Arbitration — A FourLetter Word to Plaintiffs

Alternative Dispute Resolution (ADR) refers to alternatives by which parties can keep a legal dispute out of the public court systems — Superior Courts in each state and U.S. District Courts around the country. That sounds like a very good idea on paper; but certain ADR agreements can be a death sentence for a good plaintiff’s case, depending on the level of damages.

Principals will normally include an ADR clause in their representation agreements. That might include agreements between the parties to mediate a dispute (submit the dispute to a “neutral” who tries to bring the parties together in a settlement agreed to by both sides — generally a very good idea) or to arbitrate a dispute (have a trial in the case before a “neutral,” usually a retired judge — often a very bad idea). The benefits to a defendant (usually the principal) in an agreement to arbitrate are numerous. Not so much for the plaintiff (usually the sales rep). This article will discuss the limiting aspects of arbitration when compared to lawsuits in court and will offer input on how to get an arbitration provision stricken from a contract.

The differences between lawsuits in State or Federal Court and privately held arbitrations with agencies like the American Arbitration Association (AAA) are vast. Here are a few:

  • Witness depositions are allowed in court lawsuits, but generally, only party depositions are allowed in arbitrations.
  • There is a very limited right to discovery (legal procedures to obtain evidence) from the opposition in arbitrations; whereas in court, parties have substantial powers to demand documents from the opposing party and to pose propositions of fact requiring the opposing party to admit or deny certain key facts under oath (Requests for Admission).
  • Court filings cost $350-$500, while fees for arbitration can be prohibitive. The overall fees for each party would normally turn out to be much greater in arbitration based on the fact that private arbitrators charge hourly rates for their work on the case. There are no such hourly fees that one needs to pay a public serving judge. This often makes the case prohibitive by arbitration but more sustainable in State or Federal Court.
  • One of the most severe handicaps for plaintiffs in an arbitration is the arbitrator’s limited power to order third-party witnesses to appear and give testimony. There’s absolutely no right in most agencies’ arbitration rules to take a third-party deposition, and depending on where they are located compared to where the arbitration takes place the arbitrator may not have any authority to compel key witnesses to even appear at the trial. That places a huge burden on the plaintiff, often turning the case into a “he said, she said” battle if there’s not a lot of corroborating documentary evidence.
  • Most important of all, the standard arbitration agreements we see in sales rep contracts these days have requirements for what is known as binding arbitration. That means no matter what final decision a neutral comes to, that is the end of the road for both parties, with no appeal rights at all. In State or Federal Court, decisions by judges that are not in compliance with either the law or the evidence submitted in a particular lawsuit are reviewable and will be overturned if they abuse discretion, misapply law, ignore relevant facts, erroneously instruct juries, or show bias, among other grounds for overturning trial court judgments on appeal.

Probably the best way to get your contractual counterpart to agree to remove an arbitration provision is to cite for them the exorbitant hourly arbitrator fees that they would have to share on a 50-50 basis, unless and until some party is declared to be the prevailing party in the litigation, at which time the arbitrator can award that party’s attorney fees and arbitration costs to be paid by the loser. If you compare the $400 to $500 filing fee limitation in State or Federal court, it would seem to make sense for both parties to agree to bypass arbitration in favor of Federal or State court. That being said, defendants with a larger war chest or those that want to limit the plaintiff’s tools may play a game of requiring arbitration in order to gain settlement leverage.

In my opinion, arbitrations are not worth the effort in higher damage cases but may be a good option in lower damage cases. In lower-value disputes, it makes good sense to streamline the case, limit the procedural and discovery tools available to the parties and get a dispute to final judgment in a somewhat expedited manner. However, to do so in a large damage case severely compromises the plaintiff’s chances and should generally be avoided, even if a sales rep is required to settle for dimes on the dollar.