A recent U.S. District Court decision has brought to the front burner the question of whether arbitration actually delivers on its promise of providing a means for the cost-effective and speedy resolution of business disputes.
In CellInfo, LLC v. American Tower Corp., Judge William G. Young in Boston ruled on the applicability of a binding arbitration clause to a trade secrets dispute between two companies in the wireless communications industry.
At issue in the case was the meaning of an arbitration clause in a consulting services agreement. After chiding the parties and their “big law” attorneys for drafting a contract rife with ambiguity, Young concluded that it was for the arbitrator to decide in the first instance whether the arbitration clause allowed the plaintiff to seek injunctive relief in federal court.
But Young had more to get off his chest about the perceived benefits of arbitration. He concluded his opinion with a five-page commentary about what he described as the “myth” that arbitration is cheaper and faster than civil litigation in federal court.
“So long as one party wants speed, federal courts in Massachusetts clearly outpace arbitration,” Young wrote.
U.S. District Court Chief Judge William E. Smith in Rhode Island agrees — with one caveat.
“We can accommodate parties’ desire for speedy resolution of their dispute in a fashion that is pretty consistent with what they get out of arbitration,” Smith says. “Where we have a problem is controlling the cost of discovery.”
Boston commercial litigator Stephen D. Riden says Young made some very good points in CellInfo, points that he himself has raised with his corporate clients.
“In dealing with companies, there’s a perception that arbitration is always going to be faster, cheaper and more confidential than a federal court proceeding,” Riden says. “That’s not always right.”
Two out of three ain’t bad
Matthew J. Ginsburg, chairman of the Complex Commercial Litigation Section of the Massachusetts Bar Association, says Young’s opinion adds fuel to what has become a “hot button” issue.
Ginsburg’s committee recently co-sponsored a CLE program addressing how transactional attorneys who draft arbitration clauses can do so in ways that achieve the goals of saving time and money in resolving disputes.
“What happens is that clauses get lifted from other agreements that might not suit the parties or their circumstances,” the Andover lawyer says. ‘No one has thought through how these [clauses] are going to play out.”
Bruce I. Kogan teaches dispute resolution at Roger Williams University School of Law.
“Certainly, the perception has always been that arbitration is cheaper, faster and confidential,” Kogan says. “My experience is it is usually cheaper but not necessarily faster.”
Young wrote in his opinion that the federal court in Massachusetts has often proven to be the better option with respect to the cost and speed factors.
First, Young said that arbitration is expensive. He pointed to a high-profile California case involving the alleged misclassification of drivers for Lyft. The ride-hailing company faces having to pay millions of dollars in up-front arbitration costs in the form of $1,900 filing fees and $750 case management fees for each of the nearly 3,500 drivers in the case.
In CellInfo, Young added, the parties had markedly increased their potential arbitration costs by providing for pre-hearing discovery and disposition by a three-arbitrator panel. Under those circumstances, the parties’ chosen dispute resolution process becomes “as expensive as the full panoply of federal court litigation,” Young wrote.
The judge acknowledged that federal litigation is “expensive as well — too expensive.” However, he concluded it was plainly a myth that arbitration is always a bargain by comparison.
Judge Smith agrees with Young with regard to up-front costs.
“There’s no question that it costs more to initiate a commercial arbitration than it would be to file a case in federal court because of the expenses associated with both the filing and the cost of the arbitrators,” Smith says.
Noting a typical arbitrator might charge $400 an hour, Riden says Young made one of his better points on the issue of up-front costs.
“For arbitration, it’s going to cost thousands of dollars up front, and it can cost tens of thousands of dollars just to pay for the arbitration over the course of the case,” Riden says. “Compare that to federal court where you put a few hundred dollars on your credit card and you’re off to the races.”
“So long as one party wants speed, federal courts in Massachusetts clearly outpace arbitration.”
— U.S. District Court Judge William G. Young, Massachusetts
The “real costs” of federal litigation come in the form of discovery, with trial costs being a secondary factor, Smith says.
“I’ve spoken to lots of lawyers about this,” he says. “What they complain about is the cost of formal discovery. Arbitration greatly reduces that, if it doesn’t eliminate it.”
Riden acknowledges the popular perception that the costs of discovery in litigation far outweigh the costs of discovery in arbitration. However, he says his experience has shown that the costs tend to be comparable.
“I don’t see much of a difference in terms of cost between conducting discovery in federal court as opposed to conducting discovery in arbitration,” he says. “You’re still going to have to pay for the same forensic experts in both cases.”
According to Keith A. Minoff of Springfield, Massachusetts, who serves as an arbitrator in commercial disputes as part of his practice, the cost of discovery in arbitration largely depends on the scope of discovery agreed to by the parties.
“In my experience, it’s unusual though not unheard of to take depositions of witnesses prior to the arbitration hearing,” Minoff says. “There might be an exchange of documents, but often there are no interrogatories and no depositions, so the costs for discovery would be substantially less in arbitration.”
But Ginsburg says he has been involved in the arbitration of cases in which extensive discovery has occurred by agreement of the parties, driving up the cost of the proceeding.
“If parties really want an efficient resolution of disputes, then what they need to do is build into their arbitration clauses limitations,” Ginsburg says. “Instead of saying nothing about discovery, they should say, ‘There shall be no discovery.’”
Clients can control their arbitration costs considerably by providing that the matter is heard by one arbitrator rather than a three-arbitrator panel, Minoff says.
“If you have three people and they’re charging $400 dollars an hour, there’s $1,200 dollars an hour for every hour of arbitration,” he points out. “If you did an eight-hour arbitration, that’s nearly $10,000 just for the arbitrators for a day. That’s almost $50,000 a week.”
According to Ginsburg, all too often the drafters of arbitration clauses include without much thought boilerplate provisions calling for a three-arbitrator panel — when a single arbitrator would satisfy the parties’ needs.
“The three-arbitrator panel is just a massive cost-driver,” Ginsburg says.
“There’s no question that it costs more to initiate a commercial arbitration than it would be to file a case in federal court.”
— U.S. District Court Chief Judge William E. Smith, Rhode Island
Young wrote that if the parties in CellInfo had “genuinely” committed to court adjudication, the case would have been resolved “before arbitration could get off the ground.”
So long as at least one of the parties is committed to speed, cases in Massachusetts federal court are “markedly faster,” capable of being resolved “5-8 months start to finish,” the judge stated.
In the right case, Ginsburg says, it is possible to get an evidentiary hearing before a judge within two to four months. On the other hand, he says he has been involved in arbitrations that went to hearing within two or three months.
But Kogan observes that arbitration clauses in commercial contracts typically designate a forum such as the American Arbitration Association, which has its own set of rules.
“That means there is opportunity for parties to slow things down through the use of procedural devices,” he said.
According to Riden, a main benefit of litigation is that a party can start “pulling levers” to get rulings from a judge on dispositive motions much faster than parties can get decisions on the merits from an arbitrator.
“Typically, an arbitrator is not going to issue a decision on the merits in a case until the very end of the dispute,” Riden says. “Whereas in a federal or state court case, you ask for dispositive rulings up front or move for a preliminary injunction. Then you will have input from a decision-maker at the outset of a case.”
But Minoff takes issue with generalizations that litigation is cheaper and faster than arbitration.
“With arbitration, it varies a lot,” he argues. “If there’s no issue as to arbitrability and assuming you’re using AAA rules, the process for selecting an arbitrator and selecting a venue and dealing with pre-hearing issues can go fairly smoothly.”
When parties cooperate, an arbitration hearing can be scheduled “within a few months” of the filing of a demand for arbitration, he says.
Cloak of confidentiality
Young conceded that, even though judges can issue orders to protect sensitive information like trade secrets, arbitration does trump litigation as far as keeping business disputes from the eyes of the public, competitors and customers.
“In arbitration, CellInfo and American Tower can cloak themselves in secrecy; in federal court they cannot,” he wrote.
Riden says he typically advises clients to insert arbitration clauses in their contracts when he knows the client cares more about the confidentiality as opposed to the cost of a proceeding.
“Absolute confidentiality can be provided in an arbitration, but it certainly comes at a cost,” Riden says.
For business clients that place a priority on confidentiality, there is little that can be done to make the federal courts more attractive, Smith says.
“Our whole system is based on openness and accessibility,” he notes.
And while businesses are attracted by the confidentiality afforded by arbitration, another attraction is that arbitration decisions are typically non-appealable by agreement of the parties, Kogan says.
“Usually, ‘one and done’ is commercially desirable,” he says.
Smith commends Young for bringing the issue of arbitration versus litigation to the fore. Not only is it good that attorneys and their clients re-examine arbitration, it is good for judges to reexamine how they can improve their own processes to make courts even more attractive forums for business disputes, he says.
“Should we have summary trials? Should we get rid of formal discovery for disputes under a certain amount? Should we have ‘rocket dockets’? These are conversations that we ought to be having internally.”