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The Costs of Arbitration
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"The speed and affordability of arbitration are perhaps its most discussed benefits... "
-U.S. Chamber of Commerce
"Arbitration can save parties 70-80% of the cost of litigating these cases."
-Ed Anderson, National Arbitration Forum
"Arbitration still costs less than litigation"
-The Wall Street Journal
"Less costly"
-AT&T Broadband
"Cost-effective"
-Sen. Jeff Sessions
"Usually it is quicker, less expensive, and more informal than litigation. Not always... "
-Florence Peterson, American Arbitration Association
Remarkably, although the claim is frequently made
that arbitration costs less than litigation, no research has ever been
undertaken to substantiate it. No interest group has commissioned a
study. No Member of Congress has asked for a General Accounting Office
report.
Writing in 1992 about court-annexed ADR, Stanford
law professor Deborah Hensler cautioned, "Whether alternative dispute
resolution procedures will reduce private litigation costs is still an
open question. Court-administered arbitration has shown mixed results
in this regard." Recently she repeated her caveat about a paucity of
empirical research, explaining, "Because public support for ADR is so
frequently justified on cost savings grounds, program administrators
especially fear cost-benefit assessments."
Here, Public Citizen presents the first comprehensive collection of information on arbitration costs. We find:
- The cost to a plaintiff of initiating an arbitration is almost
always higher than the cost of instituting a lawsuit. Our comparison of
court fees to the fees charged by the three primary arbitration
provider organizations demonstrates that forum costs- the costs
charged by the tribunal that will decide the dispute- can be up to five
thousand percent higher in arbitration than in court litigation. These
costs have a deterrent effect, often preventing a claimant from even
filing a case.
Public Citizen's survey of costs finds that, for
example, the forum fee for a $60,000 employment discrimination claim in
the Circuit Court of Cook County, Illinois is $221. The forum fees for
the same claim before the National Arbitration Forum (NAF) would be
$10,925, 4,943% higher. An $80,000 consumer claim brought in Cook
County would cost $221, versus $11,625 at NAF, a 5,260% difference.
These high costs are not restricted to NAF; for the same $80,000 claim,
the American Arbitration Association (AAA) would charge the plaintiff
up to $6,650, and Judicial Arbitration and Mediation Services (JAMS)
would charge up to $7,950, amounting to a 3,009% and 3,597% difference
in cost, respectively.
- Arbitration costs are high under a pre-dispute arbitration clause
because there is no price competition among providers. Companies that
want to use arbitration costs as a barrier, to prevent consumers and
others from asserting their legal rights, have no incentive to arrange
low-cost arbitration services. Instead, it is to their advantage to
seek out the highest-cost arbitration providers. While experience has
shown that many lawyers are willing to serve as arbitrators for nominal
fees, the market provides no mechanism to match volunteer arbitrators
to cases in which they are needed the most.
The mandatory arbitration clause's negative effect
on price competition can be seen in AAA's handling of insurance claim
arbitration. From 1989 to 2000, in cases submitted to AAA on a post-dispute basis, AAA charged each party a total of only $300 for administration and arbitrator fees. But cases arising under a pre-dispute clause
were governed by AAA's Commercial Rules, with much higher filing fees
and regular hourly arbitrator fees. For example, a health insurer's
denial of coverage for a bone marrow transplant, submitted post-dispute
under the Insurance Claims Procedures, would cost the consumer $300.
But for a case governed by a pre-dispute clause, AAA charged a much
higher fee. Tammy Sharpton, who arbitrated such a case in 1997, was
charged $5,290.23, eighteen times what AAA would have charged had it been competing with other arbitration providers and the courts.
- Arbitration costs will probably always be higher than court costs
in any event, because the expenses of a private legal system are so
substantial. The same support personnel that expedite cases at a
courthouse, such as file clerks and court administrators, are also
necessary to manage arbitration cases. But because arbitration provider
organizations handle fewer cases over larger geographic areas, the
economy of scale in a court clerk's office cannot be achieved,
increasing the administrative cost per case. Thus, while it costs the
Clerk of the Circuit Court of Cook County an average of $44.20 to
administer a case, AAA's administrative cost per case averages $340.63,
about 700 percent more.
- Arbitration saddles claimants with a plethora of extra fees that
they would not be charged if they went to court. For example, the
National Arbitration Forum charges $75 to issue a subpoena. A lawsuit
litigant can obtain a subpoena form for free from the court, oftentimes
downloading it off the Internet. NAF also charges fees for discovery
requests ($150) and continuances ($100), occurrences so ubiquitous in
litigation that they must be viewed as inevitable. The American
Arbitration Association (AAA) charges extra fees for use of a hearing
room.
- Taking a case to arbitration does not guarantee that a consumer or
employee will stay out of court, making arbitration still more costly.
First, a plaintiff bound by a one-way arbitration clause, the
most common type, may be forced to go to court to litigate the same
issues that are being decided in the arbitration. This is because the
other party to the clause has retained its right to sue in court.
Second, if crucial documents or testimony must come from a third party,
court litigation is necessary to enforce subpoenas. In fact, due to a
quirk in arbitration law, sometimes two different federal lawsuits are
necessary to enforce one subpoena. Third, if a plaintiff wins a case in
arbitration but the defendant refuses to honor the award, the plaintiff
must ask a judge to enforce the award.
- The costs of arbitration are so high that even some businesses that
choose to include arbitration clauses in contracts with consumers and
farmers have refused to pay the fees.
- High arbitration costs can also be used to bludgeon an adversary.
For instance, the party being sued can file a motion to dismiss or a
motion for summary judgment. The claimant must then advance additional
funds to pay the arbitrator to decide the motion, even if the motion
has no merit. The defendant can also refuse to provide discovery
information, in which case the claimant must advance funds to the
arbitrator to decide the discovery dispute. In one case, for which we
have reproduced copies of the arbitration bills, the claimant was
unable to pay and had to abandon the case.
- The oft-cited benefits that arbitration can offer in exchange for
higher fees will seldom benefit consumer litigants. Not only is there
is no evidence that arbitration reduces the overall transaction costs of litigation (e.g. witness fees, attorney fees, discovery costs), but nobody has expounded a coherent theory to explain how arbitration could
reduce such costs except in a few categories of cases. Indeed, Public
Citizen's careful examination of the cost savings claim demonstrates
that in the vast majority of cases, arbitration will necessarily increase the transaction costs of litigation.
To order a complete report call Public Citizen's Publication Office:
1-800-289-3787, for additional orders. The report's publication number is B9028.
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