DON’T ARBITRATE!

You are the CEO of an important, successful company.  Your chief financial officer comes to see you backed up by your outside accounting firm and they suggest that you hire a vice president who will be solely responsible for all spending.  They tell you that that person needs to have complete autonomy unfettered by any business concern of yours and, in fact, that he should be independent not only of you but also of the board.  And, in fact, they say that he should be immune from firing.

You are a successful CEO and you didn’t get there by surrendering power and discretion.  Your first instinct is that they must be kidding. But then, as it sinks in that they are serious, you come to the conclusion they should be fired for such an idiotic idea.  Of course, no CFO would consider making the suggestion nor would any competent outside accountant.  But your lawyer does it all the time.

You know how ridiculous it would be to hand over company spending to someone who is completely unaccountable.  So, why do you hand over your company’s legal affairs to someone who is completely unaccountable?

There is a myth abroad in the land.  For more than seventy years, lawyers, inside and out, have sold executives a bill of goods.  They have told you that your disputes are better handled through arbitration than through litigation.  It isn’t true.

What are the benefits of arbitration?  Well, they tell you that it is faster than litigation and that was true at one time.  But most states have now enacted “fast track” systems so that in California, for example, 95% of cases are disposed of in less than a year.  Arbitration of difficult business disputes will certainly take that long.

Your lawyer will tell you that arbitration is less expensive.  But that is seldom true, at this point.  Far and away the most expensive part of litigation is discovery and if you allow your lawyer to engage in arbitration without full discovery, you are taking your life in your hands.  And, frankly, virtually all large law firms insist on discovery not only because they fear going to hearing without all facts at their disposal (lest they commit malpractice) but because they want the billable hours.  So, you aren’t going to save any money on discovery.

Maybe you will save money on motions.  But most arbitrators like to have a series of meetings to discuss the conduct of arbitration and courts never do.  So, depending on how aggressively your lawyer litigates the case, it is probably a wash.  And, of course, you can always tell your lawyer that you just want to get on with it and forget about motions unless you approve them in advance.

So, what is the downside of arbitration?  Just this: under the law of most states, arbitrators do not have to follow the law and there is nothing you can do about it.  If the arbitrator gets up on the wrong side of the bed that day and decides he just doesn’t like your attitude, he can issue an award that is completely contrary to the law and the facts and because you have no appeal, that is it.  You are stuck.  Because arbitration is favored in the law, few courts will give you any relief.  And, worse, that award can be made into a judgment quickly and with little trouble.  So, not only can you get a bad decision from the arbitrator, it can become an enforceable court judgment in no time.

“But”, your lawyer tells you, “you have finality.” Well, that’s terrific.  You have finality because you have no appeal.  Finality of a bad decision is not such a great idea, is it?

The truth is that agreeing to arbitrate is the worst thing you can do to your company.  When you sign a contract with an arbitration clause, you have no alternative but to arbitrate.  But when you sign a contract without one, there is no reason why you cannot opt to arbitrate in the event of a dispute with the opposing party.  The difference is that neither it nor you can force the other to arbitration against your will.  And that is worth something.  If arbitration is a such a good idea, presumably both parties can be induced to agree and the matter will be arbitrated.  But a contractual arbitration clause takes from you your flexibility and you got where you are by insisting on maximum flexibility.  The fact is that an arbitration clause is nothing more than a waiver of your due process rights under the law.

And studies do not bear out your fear of the court process.  On average, judges find for plaintiffs more than 60% of the time.  Juries find for plaintiffs only slightly more than 50% of the time.  So, the myth that a legally trained individual will give corporations a better shake than unsophisticated jurors is simply that: a myth not borne out by facts.  Where did that fear of jurors come from?  Well, while juries find for plaintiffs significantly less often than judges, the awards they issue are generally higher, on average, than those of judges.

I don’t know.  I think I would rather take the chance of a higher judgment against the probability that the jury will find for my corporate client.  And I certainly am not going to recommend to you that you surrender your due process rights and the power to appeal.  You are a CEO.  You know how it works.  If your employees do not have the possibility of being fired, they will, like civil servants, soon lack accountability.  What is their incentive to do it the way you want it done?  That’s how it is for arbitrators.  Their decisions are final.  There is no appeal.  There is no risk to them for making a bad decision.  Is that really who you want hearing your case?  I didn’t think so.

And, by the way.  Fire that lawyer who tells you you are better off arbitrating.  He’s either lying or incompetent.  Either way, you don’t need him.

6 Responses to “DON’T ARBITRATE!”

  1. awesome work thanks

  2. Li Jin says:

    Wow, I think you nailed it! Thanks for good writing.

  3. Lynda Hurdle says:

    You are a very talented blogger, and I absolutely enjoy reading your posts.

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