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Making The Case — Arbitration Isn’t Quicker, Cheaper

On Behalf of | Feb 19, 2010 | Franchise Law News

Making The Case — Arbitration Isn’t Quicker, Cheaper

Source: by Michelle Lore, Associate Editor, Minnesota Lawyer

Arbitration is supposed to be more efficient, less costly and just as fair as litigation. But according to some practitioners, that’s not necessarily the case any longer.

Some lawyers fear that the arbitration process is beginning to look more and more like a court proceeding — but without the right to appeal. Others are concerned that the increasing use of mandatory arbitration provisions forces citizens to give up substantive legal rights without them even knowing it.

At a recent seminar sponsored by the Minnesota State Bar Association’s Alternative Dispute Resolution Section — “The Pros and Cons of Arbitration” — panelists addressed these issues head on. Speakers at the hour-long event included commercial litigator Thomas Fraser, franchise attorney Ronald Gardner, consumer rights attorney Peter Barry and labor and employment lawyer Nancy Vollersten.

The panelists agreed that the arbitration process can and does continue to have a proper place in resolving disputes.

“Arbitration has a definite role to serve as an alternative to the court system, if it truly is an alternative,” Fraser told attendees.

But some lawyers contend that too many arbitration provisions are hidden within contracts in boilerplate language that consumers often don’t know about. Others assert that even if their clients know about the arbitration clause, they don’t have any say in how it’s drafted and are therefore patently unfair.

To that end, a key component of the discussion revolved around the Arbitration Fairness Act of 2009, which would ban mandatory predispute arbitration clauses in consumer, employment and franchise agreements. It would also void a predispute agreement requiring arbitration in cases arising under civil rights statutes.

The law, which would amend the Federal Arbitration Act, would not prohibit arbitration in such cases, but would merely require that the agreements be made after a dispute has arisen, thus ensuring that the agreement to arbitrate is voluntary. The act was introduced a year ago and is currently pending in the U.S. House of Representatives Judiciary Subcommittee on Commercial and Administrative Law.

Looks Like Litigation

In the commercial arbitration area, the mandatory aspect of predispute arbitration clauses isn’t the problem, according to Fraser. The problem, he said, is that arbitration is morphing into a process that is indistinguishable from a federal court lawsuit.

The huge amount of discovery being allowed in arbitration cases and the resulting increase in cost is a major issue, he said.

“The challenge today is to make sure that arbitration is an alternative to and different from a federal court lawsuit while preserving everybody’s substantive rights,” he said. Arbitration needs to get it back on track so that it’s a respected process that is substantively different from a regular lawsuit, he added.

Fraser also pointed out that an arbitration is only as good as the arbitrator.

“If you’ve got a bad arbitrator, you’ve got a bad process,” he said, noting that even if the arbitrator is wrong on the law, there’s not much opportunity for review or appeal.

Gardner said he’s not opposed to the notion of arbitration proceedings being more like federal lawsuits.

The plaintiff has the burden of proof, but no access to the information that it needs to prove its case, he said. “You have to be able to get some discovery in order to carry the burden of proof.”

Imbalance of Power

The perceived imbalance of power among parties to an arbitration clause is another problem.

Gardner, who represents franchisees, said that his clients don’t write the contracts they are being compelled to adhere to. Instead, the franchisor drafts the arbitration clauses and therefore “makes the rules” about the process. He noted that 65 percent of franchise agreements currently contain arbitration clauses.

An attorney who represents the Subway Restaurants franchisor, which said frequently gets sued, once told Gardner that the company includes arbitration clauses in franchise contracts as “an insurance policy against a runaway jury.” He explained that having an arbitrator hear the case ensures a measured response; even if Subway loses every time, an arbitrator isn’t going to ward millions of dollars in punitive damages.

Similarly, as a consumer rights attorney, Barry is in favor of the proposed Arbitration Fairness Act. it’s all about the inability of consumers to make an intelligent choice about how to resolve a dispute they have in a consumer or employment contract, he said.

If people choose to use arbitration after a dispute arises, that’s OK, said Barry. “But trying to resolve a dispute through forced arbitration before a dispute has even arisen and before consumers understand what their rights are is palpably unfair.”

Barry contends that mandatory arbitration clauses essentially negate many of the laws Congress has enacted to protect consumers.

People should be allowed to exercise their rights in state or federal court, not be forced into mandatory arbitration, he said. “The practical effect of inserting an arbitration clause is to chill litigation.”

Fraser pointed out that the power imbalance evident in consumer or franchise cases isn’t present in construction or commercial matters. “The bargaining power is relatively evenly balanced,” he said, so the inclusion of arbitration contracts generally doesn’t pose the same predicament.

In the traditional labor setting, arbitration is almost always the method used to resolve disputes. In fact, the proposed Arbitration Fairness Act specifically exempts arbitration provisions contained in collective bargaining agreements.

While arbitration is not always used in the employment arena, according to Vollersten, it can be an effective method of resolving disputes.

Arbitration appeals to some employers because while it’s not necessarily cheaper, it’s usually quicker, confidential and the employer has a hand in choosing the decision maker, she said.

Nonetheless, Vollersten said she’s conscious of the potential imbalance of power discussed by the other panelists. Thus, in determining whether it’s fair to enforce an arbitration clause in the employment context, Vollersten advocates an examination of the parties’ bargaining power.

If the employee is a physician or a high-level corporate executive, then enforcing the arbitration provision might be acceptable. But if the clause was signed by an applicant for a job at an auto parts store, then it might not, she said.