The AAA Coffin Nail - Arbitration Requiem?
One of the things that will hamper if not ultimately destroy the utility of arbitration is that the largest non-securities self-regulatory arbitration forum, the American Arbitration Association, has begun to behave more like a scion of capitalism than a non-profit organization advocating reform. This has been brought about by several changes in AAA policy.
The first change began when AAA started viewing its continuing education of arbitrators as a profit or income center. In out of the way places like Oklahoma, the AAA soon had no local arbitrators because the number of AAA cases in Oklahoma did not provide enough arbitrator employment to offset the high cost of AAA continuing education fees.
The next change came about when AAA stopped viewing service as an arbitrator as public service and began promoting it as just another form of hourly consulting practice. Hourly rates for most AAA arbitrators rocketed from the rates associated with non-profit work to the highest commercial hourly rates, typically for legal work, offered in a region. Also, this fit in with the first change because the charges for continuing education of arbitrators could then be justified to arbitrators allowed to charge, if not encouraged to charge, their highest hourly rates.
Thus, in out of the way places like Oklahoma, where AAA has no office, and probably has never had an office, and now has to local panel of arbitrators, arbitrators must be imported. The result is that the travel costs are now a significant cost burden on the arbitration.
The result of all of this is that to hear a relatively routine commercial dispute in Oklahoma, the AAA will want to bill and collect $100,000 in fees and expenses for itself, the fees of a trio of arbitrators, and their travel costs. Even with any resources the AAA can muster as a non-profit forum, the AAA can only moderate the fees and expenses to the $75,000 range.
These fees and expenses, of course, are sought by the AAA for routine commercial disputes. This means that claims with a risk of recovery as high as 30% or 40% (the likelihood of a zero or an award less than the expenses) should not be brought in the AAA. Because handicapping outcomes in jury trials, arbitrations, and horse races bear so much uncertainty, AAA claims probably cannot be handled on a reduced hourly, partial contingency or full contingency basis. They cannot be handled on a contingency basis in which counsel advances the AAA fees and expenses. Clients that cannot pay $40,000 to $50,000 for arbitrator expenses and bear the risk of loss, too, have to stay out of AAA. Clients that, in addition to the arbitrator fees and expenses, must also pay the costs of full blown court-type discovery many of these panels authorize (depositions, document production, expert witness fees) will quickly be frozen out of the system. Indeed, it may be that the AAA, in seeking its own economic goals, has decided that B2B litigation, where the commercial entities can afford to spend hundreds of thousands of dollars on dispute resolution, are its “market” of choice.
The original premise of the US Supreme Court in authorizing mandatory arbitration clauses, came about when Wilko v Swan, 346 US 427 (1953) was overruled in a triad of cases that included Rodriguez de Quijas v Shearson / American Express, Inc., 490 US 477 (1989). The premise was that the safeguards available in modern arbitration now permitted deference to arbitration as a dispute resolution method outside of court process.
It might be better for parties to challenge in court mandatory arbitration clauses in some circumstances. For example, a mandatory arbitration clause in an older contract that mandated AAA as a forum could not have anticipated the $100,000 arbitration model that is now prevalent. Indeed, the $100,000 arbitration model for any but the largest commercial entities, might be unconscionable. In any event, the $100,000 arbitration model has ended the chief advantage in arbitration, cost-efficiency.
