-examination of key witnesses and experts.”
The in-person hearing offers each side of the dispute the opportunity to present its arguments and evidence to the arbitrator. After the hearing has ended, the arbitrator enters deliberation and subsequently produces a written decision determining the winner of the dispute.
Why Arbitration?
Arbitration is often a desirable alternative to the U.S. court system. According to Sobota, parties mostly prefer it as a “quicker and cheaper” alternative to litigation, which will require an expensive and prolonged discovery process, even before the matter makes it to trial.
Additionally, arbitration keeps disputes confidential. This is helpful for individuals who would like to keep their private affairs under wraps. For example, shareholders may want to settle a dispute privately through arbitration because filing it in the U.S. court system could publicize the dispute, potentially affecting stock values.
For conflicts involving individuals in different countries, international arbitration is frequently chosen because it is a neutral forum for resolving disputes.
Who Does Arbitration Favor?
While Sobota does not think that “the deck is stacked” to favor any one particular party, he acknowledges that individuals who have participated in many arbitrations may have an advantage.
“Reinsurance is a major source of arbitration and the reinsurers are repeat players,” Sobota says. “So they know the arbitrators better and probably have some systemic advantage.”
Notably, the arbitrator selection process requires both parties to agree on the arbitrator. Typically, they mutually decide on an arbitrator and a neutral institution to select an arbitrator. Less frequently, each party will pick one arbitrator and then the two arbitrators will decide jointly on a third.
“So, typically, it actually is a pretty level playing field,” Sobota says.
Parties might choose to avoid arbitration, however, if it is a dispute governed by specialized courts. For example, if a dispute concerns a U.S. patent, the arbitrator’s decision will only apply to that particular dispute. Only U.S. federal courts have the power to decide the scope of patents for all purposes, so the issue would have to be re-arbitrated or go to court if the patent was infringed upon again.
Arbitration may also seem like a risky move because it does not give parties the right to appeal a verdict, so there is only one result and “no real second bite at the apple,” Sobota says.
“Depending on your panel, or the sole arbitrator, you can get more erratic decisions than if you go through the entire appellate process,” Sobota says.
Trends in Arbitration
Mandatory arbitration clauses are growing in popularity. These are clauses added to contracts that prevent parties from pursuing disputes in U.S. courts. Instead, it forces those disputes into arbitration.
These clauses are particularly common for employers hoping to prevent employees who feel wronged from bringing costly lawsuits against them. The Economic Policy Institute estimated in 2018 that more than 55% of U.S. workers were subject to mandatory arbitration clauses. It also notes that they are more common in low-wage workplaces.
The courts have generally found these provisions to be enforceable under the concept of “freedom of contract.” This means that if you have signed an employment agreement that includes a mandatory arbitration clause, you will likely be forced into arbitration procedures if an issue arises.