The High Costs of Mandatory Arbitration

Cliff Palefsky

Consumer Attorneys of California Forum
May 2000 #4, page 8

The mandatory arbitration house of cards seems poised to come tumbling down on itself — as would any house built on such a corrupt foundation. For years the practice has been propped up by three fundamental premises that are simply false. First, that mandatory arbitration is "just another forum" with no impact on substantive rights. Second, that "public policy" favors allowing the parties being regulated by statutes to opt out of that regulation by designing and imposing their own arbitration systems on the parties the statutes were passed to protect. And finally, that arbitration is inexpensive and creates access for those who otherwise couldn’t afford it.

The courts themselves kicked the "just another forum" prop out when they confirmed that arbitrators need not know or apply the law and that even legal errors appearing on the face of the award could not be corrected. The truth that parties lose the "ultimate substantive right," the right to have the law enforced correctly, made it difficult for intellectually honest courts to continue the fiction that mandatory arbitration was a "separate but equal" system of justice.

The "public policy" prop fell when it collided with one of the judiciary’s bedrock concepts – their mantra that courts don’t make policy. Public policy, we are repeatedly reminded, must derive from a constitution or statute. For years, courts simply ignored express constitutional and statutory provisions setting forth the real "public policy" requiring them to protect the citizens’ constitutional rights of access to a public court and jury. Scores of opinions were written compelling arbitration that didn’t even acknowledge these constitutional mandates because they conflicted with the judicially created public policy of "docket clearing." Public policy may encourage the voluntary use of an alternative dispute mechanism appropriate for a particular case but it certainly does not and can not favor the mandatory or coerced deprivation of constitutional rights. Docket clearing is not a public policy. The Seventh Amendment is.

The final prop, the "inexpensive access" fiction, has now come tumbling down in the face of the well documented reality that arbitration is significantly more expensive than court. Not to mention that the only identifiable cost savings come from depriving plaintiffs of the depositions they need to prove their cases. This "inexpensive" fiction is in some respects the most troubling because it is so obviously and cynically untrue. Consider these incontrovertible facts.

In an effort to alleviate the costs of traditional litigation the Legislature established several low cost administrative systems to help employees and consumers enforce their statutory rights. The Fair Employment and Housing Commission and the California Labor Commission were established as essentially free forums for workers to access in order to get the protection of statutes passed for their benefit. Similarly, small claims courts were established as a judicial forum where consumers and others could go at almost no cost, without lawyers, to enforce their rights. Big business has attempted to negate these legislative initiatives by forcing arbitration agreements on employees and consumers that prohibit access to these agencies and courts and instead require them to pay thousands of dollars in forum fees in order to get justice.

Few people presented with arbitration agreements and perhaps too few judges understand just how expensive arbitration really is and why it has become so costly in recent years. Under the American Arbitration Association’s commercial fee schedule, the cost to simply file a discrimination or wage claim can be as high as $7000. The arbitrators routinely charge at least $350 per hour. Within days of initiating the arbitration, and months before any hearing occurs, the parties are sent bills for the expected length of the hearing. The Association assumes 8 hours of arbitration time per day and then adds a 50% kicker for "study" time. That means almost $3000 per day per arbitrator. Under the Commercial rules, three arbitrators are assigned to many disputes. Therefore a four-day hearing can cost between $12,000 and $36,000 on top of the filing fee. Add to that the cost of additional hours caused by discovery disputes, motions practice, scheduling conferences and administrative fees and you can easily reach $50,000. In a widely publicized sex harassment arbitration, Peacock v. Great Western, the parties were recently given a bill for $94,000 that only covered the period up through the third day of arbitration.

Just to get started in arbitration a consumer or employee must pay at least half that cost. If they lose they may be required to pay the entire cost. Even if they win they may not get the money back. That is exactly what every conscientious lawyer must tell a consumer or employee considering an action to recover wages or fight discrimination in the face of an arbitration clause. And make no mistake about it: Very few employees can afford the equivalent of an entire year’s salary to pursue even the most meritorious claim. And everyone knows it.

That is why management lawyers appear at public State Bar meetings and openly encourage employers to compel arbitration because the high forum fees may act as a deterrent to claims being filed at all. That is why so many form contracts forced on powerless consumers and employees require arbitrations to be held in locations distant from where the employee and witnesses reside and require each party to bear its own costs.

How can it have gotten so expensive? How can nearly anonymous arbitrators charge more per hour than some of the state’s leading attorneys? How can arbitrators who charge $800 per day for labor-management arbitrations (where the parties can negotiate the fee) charge $3000 per day to hear a mandatory discrimination case? Unfortunately, the answer is quite simple – contracts in restraint of trade.

When a large company agrees with a single provider like the American Arbitration Association to create a form agreement that requires all disputes be heard by the AAA’s closed panel and to use their market leverage to force that agreement on consumers and employees, it effectively eliminates all competition in the provision of dispute resolution services. The monopoly that is created permits the provider to charge unconscionable fees. So if the AAA is charging a $7000 filing fee for a case that JAMS will accept for $500 – too bad. Normal market forces can’t help consumers reduce costs. If a professional and fully competent arbitrator will work for $150 an hour – too bad, she’s not on the closed list selected unilaterally by the employer. If arbitration was voluntary, the market place would immediately remedy these abuses and just about every other problem that exists with mandatory arbitration.

And it is not just the consumers of arbitration services that are being harmed by these anti-competitive practices. There are hundreds of very competent and professional neutrals who are being driven out of the profession because they can’t break onto these closed lists.

Fortunately, the jig seems to be up. Courts in California and across the country have rediscovered their reason for being and have begun to recognize the extraordinary burden that the costs of mandatory arbitration place on citizens seeking to vindicate their rights. They now correctly declare that the high cost renders mandatory arbitration an "inadequate and inappropriate" forum for the resolution of statutory rights.

The California Supreme Court has issued a series of recent opinions which have begun to depict arbitration in its real world context. All eyes are now focused on Armendariz v. Foundation Health Psychcare Services, which will present the Court with an opportunity to address these issues for the first time in the employment setting.

But when the dust settles, the highest cost of mandatory arbitration will not be measured in dollars and cents. It will be the unfortunate but extraordinary damage done to the credibility of all of the voluntary forms of ADR which actually do have the potential to resolve disputes fairly and at a lower cost. The cost will be paid in the damage to the reputations of providers like the AAA who have sacrificed their neutrality on the altar of increased profits.

Mandatory arbitration, the overreaching it has encouraged and the backlash it has generated has been a cancer on the entire ADR community. It has subverted our civil justice system, the civil rights laws and the very reason for the creation of a public court system. That is a cost our society cannot afford.

© Cliff Palefsky 2000

© 1995 - 2000 Consumer Attorneys of California
Reposted with Permission, 9/22/00