Another unfortunate arbitration agreement

by admin on March 23, 2009

In March of 2009, the United States Court of Appeals for the Ninth Circuit upheld the dismissal of a case with prejudice. The plaintiff had agreed to arbitration but could not afford the $220,000 advance arbitration fee. Kam-Ko Bio-Pharm v. Mayne Pharma, No. 07-35449. This left the party with no remedy.

The decision follows settled law. That is, if you are a business (not a consumer or employee) and you sign an arbitration contract, you are bound by the contract terms. But the unfortunate parties who sign ridiculous arbitration contracts do not understand the implications of an agreement to arbitrate.

There are 2 problems with the arbitration process: It is more expensive than Court proceedings, and the decisions are of lower quality, i.e., arbitrary.

I recommend arbitration generally in situations where you are wealthier than the other party and you do not care about the outcome.

Arbitration is expensive

As in the case cited, the parties have to pay for private arbitration.

On the other hand, in the Court setting, access to the system is a benefit of our government, already paid for by our taxes. For a $350 filing fee you get the benefit of an excellent system.

Lower quality because of less experience

Many arbitrators are attorneys who are considering becoming Judges someday. The typical arbitrator has heard a small fraction of the number of cases heard by the typical Judge.

“Early on the learning curve” translates to “increased probability of mistakes”.

To lesson the effect of random factors, the arbitration agreement can require 3 arbitrators. Of course, this triples the arbitrator fees.

Lower quality because of lack of feedback

Arbitrators and Judges are human. As a result, they make mistakes.

If a Judge makes a mistake in a big case, the parties may appeal. But there is no appeal from a wrong arbitration decision. So the arbitrator who makes incorrect decisions may never learn.

Furthermore, there is no public record of incorrect arbitration decisions. Data on the performance of arbitrators in actual proceedings is, to be charitable, incomplete. You can ask around, but this is not as reliable as the written record of appeals.

Those who prefer arbitrations believe that arbitrations are fast and less expensive. They may be faster, but flipping a coin is faster and less expensive yet. So consider this thought experiment: would you be willing for disputes under this contract to be decided by flipping a coin? If so, then sign the arbitration clause, and specify one random arbitrator.

When an arbitration clause is used

Some clients want an arbitration clause. In a few situations, arbitration is better for the client. In such situations I add a requirement to the arbitration clause: the arbitrator selected must be a retired Judge.

If the arbitrator is a retired Judge, then you get an experienced decision maker. This greatly increases the quality of the process and the quality of the decision at no added expense.

If you have an arbitration experience or comment to share, please leave your comment below. And to my arbitrator friends: I am not writing about you.

- E. J. Simmons

{ 3 comments… read them below or add one }

Robert Nunn March 23, 2009 at 10:45 pm

Interesting case. In fairness, the plaintiff was required to pay only half of the estimated fees, but “only” $110,000 would still close out most litigants.

Still, there are good reasons for arbitration, especially in international contracts. Chief among them is avoiding the difficulty of enforcing judgments across jurisdictional lines. Enforcement of arbitration awards are generally benefited by the United Nations Commission on International Trade Law (UNCITRAL) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A good discussion of the benefits of arbitration in international transactions is “Getting to Yes Abroad,

However, this case looks like a pretty good reason to avoid ICC arbitration if another arbitration agency is available.

Travis Mayor March 23, 2009 at 11:20 pm

I have a client who was presented with a binding arbitration agreement upon her promotion and asked to sign it. The agreement provides for each side to pay for their attorney fees. My client was wrongfully terminated in violation for her rights under Title VII and ORS 659A.030, which provide for attorney fees if she prevails. If the employer is able to enforce the arbitration agreement, my client will have lost a remedy under the laws applicable to gender discrimination. Yet another example of an unfortunate arbitration agreement.

Karen Thompson March 24, 2009 at 4:08 pm

It is a challenge to find arbitrators who are familiar with the Oregon Rules of Civil Procedure. Although the arbitrator may be an expert in the subject matter, say real estate, he will have no concept of the law or its application when faced with a motion to amend the complaint to allege punitive damages.

There is also a fraternity among the tall glass tower law firms. Woe to the solo practitioner who arbitrates a case against a big firm attorney with another big firm attorney.

In addition, the arbitrator is likely to favor the big firm attorney because the big firm is going to bring in more return business than the solo practitioner.

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