Making the Economic Case for Mandatory Binding Arbitration, 0518 COBJ, Vol. 47, No. 5 Pg. 30

• Author: GENE COMMANDER, J.
• Position: Vol. 47, 5 [Page 30]

47 Colo.Law. 30

Making the Economic Case for Mandatory Binding Arbitration

Vol. 47, No. 5 [Page 30]

The Colorado Lawyer

May, 2018

ALTERNATIVE DISPUTE RESOLUTION

GENE COMMANDER, J.

Recent studies underlie the economic benefits of mandatory binding arbitration in complex civil cases. This article discusses those benefits.

ADR professionals have long touted binding arbitration for producing faster and less expensive results in complex commercial disputes, as compared to traditional civil litigation. Now there is convincing economic evidence of binding arbitration’s real value. This article discusses the economic and other benefits of mandatory binding arbitration in complex cases.

Why Mandatory Binding Arbitration?

The health of our nation’s economy depends on the vitality of its business community, including its customers, suppliers, employees, and local governments. Industry leaders have often relied on traditional civil litigation in state and federal courts to decide commercial disputes when parties are unable to do so on their own. But there is good reason for concern about the growing pattern of protracted and wasteful civil litigation, which will be potentially exacerbated by cuts to state and federal court budgets across the country. The inefficiencies and prohibitive costs associated with most traditional civil litigation will likely choke the effectiveness out of the time-honored judicial approach, becoming an even greater drag on the financial success of the litigants and our economy. It is thus prudent for industry leaders to examine other approaches to resolve business disputes. A prompt, cost-effective, and well-reasoned outcome should be the universal goal of every dispute resolution proceeding. Proponents of alternative dispute resolution approaches have long encouraged the use of mandatory binding arbitration to produce faster, less expensive, and more satisfying results when compared to the uncertainties associated with judicial discretion and juries that are often present in traditional civil litigation. This sentiment is particularly strong when the debate is focused on the extraordinary time and expense required to resolve complex commercial disputes in state and federal courts.

Economic Reports Support Efficiencies

A March 2017 report by Micronomics, Inc. presents clear and convincing evidence to support the conclusion that, on average, mandatory binding arbitration is a significantly faster and less expensive method of resolving disputes between businesses.¹Micronomics is an economic research and consulting firm that collects, tabulates, and interprets complex financial, economic, and statistical data. It provides litigation and business consulting services in various practice areas and industries.²

The 2017 report followed two prior efforts by Micronomics to analyze the economics of civil litigation: a March 2012 report, “Economic Impact of Reduced Judiciary Funding and Resulting Delays in State Civil Litigation,” ³ and a December 2009 study, “Economic Impact on the County of Los Angeles and the State of California of Funding Cutbacks Affecting the Los Angeles Superior Court.”⁴

Civil Litigation Delays

Micronomics’ 2017 report compared the 2011 through 2015 nationwide civil caseload statistics published by the U.S. District Court and the U.S. Court of Appeals with similar data provided by the American Arbitration Association (AAA). It then focused more closely on the 2015 data from both forums. Te 2015 U.S. District Court civil caseload exceeded 217,000.^[5] The AAA binding arbitration caseload the same year totaled 1,375.⁶

Te report then compared the data to determine the average time required to get to trial in the U.S. District Court (24.2 months) versus the average time required to get to a final award through mandatory binding arbitration administered by the AAA (11.6 months).⁷ Micronomics concluded that it took 12 months longer to get to trial than it took to get a final arbitration award.⁸ Moreover, when Micronomics included the time required to appeal a district court judgment, it found that the federal court delays grew substantially (between 24.2 to 33.6 months versus the 11.6 months for a final award through binding arbitration).^[9]

Te Micronomics report highlighted the 2015 civil caseloads in eight of the 10 states with the highest U.S. District Court and AAA caseloads in the nation: California, Florida, Georgia, Illinois, New Jersey, New York, Pennsylvania, and Texas. Te caseloads in the eight states also represented more than 50% of the total nationwide caseloads in both forums.¹⁰ The U.S. District Court caseload in the eight states exceeded 112,000.¹¹ AAA’s caseload in the eight states totaled 789.¹²

When Micronomics compared the data from the eight states, it found that, on average, it took more than 15 months longer to get to trial in the U.S. District Court (27.3 months versus 11.8 months), and the delays grew to more than 24 months longer to get an appellate decision (between 27.3 months to 36.5 months versus the 11.8 months for a final award through binding arbitration).¹³

Economic Impacts

Micronomics also projected the extent to which the additional time to get to trial in district court would result in increased direct and related secondary costs for the litigants. To support a reasonable estimate of the potential additional direct costs incurred by the litigants, Micronomics made three valid assumptions: (1) the disputed amount of money would not be available to the litigants for other business purposes during the extended period due to the uncertain outcome of the pending dispute (i.e., lost opportunity costs); (2)...