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Empirical Evidence Indicates Individuals Fare Well in Arbitration

Jun 1, 2005

Author(s): Kirk D. Jensen.

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An article written by Kirk Jensen titled "Empirical Evidence Indicates Individuals Fare Well in Arbitration" was published in the June 2005 edition of the North Carolina Bar Association's Dispute Resolution.

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NORTH CAROLINA BAR ASSOCIATION
Dispute Resolution

EMPIRICAL EVIDENCE INDICATES INDIVIDUALS FARE WELL IN ARBITRATION

By Kirk D. Jensen

A FEW MONTHS AGO I ATTENDED A CLE PRESENTATION ON CONSUMER arbitration. The speaker told of a family that developed serious health problems allegedly because of chemicals used by an exterminator. The family’s agreement with the exterminator contained an agreement to arbitrate any disputes. The family sued the exterminator, which then moved to enforce the parties’ arbitration agreement. The speaker’s account ended with the court ordering the family to pursue its claims against the exterminator in arbitration. Although the speaker admitted that he knew nothing about the outcome of the arbitration of the family’s claims, to the speaker’s mind the tragedy was already complete. For him, requiring the family to arbitrate its claims amounted to depriving them of their rights. Even though the speaker asserted that nobody knows how individuals fare in arbitration, he seemed certain of one thing: arbitration must be bad for individuals.

Contrary to this speaker’s contention, numerous studies have been conducted to find out how individuals fare in arbitration. And the speaker may be surprised to find that these studies show that consumers fare well in arbitration—and often much better than they fare in litigation. This body of empirical evidence shows that consumers prevail more often in arbitration than they do in court litigation and that those who win in arbitration generally recover more than those who win in court. These studies also show that arbitration resolves disputes faster—often much faster—than litigation. This evidence also shows that arbitration costs less than litigation. Finally, and importantly, individuals who have participated in arbitration overwhelmingly report that they believe they were treated fairly.

Before reviewing some of this empirical evidence, it is important to emphasize that this discussion of the benefits of arbitration assumes that the individual’s arbitration agreement allows the enforcement of all rights and the provision of all remedies available under the law. While individuals generally fare better in arbitration than in litigation, this might not be the case if the arbitration agreement contains provisions that preclude the vindication of substantive rights or restrict otherwise available remedies. Companies would be well-advised to avoid such provisions. See, e.g., Kirk D. Jensen, “How to Draft an Unenforceable Arbitration Agreement and Increase Your Client’s Risk of Class Arbitration,” Notes Bearing Interest, Vol. 26, No. 3, at 5 (January 2005), reprinted (as updated) in Dispute Resolution, Vol. 19, No. 2, at 8 (February 2005). Happily, studies have shown that such restrictive arbitration provisions are far less prevalent than arbitration critics claim. See, e.g., Christopher R. Drahozal, “ ‘Unfair’ Arbitration Clauses,” 2001 U. Ill. L. Rev. 695.

OUTCOMES

In 2004, Ernst & Young published a study showing that consumers fared well in arbitrating consumer lending claims. Reviewing 226 lending-related, consumer initiated cases filed with the National Arbitration Forum over a four-year period, Ernst & Young found that when cases went to an arbitration hearing, consumers prevailed 55 percent of the time. Additionally, when settlements and claimant-initiated dismissals were included, Ernst & Young found that nearly 80 percent of consumers obtained favorable results in arbitration. Ernst & Young concluded that their findings “do not support the allegations that consumers are disadvantaged by mandatory arbitration clauses. In fact, these findings suggest that consumers find the arbitration process beneficial to resolving disputes.” Ernst & Young, “Outcomes of Consumer Arbitration: An Empirical Study of Consumer Lending Cases” (2004), available at http://www.adrforum.com/rcontrol/documents/ResearchStudiesAndStatistics/2005ErnstAndYoung.pdf.

A comparison of the outcomes of individual arbitrations and of court litigation further suggests that arbitration is beneficial to individuals. In 2000, the National Arbitration Forum (“NAF”) reported that individual plaintiffs win 71 percent of the claims brought against corporate entities before the NAF. In contrast, between 1987 and 1994, individuals won less than 55 percent of claims brought in federal court under original diversity jurisdiction, and only about 30 percent of claims brought under removal jurisdiction. See Eric J. Mogilnicki & Kirk D. Jensen, “Arbitration and Unconscionability,” 19 Ga. St. U. L. Rev. 764 (2003).

Similarly, a 2002 study published by Professor Perino of St. John’s University School of Law found that consumers fared well in securities arbitrations. Reviewing more than 31,000 arbitrations from 1980-2001, Professor Perino found that consumers prevailed in nearly 53 percent of cases. In comparison, plaintiffs in stockholder suits prevailed only 32 percent of the time in federal court. Michael A. Perino, “Report to the Securities and Exchange Commission Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities Arbitrations,” available at www.sec.gov/pdf/arbconflict.pdf.

Numerous studies have reached similar conclusions in the employment context. A 2003 study by attorney Michael Delikat and Professor Morris Kleiner compared outcome and timing factors in 125 employment discrimination cases filed in the Southern District of New York with 186 arbitrations involving employment disputes in the securities industry found that claimants prevail more often and obtain higher awards in arbitration than in court. The study found that claimants prevailed 46 percent of the time in arbitration compared with 34 percent in court. The study also found that the median monetary award was nearly $4,500 higher in arbitration than in court. Michael Delikat & Morris M. Kleiner, “An Empirical Study of Dispute Resolution Mechanisms: Where do Plaintiffs Better Vindicate Their Rights?” Disp. Resol. J., Nov. 2003-Jan. 2004, at 56. The findings of another employment arbitration study suggest even more strongly that individuals fare better in arbitration than in court. Lewis Maltby, then the Director of the ACLU National Taskforce on Civil Liberties in the Workplace, compared employment arbitrations from 1993 and 1995 with federal District Court cases from 1994. The study found that 63 percent of employees won in arbitration, while only 15 percent of employees won in federal court. Additionally, Maltby showed that approximately 60 percent of cases brought in court are resolved by summary judgment, and that employers prevail on such motions 98 percent of the time. These findings led Maltby— hardly an industry shill—to conclude that “it would be a serious mistake for the civil rights community to attempt to stop the trend to employment arbitration.” Lewis L. Maltby, “Private Justice: Employment Arbitration and Civil Rights,” 30 Colum. Hum. Rts. L. Rev. 29 (1998).

Some consumer advocates have attempted to rationalize this evidence by arguing that although individuals may prevail more often in arbitration, they do not recover as much—or as much as they should —because arbitrators tend to “split the baby.” While more studies on this topic would be helpful, the current evidence indicates that individuals still benefit from arbitration even if allegations of baby-splitting are true. In his study, Lewis Maltby found that although average awards for employees were lower in arbitration and litigation, employees as a group win a higher percentage of the amount they demand (18 percent in arbitration versus 10.4 percent in court)—due in large part to higher win rates. Maltby also concluded that comparing average awards is misleading, since the combination of higher win rates and lower procedural costs in arbitration result in a higher adjusted outcome in arbitration than in litigation. Making the same observation, Professor Estreicher has explained that litigation gives Cadillacs to only a few and rickshaws to the many, while arbitration gives Saturns to everyone. Samuel Estreicher, Saturns for Rickshaws: The Stakes in the Debate Over Predispute Employment Arbitration Agreements, 16 Ohio St. J. on Disp. Resol. 559 (2001).

Many more studies could be cited, but the above sampling is sufficient to show that arbitration offers significant benefits to individuals in terms of outcomes.

TIME

Individuals not only benefit from arbitration in terms of outcomes, they also benefit from the faster resolution of disputes in arbitration. Maltby’s study found that, on average, arbitration resolved employment disputes in 21.4 fewer months than in litigation. Delikat and Kleiner’s study found that disputes were resolved in 8 1/2 fewer months than in litigation. This is not surprising, since court procedures are complicated and time-consuming, and since the number of judges is limited and the number of cases they hear continues to grow. Even simple cases filed in court must wait behind a line of potentially more time consuming cases. From 1999 to 2004, the average median time in federal courts from filing to disposition (even if the disposition is summary judgment) is nearly 9 months, while average median time from filing to trial is more than 21 months. And for the same time period, an average of about 12 percent of all civil cases filed in the federal courts were more than 3 years old. See Administrative Office of the United States Courts, “Judicial Caseload Profile Report,” available at www.uscourts.gov/cgi-bin/cmsd2004.pl. In contrast, procedures are more streamlined in arbitration, and parties can factor availability into their choice of arbitrators. Thus, the NAF reports that most individual arbitrations can be resolved in 3-6 months. See Mogilnicki & Jensen, supra.

There can be little doubt that arbitration offers individuals a faster means of resolving a dispute. This is a significant benefit to individuals, particularly working families and the elderly, who may not be able to afford to wait years for the resolution of a dispute.

COST

While there has been much debate about the cost benefits of arbitration in recent months, empirical evidence suggests that arbitration’s lower costs allows many individuals to bring claims they otherwise could not afford to bring. Maltby’s study shows that, in large part because of costs, only 5 percent of those who seek help from lawyers succeed in retaining legal counsel. This is, in part, because lawyers will not represent clients with small claims. See, e.g., Jill Schachner Chanen, “Pumping Up Small Claims,” A.B.A. J., December 1998, at 18 (showing that lawyers rarely agree to pursue claims less than $20,000). Professor Theodore Eisenberg and Elizabeth Hill recently showed that 72 percent of employees who brought claims in arbitration could not have afforded to bring those claims in court. Theodore Eisenberg & Elizabeth Hill, “Arbitration and Litigation of Employment Claims: An Empirical Comparison,” Disp. Resol. J., November 2003-January 2004, at 44. Because arbitration does not require a lawyer, and often offers fee-waivers to individuals who cannot afford costs, arbitration allows a larger number of individuals to vindicate claims that they could not otherwise vindicate in court.

The class action device does not fully resolve the problem of court costs. Many claims are not eligible for class treatment.
Additionally, lawyers are often unwilling to represent a class unless a significant monetary award is available. One study, sponsored by the RAND Institute for Civil Justice, found a large number of putative class claims are dropped when the plaintiff attorney concludes the case cannot be certified or settled for money. See Deborah R. Hensler et al., “Class Action Dilemmas: Pursuing Public Goals for Private Gain” (1999). For individuals whose claims cannot be brought as lucrative class actions, arbitration may be the individual’s only means of vindicating important rights.

PERCEPTION

Surveys of individuals who have resolved disputes in arbitrationshow that individuals overwhelmingly believed their arbitrations were conducted fairly and without bias. For example, 93 percent of consumers interviewed in Professor Perino’s study reported that they were treated fairly in arbitration, and 91 percent said their arbitrators demonstrated a level of fairness that was “excellent” or “good.” Ernst & Young also found that 69 percent of consumers they interviewed reported that they were satisfied or very satisfied with their experience in arbitration. It is no wonder that, in a recent survey, 64 percent of Americans said they would choose arbitration over lawsuits in disputes involving monetary relief. RoperASW, 2003 Legal Dispute Study (April 2003), available at www.adrinstitute.org/adri-lds2.pdf.

WHAT THIS MEANS

Although more studies reaching similar conclusions could be cited, the above sample is enough to show a clear trend: empirical studies show that individuals can benefit greatly from arbitration. While more research should be done, the research that has been performed proves, at a minimum, that arbitration does not disadvantage individuals. These studies prove Congress right when it asserted that [t]he advantages of arbitration are many: it is usually cheaper and faster than litigation; it can have simpler procedural and evidentiary rules; it normally minimizes hostility and is less disruptive of ongoing and future business dealings among the parties; it is often more flexible in regard to scheduling of times and places of hearings and discovery devices...” H.R. Rep. No. 97-542, at 13 (1982).

So given this evidence, why are consumer and employee advocates so hostile toward arbitration? One reason may be that someadvocates—such as the speaker at the CLE presentation mentioned above—are unaware of the benefits individuals stand to gain through arbitration. Much has been learned about the experience of individuals in arbitration in recent years. While more can be learned, what we now know should quell much of this hostility.

Another reason for hostility may be the “numerator problem.” No means of resolving disputes—whether arbitration, litigation, or some other mechanism—is perfect. For example, if 1 percent of individuals have a bad experience with arbitration, few arbitrations will result in few complaints. However, as the use of arbitration increases—as it has dramatically in recent years—the number of complaining individuals increases, even if the percentage of problems remains constant or decreases. Those working with the complainants may believe the problems with arbitration are greater than they really are, simply because the number of complainants is greater. The evidence discussed above shows that even though arbitration is not perfect, it provides many benefits to individuals that are unavailable elsewhere.

Chief Justice Warren Burger proposed two other reasons for why some are hostile to arbitration: fear of loss of power, and fear of loss of money. Some people acquire power and prestige by participating in the litigation system. Any means of resolving disputes outside that system threatens their power. Additionally, some people make substantial sums of money by participating in the litigation system. A system of resolving disputes outside litigation—particularly one that is less lucrative to them—threatens their income stream. My hope is that these people are few, and that we, as a profession, will not deprive individuals of the manifold benefits of arbitration merely because it conflicts with the selfish interests of a few.

Finally, some may be hostile to arbitration because they believe individuals want to resolve disputes in the public courts. Chief Justice Burger, advocating greater use of arbitration, addressed this view nearly 30 years ago: “The notion that most people want black-robed judges, well-dressed lawyers, and fine paneled courtrooms as the setting to resolve their disputes is not correct. People with problems, like people with pains, want relief, and they want it as quickly and inexpensively as possible.” Warren Burger, “Our Vicious Legal Spiral,” 16 Judges J. 23 (1977).

The evidence presented above shows that arbitration is and canbe beneficial to individuals in resolving disputes with companies. Given these benefits, energies currently spent fighting arbitration would be better spent working with arbitration proponents to improve the process so that it serves individuals even better.

Jensen is a member of the North Carolina State Bar and practices with Buckley Kolar LLP in Washington, D.C.


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