Arbitration was supposed to be a low cost, more efficient alternative to litigation. But organizations like the American Arbitration Association and big law firms know a cash cow when they see one. While arbitration certainly benefits these service providers, for the parties it's often much more expensive than litigation.
"The question for the business owner: Do arbitration's relative informality and lack of appellate review speed things up enough to justify the exorbitant cost."
Filing fees under the AAA's Commercial Arbitration Rules (which apply to most business disputes) range from $1,725.00 for the smallest claims to $65,000.00 for the largest. By contrast, you can initiate a lawsuit in federal court for $400.00. You also pay the arbitrators hourly for everything they do. And while judges move cases along to keep their dockets manageable, arbitrators make more money the longer your case drags on.
Because of its inherent flexibility and lack of appellate review, a final result is typically reached more quickly via arbitration than litigation (per Thomson Reuters, the average resolution time for a case in arbitration is 7 months; for litigation it's two years). The question for the business owner: Do arbitration's relative informality and lack of appellate review speed things up enough to justify the exorbitant cost.
The Takeaway
Arbitration usually isn't worth it. It's a money-maker for the AAA, bigfirms, and prominent lawyers, but as usual the clients and consumers get the short end of the stick.