Arbitration and Unconscionability

• Jurisdiction: United States,Federal
• Publication year: 2010
• Citation: Vol. 19 No. 3

Arbitration and Unconscionability

Eric J. Mogilnicki & Kirk D. Jensen

Introduction

In Unconscionable Lawyers, Professor Carrington argues that lawyers who encourage or enable their business clients to incorporate arbitration provisions in their contracts with individuals violate the law and the ethics of the profession, and are worthy of contempt. [1] These serious charges are seriously wrong. As a matter of fact, arbitration is fair to individuals and provides benefits unavailable in traditional litigation.[2] As a matter of federal law, arbitration agreements are as valid and enforceable as any contract.[3] As a matter of legal ethics, lawyers not only act ethically when they advise clients regarding arbitration provisions, but would be remiss if they failed to do so.[4]

Finally, we strongly disagree with Professor Carrington on one other, overarching issue. The current debate over arbitration is an important one, as it involves the very structure of how we as a society resolve disputes. Such a debate can and should improve arbitration and litigation alike. Each system of dispute resolution illuminates the other's strengths and weaknesses, and thereby suggests ways each system might be improved, or how each might be optimal for certain types of disputes. Vilifying those who use arbitration provisions is a poor way to further this important discussion. We propose that lawyers who disagree on this issue search for common ground rather than claim the moral high ground for themselves.

Part I of this article describes the benefits of arbitration to individuals and compares this method of dispute resolution to traditional litigation. Part II demonstrates that arbitration provisions are favored by federal law and that unconscionable provisions in arbitration agreements are already unenforceable, just as in any contract. Part III addresses the relationship of legal ethics and the fairness of arbitration provisions. Finally, this article concludes that members of the legal community should work together to improve arbitration as well as the traditional litigation system so that both forms of dispute resolution are beneficial to individuals and businesses alike.

I. The Benefits of Arbitration to Individuals

A. Arbitration Is Fair and Provides Benefits to Individuals

Professor Carrington's argument relies upon a caricature of arbitration, which is painted by citing a few selected examples of unfair arbitration clauses—most of which have been struck down by the courts.[5] These anecdotes are no substitute for analysis. First, such examples are hardly evidence of the need for reform since the courts seem to be able to identify and invalidate unconscionable arbitration agreements. Second, arbitration—like litigation—is too multifaceted to warrant such casual condemnation.[6] Third, there are ample examples of clauses that are plainly fair to individuals and therefore fairly enforced. [7] But most importantly, the available empirical evidence shows that arbitration is fair to individuals.

Too few studies rigorously compare arbitration and litigation results. However, those that exist find that arbitration can help individuals who seek to bring businesses to justice.[8] In the employment context, for example, one study found that of all employment arbitrations conducted by the American Arbitration Association (AAA), employees won 73% of the arbitration cases they filed and 64% of all arbitration cases. [9] These results show that individuals fared dramatically better in arbitration than they would have in litigation. A related study found that 63% of employees won in arbitration, while only 15% of employees won in federal court during the same period. [10] Another study found that individual employees won 51% of arbitrations, while the Equal Employment Opportunity Commission (EEOC) won only 24% of cases it litigated in court, despite its superior experience, resources, and case-screening procedures.[11] Additional studies have reached the same conclusions.[12] Not only do employees win more often in arbitration, but they also win a higher percentage of the amount they demand: 18% of the amount demanded in arbitration, but only 10.4% of the amount demanded in litigation.[13] As Lewis Maltby, the Director of the ACLU National Taskforce on Civil Liberties in the Workplace, concluded, "it would be a serious mistake for the civil rights community to attempt to stop the trend to employment arbitration."[14]

Additional studies have shown that individuals have also fared well in arbitration in contexts other than employment disputes. The National Arbitration Forum (NAF), for example, reports that individual plaintiffs win 71% of claims brought against corporate entities before the NAF.[15] In comparison, between 1987 and 1994, individuals won only 54.5% of claims brought in federal court under original diversity jurisdiction, and only about 30% of claims under removal jurisdiction.[16] Indeed, even in cases brought before National Association of Securities Dealers (NASD) arbitrators, a system that critics characterized as "provid[ing] inadequate due process,"[17] individuals win more often in arbitration than in court.[18] Furthermore, a recent survey revealed that more than 93% of parties believed that the NASD arbitrators handled their cases "fairly and without bias."[19]

Not only do individuals fare better in arbitration than they do in court, but arbitration can provide several benefits to individuals that are unavailable in traditional litigation. Congress recognized these benefits, which flow to all parties in an arbitration, when it passed the Federal Arbitration Act (FAA) nearly eighty years ago.[20] As Congress explained, "by avoiding ‘the delay and expense of litigation,' [FAA] will appeal ‘to big business and little business alike, . . . corporate interests [and] . . . individuals.'" [21] Decades later, Congress continued to acknowledge the manifold benefits of arbitration, stating that "[t]he advantages of arbitration are many: it is usually cheaper and faster than litigation; it can have simpler procedural and evidentiary rules; it normally minimizes hostility and is less disruptive of ongoing and future business dealings among the parties; it is often more flexible in regard to scheduling of times and places of hearings and discovery devices . . . ."[22] Consumer advocates likewise have noted that arbitration provides a fast, fair and affordable alternative to litigation.[23]

Arbitration is more convenient than litigation. Parties may participate in person (as in litigation), but arbitration hearings may also take place over the telephone or online. [24] Consequently, an individual can take part in an arbitration hearing without leaving home or taking a day off from work. Such conveniences simply are not available in litigation. Furthermore, individuals do not have to hire a lawyer in arbitration, although they may do so if they wish. [25]

Arbitration is also faster than litigation. A study that compared employment claims filed with AAA with similar claims filed in federal court found that, on average, arbitration resolved cases in about half the time of litigation.[26] Similarly, in March 2001, the average total turnaround time for NASD arbitrations was 12.9 months.[27] The average turnaround time for the previous year was 12.8 months.[28] In comparison, median turnaround time for civil cases in federal district courts during these same periods was more than 20 months.[29] Although the length of an arbitration "depends on a number of factors, including the types of claims being brought, the number of parties involved, and the ability to work with the schedules of the parties and their attorneys," the NAF asserts that "most arbitrations can be completed within three to six months."[30] These facts have led many commentators to the conclusion that "for smaller, simpler, more routine cases, it is hard to beat administered arbitration."[31]

Arbitration is also less expensive than litigation. As the Supreme Court has held, the reduced expense of arbitration is "helpful to individuals . . . who need a less expensive alternative to litigation."[32] For example, for disputes of less than $2,500, the NAF filing fee is only $25.[33] It is also possible to recover fees or obtain fee waivers in arbitration.[34] Moreover, some arbitration agreements provide that arbitration fees will be equivalent to what a court would charge in a similar case.[35] Indeed, in her dissent in Green Tree Fin. Corp.-Ala. v. Randolph, [36] Justice Ginsberg wrote favorably of the fee systems used by major arbitration administrators: "Under the AAA's Consumer Arbitration Rules, consumers in small-claims arbitration incur no filing fee and pay only $125 of the total fees charged by the arbitrator. All other fees and costs are to be paid by the business party."[37] She also noted that "[o]ther national arbitration organizations have developed similar models for fair cost and fee allocation."[38] The greatest savings come from simple and informal procedures that allow an individual to pursue a small claim without having to retain a lawyer. [39] In this way, arbitration substantially benefits consumers with claims under $20,000 because lawyers rarely agree to pursue such cases. [40] Thus, it is not surprising that only one in three Americans agrees that taking a case to court is affordable and "nearly nine of ten [people] point to the costs of legal representation as the main barrier" to the adjudication of claims.[41] Moreover, class actions are not an effective remedy for these high litigation costs because the strict standards for class certification result in most actions being pursued on an individual basis, where arbitration can be most helpful. [42]

At a minimum, these studies and authorities demonstrate that arbitration is a reasonable alternative to litigation. In this light, a contract that calls for arbitration instead of...