A contrarian's checklist to arbitration clauses.

• Author: Rubin, Bruce A.

IF YOU want to advise your client not to agree to an arbitration clause, this checklist may assist you. It may remind you that many of the apparent advantages of arbitration turn out to be myths.

This checklist can be especially helpful in advising clients who are contemplating the types of agreements that privately held businesses often want to have, whether they are business governance issues that arise from buy-sell agreements and executive employment agreements, employment litigation issues that arise from employee handbooks or personnel policies, or general commercial contracts with important vendors, suppliers, or customers.

This article examines some common assumptions and compares them with modern-day reality.

1. Arbitration Myths

   1. Arbitrations Are Less Expensive

      Seldom. Remember, the parties have to pay for the arbitrator, but the government pays for judges and juries. When you invoke the use of an arbitration service, you are buying into the handling fee of that service, which can equate to thousands of dollars, especially if it is pegged to the amount in controversy, as many are. Additionally, you still have to pay for the arbitrators, generally lawyers or retired judges who charge several hundred dollars per hour. (Some instead charge thousands of dollars per day.)

   2. Arbitrations are Faster

      Not really. The better the arbitrator, the longer it will take to get open dates. If you are using a panel of arbitrators, then you have an even longer wait for three persons to agree on open dates. In most jurisdictions, parties can resolve a case in court in less than two years, and sometimes in less than one. Arbitrations often take a year or so to resolve. In the grand scheme of things, at best, an arbitration may save only a few months.

      Then, even when the arbitration clause states that it is final and binding, state laws and the Federal Arbitration Act both allow resorting to the courts, albeit on supposedly limited grounds. True, the court will not revisit the facts determined by the arbitrator, (1) but many issues can be raised in court to delay final resolution. The arbitration loser (let's assume that your side was the winner) can claim that certain issues decided by the arbitrator were not within the scope of the arbitration clause, claim that the arbitrator's decision is contrary to public policy or otherwise unconscionable, and claim that the arbitrator's decision doesn't apply on a variety of other grounds. (2 Under the Federal Arbitration Act, an award can be set aside or modified if the arbitrators "exceeded their powers"--in other words, if the arbitrators went beyond the scope of the arbitration clause--to say nothing of the rarer grounds of partiality, corruption, or fraud. (3) Indeed, the entire question of just what a court may do in reviewing an arbitration award is in disarray. As a result, the United States Supreme Court has accepted certiorari in a case raising the issue of whether the parties can agree in an arbitration clause to de novo judicial review of legal issues decided by the arbitrator or whether that violates the Federal Arbitration Act. (4)

      Moreover, if there is a dispute about whether the issue is within the scope of the arbitration clause, a court, not an arbitrator, may be needed to resolve that issue. (5) An arbitrator may consider the issue of arbitrability only if the arbitration agreement contains clear and unmistakable evidence that the parties intended that the question of arbitrability be decided by the arbitrator. (6)

      If a party challenges the validity of the contract as a whole, and not specifically the arbitration clause, the arbitrator decides the issue. (7) If the challenge, however, is directed solely at the arbitration agreement, the court decides the validity of the arbitration clause. (8) Even if your case involves a claim or challenge that may be resolved by the arbitrator as set forth in the above case law, ask yourself how the dispute arrived before the court that made that pronouncement, and how much cost and delay there was in reaching that point.

   3. Arbitrations are Confidential

      Wrong. Arbitration may be confidential for a while, and you may be able to keep people out of the arbitration hearing room who do not belong there, but the word can get out in many ways. For example, if you end up in court (see example above), the chances of getting a court to keep your case confidential are low. Furthermore, a confidentiality clause in an arbitration agreement may be unconscionable, making the entire clause fail. (9)

      In federal court, parties have to convince the judge that the information is entitled to confidentiality because of a statutory or public policy. It is not enough that both parties want (or wanted at the time of the contract with the arbitration clause) some secrecy. (10) Even when the parties to the initial case agree to a protective order, the Ninth Circuit has held that the trial court abused its discretion in finding that confidentiality justified denying collateral litigants' motion to unseal filed records. (11) To be sure, the underlying case was a court case, not an arbitration, but the policies of open access to justice described by the Ninth Circuit could easily apply to the arguments you could expect in collateral litigation. (In the...