Even though you may not know it, chances are, you have signed an arbitration agreement. Many large corporations – including Amazon, X (Twitter), American Express, Tesla, StubHub, AT&T, Uber, DraftKings, Ford – require arbitration as the mechanism to resolve any dispute with the company. What does this mean? Why is arbitration generally preferred by companies? If you have a choice, should you choose to arbitrate or to litigate (file a lawsuit in court)? This legal blog will explain the answers to these questions. In addition, seeking guidance from an experienced dispute attorney can help inform your best option.
What is the Difference Between Litigation and Arbitration?
Litigation is the traditional way to resolve disputes, where parties litigate their issues in court. In a traditional court proceeding, a plaintiff can bring their case in federal or state court, depending on the type of claim(s) at issue. Generally, litigation matters are public proceedings.
Arbitration is an alternative dispute resolution (ADR) method. Unlike a traditional court proceeding, an arbitration is a private dispute resolution process. Arbitration is generally governed by the Federal Arbitration Act and state laws. Arbitration disputes can be adjudicated by any of several organizations. The best-known are: the American Arbitration Association (AAA); and Judicial Arbitration and Mediation Services (JAMS). Similar to a court proceeding, arbitration still results in a binding decision in the disputed matter. In an arbitration, the arbitrator – a neutral third-party selected by the parties – renders the decision (similar to the role of the judge and jury in a traditional litigation).
What Are the Benefits of Arbitration?
Arbitration is generally preferred by companies. Reports indicate that as of 2019, 81 out of the 100 largest companies in the U.S. require mandatory arbitration to resolve disputes.
The main benefits of arbitration are:
- Confidentiality: Arbitration proceedings are private, keeping details out of the public record.
- For example, if you a party to a litigation, the docket of your case can appear in a Google search for your name or the name of your business. On the other hand, that would not happen in an arbitration, because arbitration proceedings are generally confidential and not in the public record. You can imagine how large companies would prefer not to have their brand name tarnished in a public forum by claims of discrimination, harassment, or other wrongdoing, and arbitration can help ensure this confidentiality.
- Speed: Arbitration is often faster than litigation due to streamlined procedures and fewer delays.
- For example, in court, criminal matters generally take precedent over civil matters – so even if you have a scheduled trial, a criminal case could require your civil trial to be delayed. But, criminal matters cannot ever trump your arbitration case, because criminal matters may only be adjudicated in court.
- Flexibility: Parties can select the arbitrator or arbitration panel and set terms that best suit their needs. Unlike court, where a judge is assigned to your case, in arbitration, the parties can select an arbitrator (or a panel of multiple arbitrators) based on their specific industry experience or other characteristics.
- For example, Microsoft (a company requiring mandatory arbitration in their user agreement) would likely prefer to have an arbitrator with experience in technology litigation, as opposed to a judge who may be less familiar with the technical side of their business. Using that example, you can imagine if the case involved copying code, technical knowhow can be an important determining factor in the outcome of the case, and Microsoft would prefer not to have its trade secrets detailed in public court documents.
- Cost-Effectiveness (But Not Always): Arbitration can be less expensive than litigation due to its usually shorter duration. However, arbitration can sometimes cost more than litigation in court, because parties have to pay the arbitrator (generally by an hourly rate that can vary from $200/hour to over $5,000/hour), among other fees that parties do not have to pay for in traditional court proceedings.
- For an example of how arbitration can cost less, arbitration generally takes less time than court. The AAA estimated that most arbitrations are completed in eleven months; most court cases can take several years to reach a decision. This speed can result in lower overall costs as compared to court proceedings.
- On the other hand, arbitration can end up being more expensive, because parties must pay the arbitrator for their time (whereas in court, the judge is not paid by the parties). Also, the parties typically have to pay higher costs to the arbitration organization than they do to the court – for instance, it costs around $200 to file a case in New York state court, but it can cost triple that amount to file a case with the AAA.
- Less Formality: Arbitration has more relaxed procedures compared to traditional court settings. This can be preferred as relaxed procedures tend to save time and costs.
What Are the Benefits of Litigation?
On the other hand, litigation has its benefits. Typically, in a dispute between an individual and a large company, the individual would benefit more from a litigation proceeding than they would in an arbitration. In a dispute between two parties who have similar bargaining positions (in terms of money, time, and legal representation, among others), arbitration and litigation could be equally good options.
The benefits of a traditional litigation are:
- Better Chance to Appeal: Litigation offers the possibility – to either party – to appeal a decision. On the other hand, arbitration decisions are usually final and binding, and can only be appealed in limited circumstances, such as if the arbitrator made a blatant mistake or acted outside of their authority. This can make it difficult to overturn a decision if the arbitrator misinterprets evidence or makes a legal error.
- Formal Discovery: Litigation provides for an extensive discovery process, beginning after the complaint and answer are filed, that requires both parties to disclose detailed evidence. Civil rules of procedure generally allow for discovery of any relevant information in a litigation, which can allow for a broader scope of discoverable information, and permit parties to enforce discovery requests on people or companies that are not involved in the dispute (non-parties). However, in arbitration, the discovery process is more voluntary, the time period for discovery is shorter, and arbitrators have less power to enforce discovery obligations on non-parties.
- Enforcement: Court judgments are generally easier to enforce than arbitration decisions, especially in international cases. A court judgment can be a final decision (like a judgment for an amount of money) or an interim decision (like a temporary restraining order or preliminary injunction, requiring one side to stop doing something until a final decision is reached). On the other hand, enforcing an arbitration judgment has challenges. If you receive a judgment from an arbitrator and the losing party does not comply with that order, you would have to go to court to initiate an action (file a complaint or petition) to seek enforcement.
Can I Choose Whether to Arbitrate or Litigate?
It depends. If you have agreed to arbitrate the dispute in writing, but you file a case in court, the other side can compel or force you to arbitrate. Recently, Temu, the fast fashion retailer, successfully compelled arbitration in Illinois. For another example, recently, a man sued Disney after his wife died from an allergic reaction at Disney World in 2023. Disney initially tried to compel arbitration, due to a 2019 Disney+ terms clause that required arbitration but, after some backlash, agreed to let the case proceed in court.
But, there are exceptions – even when you agreed to arbitrate, you can be granted the right to proceed in court if the arbitration clause is unenforceable. Some reasons that an arbitration agreement may be found to be unenforceable include unclear language and failure to comply with certain requirements in online agreements, among others.
Also, there are some categories of disputes that generally cannot be arbitrated, subject to state and federal laws. Exceptions can include:
- Criminal claims: As noted above, criminal matters are not subject to arbitration and must be litigated in court.
- Certain employment claims: Charges of unfair labor practices under the National Labor Relations Act, charges filed with the Equal Employment Opportunity Commission, workers’ compensation claims, and unemployment claims generally cannot be arbitrated. Recently, President Biden also signed into law the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which prohibits an employer from forcing an employee to arbitrate claims of sexual assault and harassment.
- Claims involving property: Generally, disputes “in rem,” which are claims involving property, cannot be arbitrated. This stems from the limited powers of enforcement that the arbitrator has, as compared to the courts.
Conclusion
Choosing between arbitration and litigation depends on factors such as the complexity of your case, the need for confidentiality, and the bargaining positions of the parties to the dispute. To determine the best approach for your specific situation, and understand whether you can challenge an arbitration agreement, reach out to a member of our team for tailored advice on your next steps.
