The Wall Street Journal Law Blog has an interesting dicussion going about the benefits to consumers of mandatory arbitration clauses.  It cites a survey by Northwestern Law School that these clauses in consumer contracts are not unfair to consumers.  The survey was conducted in response to the proposed Arbitration Fairness Act.  (For a pro-AFA article, click here.  For the opposing view, click here.)

Arbitration is “relatively inexpensive and expeditious, and outcomes are not biased in favor of businesses,” said Geoff Lysaught, director of Northwestern’s Searle Civil Justice Institute, which studied 301 consumer arbitrations finalized by the American Arbitration Association in 2007(quoted in the Wall Street Journal Blog).

Arbitration is an alternative to seeking a trial (i.e. litigation) for redress of wrongs, in which the parties agree to submit their claims to a third party (other than a judge) for a binding decision. 

I have mixed feelings about mandatory arbitration. The conventional wisdom when I first started practicing in 1995 was that arbitration was considerably cheaper, quicker and more efficient than litigation. 

Since then, the arbitration proceedings have become much more like trials, with depositions, evidence, discovery and the related expense and aggravation. 

My main problem with arbitration, however, is that arbitrators do not need to be lawyers.  As a result, any attorney can give examples of arbitrators rendering binding decisions that fly in the face of long-settled legal principles.  It can be a real crap shoot and it is very frustrating to business clients who want predictability and certainty. (Although litigation is not a good place for predictability and certainty, either.)

In addition, the exact lanaguage often is weighted against the consumer.  Arbitrations must be held in the corporation’s home state.  Plaintiffs must pay arbitration expenses up front, or the loser pays all arbitration fees.  They may require using particular arbitrators that are either pro-corporation, are expensive, or require daunting procedures to be followed. 

Finally, forcing every potential claimaint against your company into mandatory arbitration prevents a group of similarly situated people from bringing a class-action suit. Sometimes, that is the only economically feasible way to address a consumer problem.   

The North Carolina Court of Appeals recently held that a mandatory arbitration clause in a securities contract was unenforceable because it was unconscionable.  The case holding itself is rather dense for a lay reader, but the arbitration provisions from the contract are worth looking at as an example of mandatory arbitration clauses that actually prevent consumers from addressing their grievances.  For a more understandable summary of the case, click here.   

The survey is interesting, however, despite its limitations.  What are your experiences with arbitration or alternate dispute resolution?

Tags: ADR, alternate dispute resolution, arbitration, Arbitration Fairness Act, binding arbitration, mandatory arbitration, Northwestern

This entry was posted on Thursday, March 12th, 2009 at 1:19 pm and is filed under Blogging, Consumer Law. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.