In past articles, I’ve discussed the attitude lawyers may have to arbitrating business disputes. Some hate it. They simply do not believe that arbitration actually saves time or money. They will tell you their experience is that it is still as expensive as litigation and takes just as long. Courts are almost free, they note, but you have to pay arbitrators and administrating organizations. And some don’t like it that there typically isn’t a meaningful appeal.
Those who love -- or at least like -- arbitration believe it is faster and less expensive. They also like the relative informality, the role they have in choosing the decision-maker, and also the subject matter expertise available from good arbitrators. Having a set hearing date rather than waiting for a slot to open up on the docket of a crowed court — often with limited advance notice — is also attractive.
Whether you are an arbitration hater or lover likely depends on your experience with or anecdotes you have heard about arbitration. You don’t get to run the same case through arbitration and litigation, then compare the two. No one has the time, money, or energy to do that. So deciding whether or not to provide for arbitration in a contract or to submit a current dispute to arbitration has been largely a matter of projecting past experience or anecdotes heard from other lawyers.
Still, it seems logical that arbitration would be less expensive and more efficient. The rules are not as complicated. Discovery is often more focused, and the relative informality allows things to move more quickly. But is it really a faster way to resolve a business dispute?
A New Study
New data suggests that it is. As a large administrator of arbitrations, the American Arbitration Association is, of course, keenly interested in the efficiency and effectiveness of arbitration. So it commissioned a study. The results make arbitration look pretty attractive.
Micronomics Research and Consulting, published the results of its study in March of 2017. Here is how Micronomics describes its engagement: “ . . . Micronomics has been engaged to compare the length of time to adjudicate disputes associated with U.S. district court proceedings on the one hand versus length of time to adjudicate disputes associated with arbitration administered by the American Arbitration Association (“AAA”) . . . In addition, to the extent that we determine such differences exist, we have been asked to estimate the cost to business associated with delays in obtaining adjudication.”
Micronomics found that, on average, U.S. district court cases took more than 12 months longer to get to trial than cases adjudicated by arbitration (24.2 months v. 11.6 months). When the comparison involved time through appeal, U.S. district and circuit court cases required at least 21 months longer than arbitration to resolve (33.6 months v. 11.6 months). Based on the cut-backs in recent year in state court budgets, it also suggested that the situation in most state courts is likely even worse.
The Cost of Delay
Micronomics further sought to quantify the overall cost of delays nationally, noting that delays mean parties cannot rely on the funds at issue in the dispute until the matter is resolved. It thus estimated that that “direct losses associated with additional time to trial required for district court cases compared with AAA arbitration are approximately $10.9 - $13.6 billion between 2011 and 2015 (i.e. more than $180 million per month).” It estimated “direct minimum losses associated with additional time through appeal required for district and circuit court cases compared with arbitration are approximately $20.0 - $22.9 billion over the same period (i.e. more than $330 million per month).” It further estimated direct, indirect, and induced losses associated with additional time to trial compared to AAA arbitration to be $28.3 - $35.3 billion between 2011 and 2015, and $51.9 - $59.2 billion for addition time through appeal.
I’m a Professional Skeptic, Too - And Yet . . .
Now, I spent over thirty years as a litigator. So my first instinct, as it always was in litigation, is to be skeptical of any report by any expert. I am fully aware that different methods and approaches can produce big differences in final numbers. And of course, the additional time through appeal — which really makes for some big numbers — is accounted for mostly because there aren’t appeals from arbitration Awards. It is true that eliminating appeals in court cases would make things faster, but I doubt that is the answer to making things more efficient in the court system.
But still, the simple difference in time to resolution is almost startling. Trials in court average over two years. Arbitrations average under a year. Anyone who has done litigation for a while knows that the longer a case lasts, the more you spend. So that very objective statistic alone suggests that the arbitration lovers appear to have it right. Arbitration is more efficient.
So, the data from this study suggests arbitration should be seriously considered for dispute resolution whether counsel is an arbitration hater or lover.
It still may be that an appeal is critical, although in most cases you could probably address that concern by providing for arbitral appeal. (If you are interested in exploring that, see my past article on that and my chapter on Arbitral Appeals in Arbitrating Patent Disputes: a practical guide (ABA 2017)(available at Shopaba.com).)
It may be that some parties’ approach to litigation is more about waging a war of attrition through discovery, motions and anything else they can conjure up to make the other side say “uncle” after the whole fight gets too expensive. But I don’t know many clients who look at it that way. By far, the majority of clients would rather have a dispute resolved and over as efficiently and inexpensively as reasonably possible so they can get back to business.
It is true that court filing fees are measured in the hundreds of dollars, and judges are free. By contrast, arbitration organization administrative fees are in the thousands for large matters and arbitrators charge by the hour, often about the same as lawyers. But legal fees are such a large proportion of the overall cost of dispute resolution that savings in attorneys’ fees and costs will overwhelm any increased costs of administration and arbitrator compensation in a case of any size.
I suppose some lawyers are so good at persuading juries— or think they are — that they simply prefer court to arbitration. But many others will find it more attractive to save money and present their case to a decision maker who they have considerable input into choosing and who can bring some useful expertise to bear regarding the specific subject matter of the case.
Have a look You can find the study at http://go.adr.org/rs/294-SFS-516/images/Economic%20Impact%20of%20Delay%20Micronomics%20Final%20Report%20%282017-03-07%29.pdf. You may want to have a look at it before you decide whether or not to provide for arbitration in your next contract or agree to arbitrate a case otherwise headed for court.