Litigation: When, why and how arbitration can help obtain better results at lower costs

Don’t listen to the critics—arbitration can be a useful tool

This is the first article in a series on arbitration. This column will address three situations in which arbitration can position you for success. Future columns will share comparative studies of arbitration and litigation, analyze the national legal landscape and provide a checklist to consider when reviewing or drafting arbitration provisions.

 

Introduction

Arbitration has its fair share of critics who decry it as an inefficient dispute resolution tool. But in certain situations, it can help you obtain better results and lower the costs of business litigation. The key is identifying when, why and how arbitration can help you do this. Our goal here is to provide you that information so you can decide whether to implement arbitration provisions with customers or employees, or whether to change your current arbitration practices.

Three situations in which arbitration can pay off

Binding arbitration can now be found in virtually all types of contracts, making arbitration a wide-ranging surrogate for civil litigation. This is due to the fact that litigation can be contentious, costly and uncertain. Arbitration, however, can suffer from the same maladies. Thus, it’s important to understand exactly how arbitration works and to identify those situations where arbitration can provide the most bang for the buck.

The overriding goal of arbitration is to get to the merits of the case as soon as possible. Picture the speed of the same runners in the 100 meter sprint and the 110 meter hurdles. In litigation, venue, jurisdiction, discovery and motion practice are hurdles that can slow down—or even disqualify—a party from reaching the finish line. Each of these hurdles can increase cost, uncertainty and ultimately the bottom line in having the case resolved. Arbitration can eliminate the most troubling of these stages—jurisdiction and venue—and it can provide uniformity in international disputes and a contractual safeguard against class actions. Here are three scenarios in which to consider using arbitration to eliminate some corporate litigation pitfalls:

1. Your company keeps getting sued in a judicial hellhole.

For a company that engages in business across state or international lines, litigation can be especially dangerous and expensive, due to venue and jurisdiction. With the courts’ rapidly expanding notions of personal jurisdiction, a business or its executives could be sued practically anywhere they engage in a single transaction. This typically means suit on your adversary’s home court with a hostile judge or jury pool. Your company’s best hope may be a venue or jurisdiction removal fight. Thus, before the merits are ever considered, you could find yourself waging an all-out war just for the right to a neutral battlefield.

You can avoid this big disadvantage if the dispute is subject to arbitration. Having consented to arbitration, the plaintiff (or defendant) now must submit to the contractually agreed upon venue and jurisdiction. Rather than engaging in expensive motion practice regarding venue or jurisdiction, the parties understand where the dispute is going to be heard from the outset and can more quickly get to the crux of the issues. And that saves time and money.

2. International disputes

Arbitration is especially beneficial in international commerce. International arbitration has been highly successful in today's global economy largely because an international treaty, the New York Convention, makes foreign arbitral awards enforceable in signatory countries. Therefore, rather than engaging in multiple international suits over the same matter, risking divergent outcomes, a company doing business internationally can resolve its disputes through international arbitration, ensuring conformity of laws, issues and resolution.

3. Consumer arbitration

Arbitration is also useful in the consumer arena, where the Supreme Court has consistently enforced arbitration contracts. A good illustration of this enforcement occurred in Doctor’s Associates, Inc. v. Casarotto, where the Supreme Court held that the Federal Arbitration Act (FAA) preempts state statutes seeking to limit the enforceability of arbitration clauses. And of course most recently, in AT&T Mobility v. Concepcion, the Supreme Court held that the FAA preempts state laws and allows parties to contractually waiver their class action rights. Thus, in consumer contracts and possibly employment disputes, an arbitration clause that contains a class action waiver can be effective in preventing frivolous class action lawsuits.

In the next column, we’ll share our results of a comparative study of several cases in arbitration and litigation. The study includes outside counsel costs, time to resolution and case results to help you craft efficient arbitration practices for your company. 

Contributing Author

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Alan Dabdoub

Alan Dabdoub represents corporate clients in business litigation, including business torts, class actions and employment disputes.  He has first chaired several trials and arbitrations in...

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Contributing Author

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Trey Cox

Trey Cox has been helping clients resolve complex business disputes for nearly 20 years, representing Fortune 500 corporations, entrepreneurs and leading firms in a wide...

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