Point Park near
Chattanooga (southeasttennessee.com)
Tennessee Law Concerning Consumer Arbitration
We have prepared a short memorandum on
Consumer Arbitration Agreements in
Tennessee
that is designed for lawyers
as well as non-lawyers. It explains their legal status in other states too. This
is a fast-changing area in the law with many courts invalidating such agreements. (To read
our memorandum, you will need
the Adobe Acrobat Reader, available by clicking below.)
The
Costs of Arbitration
In an arbitration case we are
handling on behalf of a borrower, the amount of the loan in dispute is $49,500. The legal fees for both
sides will almost certainly exceed $250,000 in value. (The lawyers for the
lender will be paid regardless of the outcome.) This case is extreme but is not
atypical of the hidden costs of arbitration, as both businesses and consumers
are now realizing. It explains the new trend in business contracts away from
arbitration and toward
trials before judges (not, Heaven forbid, juries). Here is one commentary on the subject:
"The speed
and affordability of arbitration are perhaps its most discussed benefits... "
-U.S. Chamber of Commerce
"Arbitration can save parties 70-80% of
the cost of litigating these cases."
-Ed Anderson, National Arbitration Forum
"Arbitration still costs less than
litigation"
-The Wall Street Journal
"Less costly"
-AT&T Broadband
"Cost-effective"
-Sen. Jeff Sessions
"Usually it is quicker, less expensive,
and more informal than litigation. Not always... "
-Florence Peterson, American Arbitration
Association
Remarkably, although the claim is frequently made that arbitration costs less
than litigation, no research has ever been undertaken to substantiate it. No
interest group has commissioned a study. No Member of Congress has asked for a
General Accounting Office report.
Writing in 1992 about court-annexed ADR, Stanford law professor Deborah Hensler
cautioned, "Whether alternative dispute resolution procedures will reduce
private litigation costs is still an open question. Court-administered
arbitration has shown mixed results in this regard." Recently she repeated her
caveat about a paucity of empirical research, explaining, "Because public
support for ADR is so frequently justified on cost savings grounds, program
administrators especially fear cost-benefit assessments."
Here,
Public Citizen presents the first comprehensive collection of information on
arbitration costs. We find:
·
The cost to a plaintiff of initiating an arbitration is
almost always higher than the cost of instituting a lawsuit.
Our comparison of
court fees to the fees charged by the three primary arbitration provider
organizations demonstrates that forum costs- the costs charged by the
tribunal that will decide the dispute- can be up to five thousand percent higher
in arbitration than in court litigation. These costs have a deterrent effect,
often preventing a claimant from even filing a case.
Public Citizen's survey of costs finds that, for example, the forum
fee for a $60,000 employment discrimination claim in the
Circuit Court of
Cook County, Illinois is $221. The forum fees for the same claim before the
National Arbitration Forum (NAF) would be $10,925, 4,943% higher. An $80,000
consumer claim brought in Cook County would cost $221, versus $11,625 at NAF, a
5,260% difference. These high costs are not restricted to NAF; for the same
$80,000 claim, the American Arbitration Association (AAA) would charge the
plaintiff up to $6,650, and Judicial Arbitration and Mediation Services (JAMS)
would charge up to $7,950, amounting to a 3,009% and 3,597% difference in cost,
respectively.
·
Arbitration costs are high under a pre-dispute
arbitration clause because there is no price competition among providers.
Companies that want to use arbitration costs as a
barrier, to prevent consumers and others from asserting their legal rights, have
no incentive to arrange low-cost arbitration services. Instead, it is to their
advantage to seek out the highest-cost arbitration providers. While experience
has shown that many lawyers are willing to serve as arbitrators for nominal
fees, the market provides no mechanism to match volunteer arbitrators to cases
in which they are needed the most.
The mandatory arbitration clause's negative effect on price
competition can be seen in AAA's handling of insurance claim arbitration. From
1989 to 2000, in cases submitted to AAA on a post-dispute basis, AAA
charged each party a total of only $300 for administration and arbitrator fees.
But cases arising under a pre-dispute clause were governed by AAA's
Commercial Rules, with much higher filing fees and regular hourly arbitrator
fees. For example, a health insurer's denial of coverage for a bone marrow
transplant, submitted post-dispute under the Insurance Claims Procedures, would
cost the consumer $300. But for a case governed by a pre-dispute clause, AAA
charged a much higher fee. Tammy Sharpton, who arbitrated such a case in 1997,
was charged $5,290.23, eighteen times what AAA would have charged had it
been competing with other arbitration providers and the courts.
·
Arbitration costs will probably always be higher than
court costs in any event, because the expenses of a private legal system are so
substantial.
The same support personnel that expedite cases at a
courthouse, such as file clerks and court administrators, are also necessary to
manage arbitration cases. But because arbitration provider organizations handle
fewer cases over larger geographic areas, the economy of scale in a court
clerk's office cannot be achieved, increasing the administrative cost per case.
Thus, while it costs the Clerk of the
Circuit Court of
Cook County an average of $44.20 to administer a case, AAA's administrative cost
per case averages $340.63, about 700 percent more.
·
Arbitration saddles claimants with a plethora of extra
fees that they would not be charged if they went to court.
For example, the National Arbitration Forum charges
$75 to issue a subpoena. A lawsuit litigant can obtain a subpoena form for free
from the court, oftentimes downloading it off the Internet. NAF also charges
fees for discovery requests ($150) and continuances ($100), occurrences so
ubiquitous in litigation that they must be viewed as inevitable. The American
Arbitration Association (AAA) charges extra fees for use of a hearing room.
·
Taking a case to arbitration does not guarantee that a
consumer or employee will stay out of court, making arbitration still more
costly. First, a plaintiff bound by a one-way arbitration clause,
the most common type, may be forced to go to court to litigate the same issues
that are being decided in the arbitration. This is because the other party to
the clause has retained its right to sue in court. Second, if crucial documents
or testimony must come from a third party, court litigation is necessary to
enforce subpoenas. In fact, due to a quirk in arbitration law, sometimes two
different federal lawsuits are necessary to enforce one subpoena. Third, if a
plaintiff wins a case in arbitration but the defendant refuses to honor the
award, the plaintiff must ask a judge to enforce the award.
·
The costs of arbitration are so high that even some
businesses that choose to include arbitration clauses in contracts with
consumers and farmers have refused to pay the fees.
·
High arbitration costs can also be used to bludgeon an
adversary.
For instance, the party being sued can file a motion
to dismiss or a motion for summary judgment. The claimant must then advance
additional funds to pay the arbitrator to decide the motion, even if the motion
has no merit. The defendant can also refuse to provide discovery information, in
which case the claimant must advance funds to the arbitrator to decide the
discovery dispute. In one case, for which we have reproduced copies of the
arbitration bills, the claimant was unable to pay and had to abandon the case.
·
The oft-cited benefits that arbitration can offer in
exchange for higher fees will seldom benefit consumer litigants.
Not only is there is no evidence that arbitration
reduces the overall transaction costs of litigation (e.g. witness fees,
attorney fees, discovery costs), but nobody has expounded a coherent theory to
explain how arbitration could reduce such costs except in a few
categories of cases. Indeed, Public Citizen's careful examination of the cost
savings claim demonstrates that in the vast majority of cases, arbitration will
necessarily increase the transaction costs of litigation.
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