Mike Gaddis, Ph.D., Taj Clayton and Steven H. Stodghill | Fish & Richardson PC | November 30, 2016
There is a widespread belief that arbitration is unequivocally a better, faster, and cheaper alternative to litigation. According to some advocates, the advantages of arbitration include (1) saving money by streamlining procedure and limiting discovery; (2) reaching a quicker resolution; and (3) achieving more predictable results by avoiding excessive or capricious jury verdicts.
In the world of commercial litigation, however, these “advantages” of arbitration are increasingly being called into question. In recent years arbitration has become increasingly like litigation, with escalating costs and delays resulting from procedural disputes and uncontrolled discovery. Today, complex commercial cases can take just as long to arbitrate as they take to litigate in court, and can cost substantially more. Arbitrated cases are rarely resolved by dispositive motions, and are less likely to reach early settlement than litigated cases. In contrast to many judges, who want to clear their busy dockets as quickly as possible, arbitrators are often paid by the hour.
The “predictability” of arbitration is also far from certain. The outcome of the arbitral process is not necessarily more reliable at reflecting the merits of the case than a court’s verdict. Arbitrators are less constrained to follow the law. Their decisions will almost always be upheld on judicial review even if they get the law wrong. Some arbitrators will “split the baby” and make a compromise award even when the law and facts clearly favor one side. At the other extreme is the “runaway arbitrator,” guided only by a sense of fairness, who makes a massive award against the party he or she believes is in the wrong. Unlike a jury verdict, an excessive arbitral award is nearly impossible to overturn on appeal. Because of its unpredictable and unreviewable nature, arbitration may sometimes be a more risky choice than litigation.
Corporate counsel have become increasingly skeptical of arbitration, and many are refusing to include arbitration clauses in their commercial contracts. Only 25% of in-house attorneys believe arbitration is “generally a better solution” than litigation – 42% say it’s a toss-up, and 21% think arbitration is worse. The vast majority of corporate counsel are familiar with arbitration: 83% of the general counsel for Fortune 1000 corporations report that they have had at least one arbitrated case within the last three years. However, the use of arbitration in most categories of business-to-business disputes has become significantly less widespread today than it was in previous decades. The 2011 survey of Fortune 1000 companies asked general counsel whether they had been involved in an arbitration within the past three years and compared the results to an identical question asked in a 1997 survey:
- For commercial/contract cases, the number of companies reporting they had recently been involved in an arbitration fell from 85% in 1997 to only 62% in 2011.
- For intellectual property cases, the number fell from 21% in 1997 to only 17% in 2011.
In the same Fortune 1000 survey, only 15% of the general counsel said that they “frequently” or “always” use arbitration, and almost half said that they “rarely” or “never” use it. Only 50% said that they were “likely” or “very likely” to use it in the future – a sharp decline from the 1997 survey, in which 70% had said they were likely to use arbitration in future.
There are many good reasons for corporate counsel to be wary of arbitration. In the Fortune 1000 survey, general counsel gave several common explanations for why they prefer not to arbitrate corporate/commercial disputes:
- 52% cited the difficulty of appealing from an adverse award.
- 47% cited arbitrators’ tendency to make “compromise” awards.
- 44% complained that arbitrators are not bound to follow the law.
- 34% expressed a lack of confidence in the neutrality of the arbitrators.
- 34% complained that arbitration is too costly and/or takes too long.
Today, a significantly greater number of in-house counsel view high costs as a “barrier” to using arbitration than they did in previous decades.
As many in-house counsel are coming to realize, arbitration can sometimes be just as costly and time-consuming as litigation, if not more so. And the unpredictability, unreliability, and unreviewability of the arbitration process may make it a particularly bad choice for high-stakes “bet the company” disputes.