Nineteen twenty-five was a watershed year in the history of American arbitration. That was the year that Congress passed the Federal Arbitration Act, codifying an express policy in favor of arbitration. Among other things, Congress intended passage of the FAA to counter years of judicial distrust and hostility to arbitration. [1] Proponents of arbitration cited its speed, lower cost, efficiency and finality. There was little or no discovery or motion practice, and very narrow appellate review. [2]

That was then. Now, as Professor Tom Stipanowich points out, arbitration often has become “judicialized” with extensive - and expensive - discovery, arbitral law and motion, statutory due process requirements, and even attempts at engrafting appellate review onto the process. Stipanowich goes so far as to call judicialized arbitration “the new litigation.” [3] The negative aspects of litigation, such as cost, time, and an adversarial atmosphere, conjoin with the drawbacks to arbitration: lack of review, [4] uncertainty flowing from the absence of precedent, [5] and the possibility an arbitrator will ignore a winning legal position to do what’s “fair.” [6] This creates a kind of arbitral Frankenstein’s monster including the worst of both worlds. It’s not surprising that lawyers’ opinions of arbitration have worsened, with some corporate attorneys indicating that litigation is now preferable to arbitration. [7]

And yet, the use of arbitration by sophisticated business disputants does not seem to have suffered greatly. The latest available Fullbright & Jaworski litigation trends study (2011) showed an increase in the proportion of U.S. companies favoring arbitration over litigation from 34% in 2010 to 40% in 2011. [8]

Why is judicialized arbitration still so much in use? There are four main reasons:

1. First, despite a decrease in the cost and time advantages of arbitration over litigation, what evidence there is suggests that arbitration is still three to five times faster than litigation, and is also less costly. Exactly how much faster or cheaper depends on the characteristics of each proceeding. [9]

2. Second, most arbitration advocates are litigation attorneys in a new forum. By using trial experts to arbitrate, clients nearly ensure that arbitration will look and feel more like litigation. Counsel are doing what feels natural - discovery, motion practice, evidentiary technicalities and so on. Since it’s so familiar, there’s no reason to avoid judicialized arbitration. [10]

3. Unlike litigation, arbitration is generally not a matter of public record. Confidentiality is easier to maintain. [11]

4. Fourth, because arbitration is primarily a creature of contract, it permits the parties to tailor the process, fitting it to their needs. Professor Stipanowich calls the opportunity for choice the greatest advantage of arbitration over litigation. [12]

But just as users of judicialized arbitration minimize the recognized arbitral advantages of speed and low cost, ADR consumers are squandering the flexibility inherent in contractual arbitration by using familiar boilerplate provisions without regard to their usefulness or practicality. As discussed below, by clinging to the familiar, cumbersome patterns of litigation like tourists refusing to learn even a few words of a foreign language, arbitration users and their counsel waste resources and risk poor results. Here are a few tips to improve your outcome.

1. Know what you’re agreeing to.

It may seem odd, but parties (and their counsel) often agree to arbitration provisions without knowing exactly what they mean. Not knowing quite what they want from arbitration, they use a boilerplate clause that refers to certain rules, but don’t review the rules before agreeing to them. Of course, counsel know the rules of litigation - they use them daily.

But the whole point of contractual arbitration is to customize the conflict resolution experience to fit the parties’ needs. The court picks the judge, and generally the code sets the rules. But who will pick the arbitrator, and by what means? Sometimes it’s the ADR provider’s administrator, sometimes it’s the parties, sometimes her identity is laid out pre-dispute. Will there be more than one neutral on the panel? Must the neutral(s) have particular expertise? Must there be a written arbitral award? What, if any, discovery is contemplated? What motion practice is allowed? Are there appeals?

All of these questions and more are addressed in a comprehensive set of rules, and the major ADR providers have their rules (sometimes different sets for different case types) posted online. It may make sense to use “off the shelf” arbitration provisions where the transaction costs of agreeing upon and drafting individualized ones exceed the benefits - as, for example where the incidence of arbitration is expected to be low, and the risk associated with losing is small. Even then, knowing what those provisions are in the associated rules is critical, because certain rules might seriously interfere with overall goals of speed, economy, finality, and so on.

2. Plan thoughtfully

Where arbitration is expected to be more frequent or the stakes are higher, it is worthwhile to tailor arbitration clauses and their related rules to the specific situation. This can only be done effectively if the practicalities and goals of the client are kept firmly in mind. Ask yourself these questions before you begin drafting:

A. Does one size fit all?

Even if arbitration under a certain set of rules is right for some of your disputes, a different process might be better for other disputes. For example consumer disputes might best be left to the small claims court, while franchisee disagreements could first be mediated in an effort to preserve the relationship and then sent to arbitration. Supplier disputes might be document intensive, which means that more liberal discovery rules are desireable. Try to make a list of all of the different types of disputes you may encounter. Which should be categorically excluded from arbitration, if any? Which are different enough to require their own rules?

Employment arbitrations are a special case, because the courts have determined that statutory employee rights require certain protections: 1) a neutral arbitrator, (2) limitations on the costs of arbitration to employees, (3) adequate discovery, (4) no limit on remedies, (5) a written decision [13] The point is that not every case is the same. It may make sense to exclude some cases from arbitration altogether; others will need separate rules.

B. How much discovery is needed?

Seventy percent of the average litigation budget is spent on discovery or related motions. (14] How much is needed in the type of dispute you are considering? How complete are the records you keep or have easy access to? Does your opponent likely have information you cannot win without? Do you wish to set up a mechanism for the exchange of those document to be relied upon at hearing?

C. How will the arbitrator be chosen?

Although statutes controlling arbitration permit the court to appoint an arbitrator if the parties do not agree or the agreement does not indicate a method, it is usual to choose an arbitrator without court assistance. An agreement should indicate the method of choice - by agreement of the parties and/or by the provider’s administrator are common. If the matter is a technical one, the choice could be made from a relevant trade group, though it seems more logical to choose a professional arbitrator and appoint an expert to assist the neutral.

D. How much law and motion is allowed?

In “classic” arbitration there was no law and motion at all. To the extent there is discovery allowed, one should expect argument and or briefing akin to motions to compel. Are motions about pleadings or dispositive motions also necessary? How complex are the issues? How closely is the arbitrator required to follow the law of the forum?

E. What remedies are permitted?

Are there particular remedies, such as punitive damages or class action treatment, that should be limited in the arbitration contract? Should damages be capped, or a high-low (baseball arbitration) format be chosen? Should provisional or equitable remedies be allowed? [16]

This is not meant to be an exhaustive list of matters to consider when drafting arbitration clauses. No doubt many more will suggest themselves to the reader or his or her attorney. The point is that arbitration can fulfill its promise as a speedy and economical alternative to litigation if both client and counsel will make the effort to plan ahead and choose wisely.

REFERENCES:

[1] Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 1651 (U.S.N.C.,1991).

[2] Krsul, T., Limits on Enforcement of Arbitral Subpoenas 57 DISP. RES. JOURN. 30, 31; (Jan.2003); Levi, S. D., Arbitration in Outsourcing Agreements 981 PLI/Pat 577, 580 (2009); 9 USC secs 10-12.

[3] See Stipanowich, T. J., Arbitration: The “New Litigation” 2010 U. ILL. L. REV. 1 (2010).

[4] In general, attempts to build appellate review in to the arbitration process have been unsuccessful. See Sussman, E., Why Arbitrate? The Benefits and Savings (2011) 1899 PLI/CORP 257 at fn. 12, noting that the US Supreme Court interprets the FAA to forbid contractually expanded court review and that private appellate programs are rarely used. However, the California Supreme Court has upheld (on state law grounds) enforcement of contracts providing for judicial review of arbitral decisions. See Cable Connection Inc. v. DirecTV Inc. (2008) 44 Cal.4th 1334. Also, private appellate review of arbital awards by other arbitrators is not unheard of, though the expense and complexity limits its use to larger cases (Stipanowich, T. J., Arbitration and Choice: Taking Charge of the “New Litigation” (Symposium Keynote Presentation), 7 DEPAUL BUS. & COMM. L. J. 383 (2009), at 448.

[5] Kaplinsky, A. THE USE OF PRE-DISPUTE ARBITRATION AGREEMENTS IN CONSUMER CONTRACTS 1946 PLI/Corp 201, 209 (2012)

[6] Id.

[7] Stipanowich, von Kann & Rothman, 590 PLI/739 REAL “PROTOCOLS FOR EXPEDITIOUS, COST-EFFECTIVE COMMERCIAL ARBITRATION: KEY ACTION STEPS FOR BUSINESS USERS, COUNSEL, ARBITRATORS & ARBITRATION PROVIDER INSTITUTIONS.” (2011) at 759.

[8] Fullbright and Jaworski, 8th Annual Litigation Trends Report. See http://www.fulbright.com/index.cfm?fuseaction=news.detail&article_id=9902&site_id=286 (downloaded 6/16/2012).

[9] Sussman, n. 4 at 261-263.

[10] Sussman, n. 4 at 264; See also Stipanowich, n. 4, at 448.

[11] Stipanowich, n. 3, at 4.

[12] Stipanowich, n. 4, at 410; Stipanowich, n. 3, at 50-51.

[13] Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494.

[14] Martin, John D., Striking the right balance to control litigation spend, In-House Defense Quarterly 08/2009. See http://www.nelsonmullins.com/DocumentDepot/StrikingtheRightBalancetoControlLitigationSpend.pdf (visited 6/22/12).

[15] Under California law, provisional and equitable remedies are a matter decided by the court, even if the matter is being arbitrated. See C.C.P., 1281.8.

by Scott van Soye

Scott Van Soye is the managing editor of ADR Times. He is also a full-time mediator and arbitrator working with the Agency for Dispute Resolution with offices in Irvine, Beverly Hills and nationwide. He is a member of the California Bar, and practiced real estate, civil rights, and employment law for over twenty years. He holds an LL.M. in Dispute Resolution from Pepperdine University, where he is an adjunct professor of law. He welcomes your inquiries, and can be reached at scott.vansoye@agencydr.com or (800) 616-1202, Ext. 721. www.scottvansoye.agencydr.com