Who Wants Arbitration, and Why

That’s the first thing to consider. If your potential adversary presses for arbitration you can assume they’re doing so for reasons of self interest. You should try to surmise what those reasons are, and, more importantly, how such considerations may affect your interests.

Many aspects of arbitration may be mutually beneficial, presenting a win-win scenario. Other aspects of arbitration may not be mutually beneficial. The parties’ interests may be tied together in an inversely proportional way such that a particular aspect of arbitration that benefits your adversary may harm you, or vice versa.

The analysis can be nuanced or straightforward. For example, one consideration is the privacy of arbitration versus the public nature of court proceedings. Defendants accused of wrongdoing generally don’t want allegations against them publicly aired in a trial, especially if a bad result is expected. Nor do they want evidence of their wrongdoing disclosed to other potential plaintiffs. These considerations may steer defendants to arbitrate. Plaintiffs, on the other hand, may desire publicity to heighten awareness of defendants’ bad conduct, or they may desire to use the threat of publicity as leverage to settle their cases for more.

Arbitrator Interest and Repeat Players

Arbitration is a for-profit business that is not paid for with tax dollars. Arbitrators are paid very well generally, and they’re paid by the parties who mutually select them. Parties generally have a right to veto prospective arbitrators for any reason. Thus, one must be mindful of the economic clout that repeat players to arbitration have. An arbitrator who rules against a repeat player in the arbitration arena stands to lose out on future appointments to be an arbitrator by that party.

The Process: Arbitration vs. Court

How does an arbitration compare to a trial? Our court system is mature. The court rules and case law governing trials have been refined over generations. From these refinements of process, reliability and predictability have emerged. Trial courts, then, generally get things right, and if they don’t, appeals may be taken to fix mistakes. No such right of appeal exists in arbitration, there, you get one shot.

The refined processes of trials may come at a cost as the more formal requirements for submitting proofs in court may be more time consuming, tedious, and costly than in arbitration. But if those proofs are to be used against you, you may want your adversary to jump through every possible legal hoop. One must also be mindful of parties who would take liberties with evidence. In arbitration the rules are more relaxed and counsel can push boundaries. Sometimes they need to be restrained and judges generally wield more clout than arbitrators and can mete out harsher penalties.

One should consider how an adversary is likely to behave when the rules are relaxed. This is especially important with discovery, the process by which parties gain information and “discover” relevant facts. Discovery is critical to any fair dispute resolution and rests largely on an honor system. If discovery is likely to be hotly contested or if one is pitted against an adversary who would corner-cut and cheat, the procedural safeguards offered by trial courts may be preferable.

Also, if a dispute turns on esoteric and specialized knowledge the parties may benefit by choosing an arbitrator with strong knowledge of the subject matter.

Fees and Costs

Many fees and costs are greater in arbitration proceedings than court proceedings. Those fees and costs add up, especially if a panel of several arbitrators is required. In a Michigan court it costs $235 to file a complaint and jury demand for claims exceeding $25,000. In arbitration, filing costs can run into the thousands of dollars.[2]

Conclusion

The debate over the advisability of arbitration rages on. In a professional journal article published to all Michigan attorneys, Timothy H. Howlett and Christina K. McDonald delved deep into the research before concluding that arbitration “may not necessarily be more efficient or less expensive than going to trial.”[3] Their article was about employment arbitration but its logic applies to other types of arbitration too. Whether you choose to be in arbitration, or not to be, hopefully your fortunes will not be too outrageous.

(This post is intended for general information purposes and should not be construed as legal advice. All Rights Reserved. Copyright 2018.)

[1] On October 2, 2017, the U.S. Supreme Court heard arguments in a case about whether an employment arbitration agreement is enforceable. Epic Systems Corp. v. Lewis.

[2] The American Arbitration Association’s fees depend on the arbitration type and are graduated. Commercial and construction arbitration fees increase from $1,550 for claims under $75,000 to $7,500 for claims of between $300-500,000 (through first hearings).

[3] Mandatory Arbitration of Employment Claims; An Update, at p. 41, Michigan Bar Journal Magazine, September 2013.

Some see jury trials as riskier and more unpredictable, viewing juries as more easily manipulated than judges, who would be more reasoned and dispassionate. But whether a single judge is more likely than a group of jurors to reach an aberrant result is debatable given that jury deliberations are tempered by a wisdom of crowds dynamic not in play with a judge (though others might say there’s a madness of crowds dynamic to consider too).

Then there’s the perception that juries overvalue monetary damage awards, but that may be wrong too. Hans and Albertson found that “media coverage and advertising campaigns have led to a gross overestimation of the typical jury award.”[2] As Hans and fellow researcher Thomas Eisenberg explain, citing Amos Tversky and Daniel Kahneman’s Nobel prize winning research, “the more readily we can call an instance of a phenomenon to mind, the more frequent we assume it is.”[3] That large awards are disproportionately featured in the news is not surprising. After all, who wants to hear about no cause verdicts?

Jury trials are certainly more work for the attorneys, and cost more. The breadth of a jury trial is necessarily greater, more evidentiary issues arise, and opposing attorneys must research and argue over principles of law to be given as jury instructions before deliberations begin. Preparing jury instructions is demanding. That said, doing such work provides an important opportunity for good lawyering to make a difference in advancing a client’s cause.

Do juries get it right? The data says yes. A whopping 98.6% of 594 federal trial judges surveyed thought that jurors did “very well” or “moderately well” in reaching a just and fair verdict.[4] Most telling, however, were their answers to this question: “If you were personally a litigant in a civil case, how would you prefer the dispute be decided?” By a 3 to 1 margin the federal trial judges expressed a preference for juries over judges to decide matters in which they were litigants.[5] Why this result? Maybe they see that the group dynamics of juries really work, the novelty and gravitas of jury service brings out the best in people. Maybe it has to do with the law’s growing complexity, judicial caseloads, and the effects of something known as “decision fatigue” about which some interesting research is being done.[6] For whatever reasons, trial judges – who best know the risks of civil jury trials – seem to recognize that having well-guided groups of engaged, fresh decision makers pass judgment is often preferable to having individuals do so, even very talented judges. Perhaps they understand better than the rest of us the degree to which the work of judging can become more challenging once the bloom is off the rose.

(* Del A. Szura is a member of Szura & Delonis, PLC. This post is intended for general information and educational purposes and should not be construed as legal advice. All Rights Reserved. Copyright 2017.)

[1] “Empirical Research and Civil Jury Reform,” 78 Notre Dame L. Review 5, at 1507 (2003), citing Valerie Hans, Business on Trial: The Civil Jury and Corporate Responsibility (2000), Yale University Press.

[2] Id. at 1522.

[3] “The Predictability of Juries” (2011), Cornell Law Faculty Publications, Paper 202.

[4] John B. Attanasio, “Foreword: Juries Rule” (2001), 54 SMU Law Review 1681, (See also, Allen Pusey, “Appendix: Methodology – State and Federal Judge Surveys” (2001), Id. at 1903).

[5] Only 20.7% surveyed preferred a judge, 59.3% preferred a jury, and smaller percentages preferred arbitration, or said that it would depend on the case. Id. at 1684, fn. 15.

[6] S. Danziger, J. Levav, L. Avnaim-Pesso, “Extraneous Factors in Judicial Decisions” (2011), Proceedings of the National Academy of Sciences in the United States.

In the 1970’s Congress enacted ERISA and made union employers quasi-insurers of the continued viability of defined benefit pension plans by imposing withdrawal liability on employers who would quit a union and withdraw from multiemployer pension plans that are underfunded. Those withdrawing employers must pay sums calculated to represent their proportional share of the current sums necessary to make good on future pension promises, that is, their estimated share of the shortfall.

Part of the impetus for enacting ERISA was to shore up private pension plans and help prevent a potential death spiral for plans that might lose contributing employers at an accelerating pace, leaving remaining employers to go down with a sinking ship. But however beneficial this private rescue of pension plans by union employers might have seemed at first blush, it raised issues of fairness and had several unintended consequences. The fix was unfair because it did not cause costs to be borne by actors responsible for the underfunding. Underfunding’s causes are many and complex but underfunding often results from errors of judgment by actuaries, investors and trustees. Too often, however, employers whose conduct was blameless, who faithfully paid required contributions to pension funds for years, would find themselves saddled with liability caused by others. The more underfunded (and mismanaged?) a multiemployer pension fund, the harder it may be for an employer to extricate itself and quit the fund. And the most loyal employers who stuck it out and stayed in the union the longest were often the biggest losers as their competitors who first bolted the union often came out ahead.

The law could be unduly harsh on employers in other ways too. As originally passed, ERISA limited liability for underfunding to 30% of an employer’s net worth. In 1980 Congress removed that liability cap with the Multiemployer Pension Plan Amendments Act to ERISA. Since then all employer assets are subject to takeover by underfunded pension funds. All of this must have been difficult for employers to anticipate in the 1950’s and 60’s when many collective bargaining agreements were first entered. Union employers have been made, in effect, insurers of some bad deals – on an ex post facto basis. And Congress also authorized underfunded pension funds to reach an employer’s unrelated business interests through imposition of control group liability, by which all businesses controlled by an owner and spouse are subject to seizure to satisfy the underfunding. These changes to national labor policy have left a lasting impression on union businesses. Even the most committed union employers have lost faith in federal labor and pension law to ensure their fair treatment.

An unintended consequence of such policies has been to likely accelerate the pace of the decline of unions, and, possibly, to widen the gap between the numbers of persons with defined benefit pensions and those not entitled to such benefits. There are political consequences to this, and a political solution may be necessary. (David Blitzstein, Multiemployer Pension Plans In Crisis: Troubled Plans Need Public Resources To Survive, FORBES, January 11, 2017.) It makes sense that resentments may arise among the growing numbers of younger workers who are not entitled to such benefits. And it is difficult to explain to a millennial why he should approve a political solution to shore up the pensions of earlier generations when that millennial and his cohort are unlikely to ever have a defined benefit pension.

A promise of a defined benefit pension decades into the future is always speculative and depends on many unknown variables. It seems obvious that such promises may, in some cases, have to be recalibrated. In addition to more recent changes to the law allowing for benefits to be reduced in some cases, an obvious answer to this problem is to convert defined benefit plans to defined contribution plans.

(This post is intended for general information and educational purposes and should not be construed as legal advice. All Rights Reserved. Copyright 2017.)