08 Dec The Latest Assault on Arbitration

Posted at 17:19h in Securities Litigation & Regulation by

A recent series of articles and an editorial in the New York Times have re-ignited the debate about the fairness of private arbitration. While the current clamor is largely about class action arbitrations, and two recent Supreme Court decisions striking them down in arbitration (AT&T v. Concepcion and American Express v. Italian Colors), critics have also attacked in the securities, health care and employment contexts. Critics contend that not allowing claimants to join their often small but similar grievances against corporations together to form a critical mass that makes litigation economically viable is effectively a denial of those claimants’ right to due process. In other respects, they contend that corporations “control” the arbitration process, including the selection of arbitrators and the rules of evidence they apply.

Undoubtedly, some cases yield disappointing results for claimants, just as there have been and will be cases where the claimant receives a pre-hearing settlement or a favorable award after the evidence has been weighed and considered. But to suggest that private arbitration as a process, across the board and in all of the different fora in which it occurs, is broken or willfully skewed in favor of corporate defendants is to be too uncritically receptive to claimants’ arguments.

First, the Arbitrators who hear the evidence and decide the outcome of arbitration cases are chosen by the parties through a mutual selection process, where both sides are provided the same profile information about the arbitrator candidates, including educational and professional backgrounds and past rulings. Candidates are drawn from a pool of either former judges, business persons or persons having expertise in the particular subject matter of the dispute. Whatever the candidates’ backgrounds may be, both sides are given the same information to evaluate and rank their preferred candidates. In that sense, one has to squint pretty hard to see how corporations “control” the appointment process – the single most important decision affecting how the arbitration will be conducted – particularly in cases with a three-person arbitration panel.

Second, once the parties select the arbitrators, they meet with the parties’ lawyers to determine what rules and procedures will govern. Again, there is mutuality in this process, with the arbitrators receiving input from both sides and seeking consensus where it can be achieved. Thereafter, it is simply a matter of calling balls and strikes, with the rules applying equally to both sides. No arbitrator I have ever encountered, in dozens of cases, has come into the process with a known or apparent bias for or against my client, no matter which side I represented – claimant or respondent. Just the opposite: every client – corporation and individual, alike – goes into the process concerned about how the arbitrator will rule, not only on the ultimate outcome of the case, but on every ruling from the time the first witness is sworn. In that respect, arbitration is no different than civil court for claimants or respondents – you win some and you lose some, in terms of intra-hearing rulings and final decisions.

If anything, arbitration is a more claimant-friendly forum than civil court, in that it does away with many of the procedural devices that might otherwise allow a party (typically defendants/respondents) to exit the case early, without having to endure a full evidentiary hearing. From that perspective, arbitration provides a claimant a better opportunity to have his case heard than he might receive if filed in court. In this respect, the corporate respondent, far from being in control, is often captive to the process from the time the claim is filed until the final ruling is issued, no matter how small the amount in controversy or how long the process may take. This captivity and its attendant costs are strong motivators for corporate defendants to settle meritorious claims early, as they often do, to avoid incurring the substantial fees and costs that can mount over time and can, over the course of a year, with the number of arbitrations that are typically filed, become a significant drag on the corporation’s performance. No CEO, director, shareholder, retiree or portfolio manager wants to see this happen.

To work effectively, arbitration, like any other adjudicatory process, requires good facts, good lawyering and good judging. From this writer’s vantage point, all arbitration participants tend to take their role seriously and perform it to the best of their ability. While some may seek to cast arbitration as an unfair process, their real grievance is that arbitration is not as profitable (for them) because they can’t aggregate dozens of small claims to leverage a large settlement, settlements that in class actions often yield little more than nominal compensation to the individual claimants. But, that does not justify indicting the arbitration process or suggesting that it denies any claimant their right to due process. For those situations where the offending conduct represents recurring or systemic corporate misbehavior but the amount involved per claimant is too small to justify pursuing an individual case, there remains an armada of federal and state regulators and enforcers, not to mention public interest and special interest advocates, who stand ready to take up the next cause, and often do so with great effectiveness, resulting in restitution funds from which victims may seek to recover.

This latest round of hand-wringing is just a higher level of misinformation spread by the plaintiffs’ bar to try and win back the ability to gain extra bargaining power. Arbitration has long been a respected avenue of redress that seeks to do, and does, as much as civil courts to give the little guy his “day in court” and his shot at the big bad corporation.

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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