Recently, the American Association for Justice (AAJ) released a “study” on arbitration—just as the House of Representatives took up legislation. To no one’s surprise, the AAJ argues that litigation is a better way to resolve disputes.
But this “study” is nothing more than a misleading attempt to discredit arbitration that’s based on three flagrantly false premises:
- It implies that settled arbitrations are losses for claimants when the opposite is almost certainly the case.
- It does not compare arbitration to litigation.
- It uses out-of-the-mainstream anecdotes to argue that all arbitration is unfair.
Of course, AAJ represents the plaintiffs’ lawyers who stand to gain the most by forcing disputes into litigation where lawyers are in control and reap higher fees.
Multiple empirical studies have reached the opposite conclusion, finding that arbitration benefits both consumers and employees because it is cheaper, simpler, and faster. Litigation, on the other hand, benefits mainly lawyers.
Most egregiously, AAJ’s report asserts that consumers win in arbitration only six percent of the time. To come to this conclusion, AAJ essentially treated every settled arbitration as a “loss” for consumers. In a settled case, both sides agree to end the dispute, and (as plaintiffs’ lawyers know) most of the time the plaintiff is paid something to resolve the case—otherwise why would he or she settle? To count a settlement agreement as a “loss” is patently absurd.
This incentive to settle arbitrations as early as possible—and typically to reach a resolution that is satisfactory for consumers—is driven in large part by the fact that businesses are required to cover nearly all the costs of arbitration. Contrary to what the AAJ claims, businesses cover almost all of the costs—and the longer the arbitration goes on, the more a business has to pay. In court, though, this incentive does not exist. Plaintiffs are on the hook for filing fees (taxpayers subsidize the rest) and are left to navigate a litigation process that is exponentially more complex than arbitration.
The cost and complexity of litigation is a key reason that arbitration is more accessible than the court system. A recent study of employment arbitration by NDP Analytics found that nearly eight-in-ten employees who initiated arbitration earned less than $100,000 per year. For these claims, the costs associated with getting a dispute resolved matters.
AAJ makes little effort to compare how claimants fare in arbitration and in court. That is because multiple empirical studies have concluded that—as one law professor put it—“there is no evidence that plaintiffs fare significantly better in litigation. In fact, the opposite may be true.”
The NDP Analytics study found that employees were three times more likely to win in arbitration than in court, and they also win significantly more money in considerably less time. The average award in arbitration was $520,630 compared to $269,885 in litigation. The average arbitration took about 100 fewer days than litigation.
AAJ does not draw such comparisons. Again, the explanation is simple: an honest comparison does not favor their preferred policy outcome.
AAJ also fails to mention that if a plaintiff does settle or win in litigation, much of the plaintiff’s award gets sucked away. In contingency fee litigation, plaintiffs’ attorneys often take upwards of 33 percent of a recovery, not including costs and expenses. In class actions, the lawyers frequently take 25 to 33 percent of the recovery, which is many multiples of what class members actually get. If you have a smaller claim, you may not even be able to attract a lawyer to take your case to court. Supreme Court Justice Stephen Breyer once said that without arbitration, plaintiffs with small claims may be left “without any remedy but a court remedy, the costs and delays of which could eat up the value of an eventual small recovery.”
The study also says all arbitration is naturally unfair. This assertion is based on selectively cherry-picking anecdotes involving out-of-the-mainstream arbitration provisions or provisions that do not involve ordinary employees or consumers. AAJ intentionally fails to acknowledge the polices of the American Arbitration Association and Judicial Arbitration and Mediation Services, the two leading arbitration providers. Neither organization will accept a case involving non-negotiated consumer or employment arbitration provisions unless the arbitration agreements guarantee that neutral arbitrators can reach unbiased decisions; award individual claimants damages and fees to the same extent as they would in court; and limit consumer and employee filing fees to an amount that is less than or comparable to court filing fees. And AAJ ignores the many court decisions invaliding unfair arbitration agreements—because the existence of that judicial oversight completely undermines AAJ’s entire argument.
Of course, the real motivation behind this litigation-at-all-costs stance comes down to money. The more lawsuits are filed, the more money plaintiffs’ lawyers make in fees. The AAJ “study” should be seen as exactly what it is: an attempt to misrepresent the facts in order to protect a system that enriches lawyers rather than their clients.