Affordable justice through arbitration
The authors reveal some of the flaws in the arguments made by a vocal consumer advocacy group in a recent paper purporting to compare arbitration costs with those of litigation. They show, among other things, that arbitration costs on employees and consumers actually are going down, and they cite soon-tobe-published research showing that the costs for employees are modest. They emphasize that since most. employees and consumers have low– stakes claims that are not likely to ever be heard in court, arbitration is the only real forum in which their claims can be heard.
In April 2002, Ralph Nader’s “consumer rights” group, Public Citizen, issued a report on the costs of arbitration.1 Billing itself as the “first comprehensive collection of information on arbitration costs,” it contains but a few “case studies,” without any evidence that they are representative of the forum costs incurred by the typical consumer or employee. In fact, several examples involve disputes that appear to be well outside the realm of the typical lower-income claimant, such as one involving a $605,000 custom-designed home, and others involving highly compensated employees of two well-known brokerage firms.2 Moreover, the report does not take into account the frequent reallocation of forum fees by arbitrators, which often allows employees and consumers to resolve their disputes at modest cost. The report also does not address the clear trend in provider organization rules and company-promulgated agreements to prospectively allocate the bulk of arbitration costs to the employer or non-consumer party.
More significantly, the Public Citizen report makes the faulty assumption that lower-income parties are otherwise being denied their “day in court” due to mandatory predispute arbitration agreements. As discussed below, it is unlikely that many of these claims would ever be litigated in the public court system, due largely to the difficulty in securing legal counsel for high-cost litigation in such low-stakes cases.
Accordingly, arbitration is not a device that deprives employee and consumer claimants of an opportunity to vindicate their rights, and may well be the only forum in which they can obtain a hearing. The fact that some costs are involved in arbitrating such disputes outside the publicly funded court system is not surprising, and, in fact, may be necessary to deter pursuit of frivolous claims.
Inadequate Case Studies
Almost no empirical research has been conducted on the forum costs of arbitration for lower-income consumers and employees. Unfortunately, the Public Citizen report adds little to the discourse in this area, as its so-called case studies offer no illumination as to the true average costs of arbitration in consumer and employment cases. The report does not identify the source of the case studies, making it impossible to know if they are representative of most employment and consumer disputes. Given the thinly veiled agenda of the report, one can only assume that these examples represent the worst-case scenarios that the authors could locate.
Notably, the report ignores the fact that in many cases the forum fees incurred by the consumer or employee are reallocated by the arbitrator to their adversary. A soon-to-be-published empirical study of 200 randomly selected employment arbitrations administered by the American Arbitration Association suggests that the costs to the employee are relatively low, and often zero-either as a consequence of employer-promulgated plan design or reallocation by the arbitrator.3 While the study concerned only employment arbitrations administered by the AAA, there is no reason to believe that similar results would not be obtained in other types of arbitration, including those administered by other reputable service providers.
It might be argued that the reallocation of arbitration costs at the end of the arbitration process does not protect lower-income parties from the up-front costs. However, up-front costs are not unique to arbitration and, in fact, are usually significantly higher in litigation.
In order to make litigation look more attractive, Public Citizen compared only court filing fees with arbitration forum fees, while ignoring the fees of attorneys and the cost of discovery typically incurred in litigation. Many plaintiffs’ attorneys require a minimum retainer of $3,000 even for a minimal effort in litigation; others require out-of-pocket expenses to be paid as they are incurred, which can be significant.4 Moreover, as discussed below, the unmistakable trend in company-promulgated arbitration programs and provider-organization rules is the continued reduction in forum and arbitrator fees for individual employees and consumers.
Trend Toward Lower Costs
Recent judicial developments and revisions to arbitration agreements and rules of arbitration providers suggest that arbitration costs for lowerincome parties are not likely to increase and are more likely to be shifted to the employer or nonconsumer party. Some courts have held that employees cannot be forced to pay any costs of arbitration, or more than a nominal amount.5 Other courts have rejected a flat prohibition on fee-splitting. These courts have adopted a caseby-case analysis that focuses on the claimant’s ability to pay arbitration fees and costs, the expected cost differential between arbitration and litigation, and whether the costs are so substantial as to deter employees from filing claims.6 These decisions rely on Green Tree Financial Corp. v. Randolph,7 a consumer-credit case, in which the Supreme Court held that despite the possibility of high fees, the mere risk of such costs was too speculative to justify a refusal to compel arbitration of the consumer’s Truth in Lending Act claims. The Court explained that the party resisting arbitration has the burden of establishing that she is likely to incur prohibitive costs that would deter her from arbitrating her claims.
These decisions, along with the “Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising Out of the Employment Relationship” and the “Consumer Due Process Protocol,”8 have had a salutary influence on many company– promulgated arbitration programs, as well as on the arbitration rules of provider organizations, which have been (or are in the process of being) revised to shift a greater portion of forum and arbitrator fees to the employer or non-consumer party.
For example, under the AAA’s recently revised rules for consumer arbitration, consumers pay only $125 in cases involving less than $10,000. If the claim is between $10,000 and $75,000, the consumer’s fee is capped at $375. In each of the foregoing situations, the business pays the remaining costs and fees that are due.9 Moreover, in all consumer cases involving claims under $75,000, the fees paid by the consumer are fully refundable if the dispute is settled before the arbitrator takes any action. Additionally, the AAA has formalized the process for a claimant to receive a waiver or deferral of the AAA administration fee based on financial hardship. And it now has a roster of over 3,000 arbitrators who have volunteered to serve pro bono where an individual would otherwise be financially unable to pursue his or her rights in the arbitral forum.10
It is also worth noting that under the AAA consumer arbitration rules, the filing fee is based only on the amount of the compensatory or actual damages claimed, and does not take into account any additional claims for punitive damages or attorney’s fees.11 Thus, any concern that a claimant must pay a “graduated filing fee corresponding to the highest possible amount” in order to preserve a “borderline” claim for damages is simply not the case under the AAA’s consumer arbitration rules. A consumer claimant with relatively small actual damages can initiate an arbitration at low cost and still seek other types of damages in unlimited amounts.
Other arbitration organizations have similarly reduced forum costs to consumers and employees. For example, Judicial Arbitration and Mediation Services JAMS) limits consumer arbitration fees to $125, and requires the company to pay all other costs, including case management and arbitrator’s fees.12 If an arbitration is based on an agreement that is required as a condition of employment, the only fee that an employee may be required to pay is the JAMS case management fee.13 Likewise, the National Arbitration Forum recently reduced its fees for consumer arbitrations, which it defines to include employmentrelated arbitrations.14
In the employment arena (our area of expertise), we find that leading companies like Halliburton, Phillip Morris and General Electric have promulgated predispute ADR programs (including arbitration) that limit the forum fees that an employee is required to pay to an amount set at the level of court filing fees; all other forum costs and arbitrator fees are paid by the employer. (Indeed, Halliburton and Phillip Morris provide an insurance benefit to defray the costs of legal representation.) The employment arbitration programs we have drafted for clients invariably provide for shifting virtually all of the arbitration costs to the corporate client. In fact, this is often done at the client’s insistence. Most companies are understandably reluctant to waste resources litigating the propriety of an arbitration agreement’s cost allocations.15
Public Citizen baldly asserts that overall forum costs are likely to increase because of an alleged lack of price competition among providers, particularly when a single provider is specified in the agreement to administer the arbitration program. The claimed lack of competition is a myth, however, since it ignores the intense price competition among provider organizations seeking to be selected to administer both large and small arbitration programs. It is difficult to imagine any business considering an arbitration program that would not look very closely at the fees charged by potential administering organizations. Moreover, at least in the case of the AAA, there is no contract between it and the employers or other businesses using the AAA’s services. Thus, there is nothing to prevent the business from initially designating one provider organization and then changing to a different organization. It is also possible for the business and the claimant to agree to use a different provider organization. Our clients often insist on providing employee-claimants with a choice among provider organizations.
There is also considerable competition among arbitrators. Arbitrators who serve on AAA panels, and perhaps others, are free agents and set their own fees, which are not shared with the AAA. These arbitrators are competing with each other and their fees are undoubtedly a factor in the arbitrator selection process. As most of these fees are going to be borne by employers and businesses, arbitrator fees will be of less concern to most employee and consumer claimants. At the same time, the companies that will have to pay these fees are likely to become even more price-sensitive when choosing an arbitration provider, which will increase, not decrease, competition.
The Public Citizen report claims that there are “other costs” of arbitration that are not quantifiable that disadvantage consumers and employees. It contends that one of these is a lack of information about the background of potential arbitrators. This claim is difficult to accept fully since information about the arbitrator is usually available from the provider. Moreover, arbitrators themselves often post information on their own Web sites.
To the extent, if any, that there is a dearth of information about arbitrators, it is a problem that employee and consumer groups can and do remedy. The National Employment Lawyers Association (NELA), a plaintiffs’ counsel group with chapters in all major legal centers, maintains a database of arbitrators. With systematic information-sharing at NELA gatherings and elsewhere about experiences with different arbitrators, the database provides an especially useful tool for employees and consumer claimants to screen potential arbitrators.
Public Citizen also complains about a lack of information about the award history of arbitrators. Yet information-sharing among repeat-player plaintiff bar groups also includes comparative award history. Moreover, since 2001, the AAA has arranged for third-party publication of its employment awards, which are redacted to preserve the parties’ anonymity. (This program, we are told, has been temporarily halted, but will resume in the near future.)
Another argument Public Citizen makes is the claim that “few arbitration clauses drafted by parties with superior bargaining power operate on a `two-way’ basis.” The assertion is contrary to common sense, since few employers would draft one-sided agreements that it knows would inevitably wind up in court. It also runs counter to our experience and to recent court decisions requiring “a modicum of mutuality” such that both parties are obligated to arbitrate their claims against the other.16
Public Citizen charges that as a result of these “one-way” agreements, a business entity can force a consumer or employee to arbitrate her claims, while retaining the right to litigate its own claims against the employee or consumer in court. It is true that certain types of claims are reserved for litigation, but generally these are independent claims that involve injunctive relief, such as in connection with claimed violations of a non-compete or confidentiality agreement. (Few average employees enter into non-compete agreements, since these agreements are generally found among higher management.) We generally advise our clients to carve out all claims for injunctive relief from their arbitration programs.
Also reserved for litigation are claims covered by statutory schemes, such as the National Labor Relations Act and workers’ compensation laws. In these situations, it usually is in both parties’ interest to exclude such claims from arbitration and allow prompt judicial/administrative relief to be sought. Although Public Citizen characterizes potential employer actions as “companion claims,” they are in fact not companions to employee claims for, say, employment discrimination and will not predetermine the merits of such employee claims.
Public Citizen contrives an argument that arbitration costs more because of extra costs incurred to seek judicial enforcement of arbitral subpoenas and other directives from the arbitrator. However, it fails to acknowledge similar costs in litigation, which probably are incurred far more often. In most jurisdictions attorney subpoenas issued in litigation are not self-enforcing and require motion practice when resistance is encountered. Moreover, courts do not have unlimited jurisdiction. Like an arbitrator, a court may be powerless to order the appearance of a witness who resides outside the court’s jurisdiction at a trial or hearing. Thus, litigants in the public court system may be forced to file separate actions in other districts or counties in order to enforce a subpoena and compel a party’s appearance. This process typically involves new court filing fees, preparation of motions, remote site depositions, and retention of local counsel. Accordingly, any concerns about the added costs of arbitration are unfounded since they are not significantly different, and are probably lower than those that would arise in litigation.
Denial of “Day in Court”
Even if we assume, for argument’s sake, that the cost of arbitration relative to the public court system were higher, predispute arbitration clauses still would not have the effect of denying employees and consumers their “day in court,” as the Public Citizen report broadly asserts. To the contrary, the vast majority of employees and consumers have low-stakes claims that would never be asserted in court. Thus, arbitration is the only forum available, as a practical matter, for resolution of these claims.
Access to justice in court costs money, and not an insignificant amount. One survey by a leading plaintiffs employment-rights advocate found that prospective plaintiffs in employment disputes need a minimum of $60,000 in provable economic damages (not including pain and suffering) before an attorney will take the case.17
Moreover, in addition to requiring a large provable claim, many plaintiff attorneys require a minimum retainer of $3,000, and others require payment of out-of-pocket expenses as they are incurred. This is not a small entry fee to the public court system for lower-paid employees and consumers with small claims.
The inability of the majority of employees to obtain legal representation is borne out by another study which found that only 5% of employees who believe that they have an employment discrimination claim are able to obtain the representation of an attorney to pursue that claim in court.18
The fact that most employee claims do not attract the attention of private lawyers means that, without arbitration, most of these claims could be heard in only one place: before an administrative agency. But most claims filed with agencies languish because the agencies themselves lack the staffing (and sometimes the will) to serve as counsel for the average claimant. For example, as of 1994, the Equal Employment Opportunity Commission was prosecuting only 0.47 of 1% percent of the charges filed with it.19 Matters have improved since the EEOC has come to embrace mediation, at least for charges it has no interest in pursuing. Nonetheless, most lower-income individuals with employment discrimination claims find relief neither in the court system nor through administrative agencies. The only real option is a good internal ADR system culminating in arbitration.
The Public Citizen report notes that some of these claims could be joined in a class action, which would help attract private counsel due to the larger, collective stakes involved. While it is true that arbitration clauses have been a barrier to class actions in some cases, it does not follow that a class action increases the recoveries of individual plaintiffs. In fact, recoveries in class actions for individuals may even be lower than those they could obtain on their own. Some statutes even have caps on recoveries that are spread over an entire class.20 Furthermore, class action settlements often feature a discounting of pro rata claims.
It should also be borne in mind that the “right” to proceed as a class is a procedural one. The validity of Rule 23 of the Federal Rules of Civil Procedure depends on its honoring the statutory interdiction of “procedural” rules that “abridge, enlarge or modify any substantive right.”21 In a properly structured arbitration system, substantive rights are not modified. Accordingly, individuals are not prevented from vindicating their rights in arbitration; indeed, to the extent arbitration expands access, it enhances the prospect of such vindication.22
Another important point is that class actions are not the only means of correcting negative behavior by companies. Many consumer statutes give expansive enforcement powers to the Federal Trade Commission and other governmental agencies that far exceed those available to plaintiffs’ attorneys in a class action. For example, the federal Truth in Lending Act empowers a number of federal agencies to issue cease-and-desist orders, impose monetary penalties, and in some instances order the removal of institution directors or officers.23 In the employment context, the EEOC not only can bring systemic litigation but also may continue to file actions on behalf of individuals who have entered into otherwise binding predispute arbitration agreements.24 Thus, the inability of employees and consumers who are parties to predispute arbitration agreements to join in a class action does not put society in a disadvantaged position.
Because of the cost of litigation and the hurdles involved in obtaining legal counsel, individuals with low-stakes claims would most likely never be able to assert their claims in court. Arbitration offers “average” claimants a more realistic opportunity to participate in dispute resolution than the public court system. We reject Public Citizen’s agenda, which seems to be the elimination of predispute arbitration agreements. In our view, the agenda should be one that seeks to develop an apportionment of the costs of arbitration in a manner that makes the forum accessible yet sustainable. Working toward that end will ensure that arbitration fulfills its promise of being an efficient and fair method of dispute resolution for the many, a role that our public court system to date has been unable to fulfill.
‘ Public Citizen, “The Costs of Arbitration” (April 2002), available at www.citizen.org/publications/release.cfm?ID=7173.
Id., Case Studies C, J-2, J-3. Elizabeth Hill, “Due Process at Low Cost: An Empirical Study of Employment Arbitration Under the Auspices of the American Arbitration Association,” (Forthcoming in Alternative Dispute Resolution in the Employment Arena: Proceedings of New York University’s 53rd Annual Conference on Labor (S. Estreicher & D. Sherwyn eds., Kluwer Legal Int’l 2002)).
‘ Lewis L. Maltby, “Private Justice: Employment Arbitration and Civil Rights,” Colum. Hum. Rts. L. Rev. (1998), pp. 30,46-55.
1 See Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1468 (D.C. Cir. 1997) (the “only way that an arbitration agreement of the sort at issue here can be lawful is if the employer assumes responsibility for the payment of the arbitrator’s compensation”). The D.C. Circuit subsequently limited its holding in Cole to arbitration of federal statutory claims and not to common law claims, even those rooted in public policy. See Brown v. Wheat First Secs., 257 F.3d 821 (D.C. Cir. 2001), cent. denied, 122 S. Ct. 668 (2001); see also Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002) (stating that a provision requiring the employee and employer to equally split arbitration fees “alone would render an arbitration agreement unenforceable,” even though the agreement provided that an arbitrator could order the employer to pay the employee’s portion of arbitration fees), cert. denied, 122 S. Ct. 2329 (2002); Shankle v. B-G Maint. Mgmt. of Colo., 163 F.3d 1230 (10th Cir. 1999) (finding that an arbitration agreement was unenforceable because of a mandatory fee-splitting provision).
See Bradford v. Rockwell Semiconductor Sys., 238 F.3d 549, 556 (4th Cir. 2001); Williams v. Cigna Fin. Advisors, 197 F.3d 752, 763-64 (5th Cir. 1999) (finding that the evidence did not indicate that the plaintiff was unable to pay one-half of the forum fees or that they were prohibitively expensive for him, such that he was prevented from having a full opportunity to vindicate effectively his claims), cert. denied, 529 U.S. 1099 (2000); Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 170 F.3d 1, 18-19 (lst Cir. 1999) (refusing to invalidate an
arbitration agreement simply because of the possibility that the arbitrator would charge the plaintiffs a forum fee “which may be as high as $3,000 per day and tens of thousands of dollars per case,” because, among other reasons, “arbitration is often far more affordable to plaintiffs and defendants alike than is pursuing a claim in court”); Koveleskie v. SBC Capital Mkts., 167 F.3d 361 (7th Cir. 1999) (holding that the mere possibility of high fees is insufficient to invalidate an arbitration agreement), cert. denied, 528 U.S. 811 (1999).
531 U.S. 79 (2000).
The Employment Due Process Protocol was created by the AAA and certain other provider organizations, with consultation from leading plaintiff advocacy groups like the American Civil Liberties Union and the National Employment Lawyers Association. The Employment and Consumer Protocols are available on the AA-A’s Web site at www.adr.org. To see them, click on “Focus Area,” then on “employment” or “consumer.” Then scroll down to “Guides/ Protocols.”
‘ The AAA’s Supplementary Procedures for Consumer-Related Disputes (effective Mar. 1, 2002) (Supplementary Procedures) are available on the AAA’s Web site at www. adr.org.
” See “Costs of Arbitration” (effective Mar. 1, 2002), on the consumer page of the AAA’s Web site at www.adr.org. Click on “Focus Area,” then on “consumer.” Then scroll down to “Topics of Interest.”
11 Supplementary Procedures, supra n. 9.
12 JAMS Policy On Consumer Arbitrations Pursuant to Pre-Dispute Clauses (Jan. 2002), available at www. jamsadr.com/consumer-arb-std.asp.
11 JAMS Employment Arbitration Rules and Procedure Rule 29 (April 2002), available at www.jamsadr.com/ employment arb.asp.
11 National Arbitration Forum, Fee Schedule, available at www.arbitration-forum.com/arbitration/NAF/ Code-linked/apdx-c.htm.
For example, in Blair v. Scott Specialty Gases, 283 F.3d 595, 610 (3d Cir. 2002), the 3rd Circuit reversed the district court’s finding that the employee failed to show that a fee– splitting provision imposed so great a burden as to invalidate the agreement. The case was remanded for limited discovery on the costs of arbitration
and the approximate length of similar arbitrations, to give the employee “the opportunity to prove, as required by Green Tree, that resort to arbitration would deny her a forum to vindicate her statutory rights.” The court also stated that the employer “should be given an opportunity to meet its burden to prove that arbitration will not be prohibitively expensive, or as has been suggested in other cases, offer to pay all of the arbitrator’s fees.” Obviously getting to this ruling was not without cost to the parties, and the issues required to be considered on remand would no doubt require expenditure of additional time and resources.
” See, e.g., Ferguson v. Countrywide Credit Indus., 2002 WL 1611199 (9th Cir. July 23, 2002) (finding arbitration agreement unconscionable where it excluded from arbitration claims typically brought by an employer, such as trade secret or unfair competition issues); Blair, supra n. 15 (holding that a valid agreement was formed based on the parties’ mutual agreement to arbitrate); Michalski v. Circuit City Stores, 177 F.3d 634 (7th Cir. 1999) (compelling arbitration of plaintiffs Title VII claims since Title VII did not preclude enforcement of a predispute arbitration agreement, particularly where the agreement had an opt-out provision; also finding that the employer’s mutual agreement to arbitrate constituted sufficient consideration, pursuant to Wisconsin law, to bind the parties to the agreement).
Maltby, supra n. 4, at 46-55. William Howard, “Arbitrating Claims of Employment Discrimination: What Really Does Happen? What Really Should Happen?,” Dispute Resolution Journal (Oct.-Dec. 1995), pp. 40, 44.
11 Id. at 47.
11 Johnson v. West Suburban Bank, 225 F.3d 366, 374 (3d Cir. 2000) (caps on class recoveries under Truth In Lending Act suggested that individual recoveries could be greater in arbitration, thereby weighing in favor of enforcing arbitration agreement), cert. denied, 121 S. Ct. 1081 (2001).
11 Rules Enabling Act, 28 U.S.C. 2073.
22 Johnson, supra n. 20, 225 F.3d at 369.
21 Id. at 375.
24 EEOC V. Waffle House, Inc., 122 S. Ct. 754 (2002).
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