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Five Myths About Arbitration

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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. We say: Don't take the bait.

It costs $400.00 to file a federal lawsuit. Initiating arbitration in a commercial case worth $350,000.00 costs $4,400.00.

It's cheaper. Arbitration is touted as a lower-cost dispute resolution option. It can be MUCH more expensive. Judges and court clerks are paid with tax dollars, and state and federal courts charge relatively low filing fees and costs. Initiation 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. (Good news: They offer payment plans.) You also typically pay the arbitrators hourly for everything they do. While judges have an incentive to move cases quickly to keep dockets manageable, arbitrators make more money the longer the case drags on. And any state bar presidents or 'prominent lawyers' who suggest that attorneys aren't profit motivated are . . . um . . . how to put this nicely . . . full of it. (We took out the 'sh' so that counts as 'nicely'.)
It's faster. Arbitration was supposed to make dispute resolution more manageable by cutting through wasteful discovery disputes and motion practice. It can be faster . . . because the parties run out of money and there are no appeals. Depending on the state and the courts, arbitration can be faster than litigation. The average resolution time for a case in arbitration is 7 months; for litigation it's two years (source: Thomson Reuters). Arbitration's relative informality and lack of appellate review can speed things up, but not nearly enough to justify the exorbitant cost.
It's fairer. Sure! For the American Arbitration Association, law firms, and big companies looking to insulate themselves from valid claims. Everyone else still gets screwed. Because arbitration agreements are strictly enforced by courts, some companies use them to avoid otherwise valid claims. The American Arbitration Association's absurd fees and the prospect of spending tens of thousands on arbitrators prices many potential claimants out of the market (90% of Americans already can't afford basic legal services). Not that legal industry bigwigs care as long as they're making money. Their definition of "fair" is a little different.
It's the next big thing. Arbitration was supposed to be a revolutionary way to make dispute resolution accessible, efficient, and cheaper. No. It isn't. It doesn't take Euclid to figure out that requiring disputants to pay thousands of dollars to initiate a case plus tens of thousands more on arbitrators will often be cost-prohibitive. Arbitration is a cash cow for law firms and the American Arbitration Association, but it doesn't change the landscape for the average entrepreneur. If anything, it further deprives small business owners of access to justice.
It's all about the clients. Really? It costs $400.00 to file a federal lawsuit. Initiating arbitration in a business case worth $350,000.00 costs $8,250.00 ($4,400.00 of it up front). So . . . who's benefiting here? It's all about the AAA, big law firms, and prominent lawyers. Individual lawyers' fees are subject to various ethical rules. But big firms and providers like the American Arbitration Associaiton are practically unregulated. Follow the money. They have most of it.
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