Arbitration is often sold as efficient, fair, and business-friendly. In theory, it offers a streamlined process without the burdens of courtroom litigation. But in reality, arbitration frequently favors power over principle, and repeat players over first-timers.
If you’re signing contracts that include arbitration clauses, you should understand exactly what you’re giving up.
Arbitration is not neutral
In Monster Energy Co. v. City Beverages, the Ninth Circuit vacated an arbitration award after finding that the arbitrator failed to disclose his ownership interest in JAMS, the arbitration company named in the parties’ contract. JAMS had handled 97 prior cases for Monster Energy over five years.
That volume of business created the appearance of bias. The arbitrator’s silence about his ownership stake made it worse.
This is not an isolated problem. Many arbitration providers are private businesses, and some arbitrators profit from cases involving the same companies repeatedly. If your opponent is a large company that frequently uses arbitration, it may have an edge before the process even begins.
It is rarely cheaper
Unlike a judge, an arbitrator must be paid by the parties. Many charge hourly rates that exceed those of experienced attorneys. Arbitration providers also add administrative fees, hearing fees, and filing fees. The result can be staggering. In one case I handled, over $700,000 was paid in arbitrator’s fees alone, before the matter even reached a final award.
Litigation in court may take longer, but at least the judge’s salary does not come out of your pocket.
You lose access to rules that protect you
Arbitrators are not bound by the rules of civil procedure or the rules of evidence. They are also not required to follow precedent. Appeals are limited, often nonexistent. In short, there is no guarantee of consistent or legally grounded decisions.
Confidentiality may sound appealing, but it also ensures no public scrutiny. Arbitrators are not accountable to anyone other than the parties who hired them, and repeat customers tend to get favorable treatment.
Who benefits from arbitration clauses?
Large companies. National vendors. Franchisors. Employers. Landlords. Insurance carriers. They include arbitration clauses in standard contracts because it allows them to control risk and avoid public litigation. The repeat-player advantage is real, and it has been studied extensively. One party appears regularly. The other shows up once and never again. That is not a level playing field.
What can you do?
- Do not sign contracts with arbitration clauses without reviewing them carefully.
- Negotiate to remove arbitration if possible, or at least to include mutual selection of arbitrators, limited fees, a right to appeal, and a local venue.
- Ask whether court would provide a better remedy. Often, it does.
- Have a business litigation attorney review your contracts. Arbitration clauses are often boilerplate, but their consequences are anything but.
Final thought
Arbitration was intended to offer a fair alternative to litigation. Today, it often functions as a shield for those with more money, more experience, and more influence over the forum itself.
The only way to win in arbitration is to know what you are walking into before the dispute begins.
