Arbitration- Litigation Choice Not Always Obvious

Compared to traditional litigation, arbitration is often viewed by in-house and outside counsel alike as a preferable method of resolving commercial disputes. Many in the corporate legal community have long held this to be the case, based on the assumption that arbitration is less costly, speedier and less adversarial than litigation. These assumptions have been bolstered by overt pressure from federal and state courts and legislatures to encourage arbitration.

But despite its many perceived advantages, arbitration should not always be the default method for solving corporate disputes. When choosing between arbitration and the courthouse, counsel should make an informed decision to get the best result for their clients. Often it is assumed that arbitration and traditional litigation vary greatly, but on the contrary both methods involve most of the same elements and embody many of the same fundamental concepts. Witnesses testify and are cross-examined, evidence is submitted, opening and closing statements are made. Both involve motions practice and varying forms of discovery. In addition, protective orders are available and enforceable in both forums.

Because a number of the core procedures are for the most part the same, the disputes that traditionally arise in both forums – particularly very costly ones such as discovery disputes – are virtually identical. The net result is that it often takes the same amount of time and expense to resolve a dispute through arbitration as it does through litigation.

Along with the basic similarities, there is one noticeable and often overlooked difference. In arbitration, the parties must pay someone to resolve the dispute. Arbitration, including administrative fees, are no small cost, especially in instances where there are complex issues and a panel of arbitrators.

An arbitrator, unlike a judge, is personally affected by the outcome of the dispute precisely because arbitrators are paid by the parties. Moreover, the parties must also pay legal fees to counsel. And because the procedures for both arbitration and litigation are appreciably similar, commercial litigation clients should not expect to see a dramatic savings in legal fees by opting for arbitration; a deposition costs roughly the same no matter if it is taken in an arbitration or in litigation.

Another key difference counsel must consider pertains to injunctive relief. Many arbitration clauses expressly exclude the opportunity for injunctive relief altogether. Moreover, in many jurisdictions, arbitrators have no independent authority to grant injunctive relief. This can be a significant problem, given that in many commercial disputes preserving the status quo while the parties work through the legal dispute may actually be more important than the ultimate resolution.

Accordingly, when drafting arbitration agreements, counsel should consider including a clause that explicitly provides for injunctive relief. Otherwise they should opt for litigation, where courts, subject to applicable rules, are free to issue injunctions as they see fit.

An advantage unique to arbitration, one that cannot be overlooked and in many instances is the main reason for a corporations to seek arbitration, is that it can shield disputes from the public eye.

As a rule, arbitration proceedings are much more private than court proceedings. Unlike in court proceedings, there are generally no public “dockets,” and the arbitration hearing itself is usually not open to the press. Most arbitration clauses expressly call for confidential proceedings. Moreover, arbitration rulings are not regularly published, which in turn makes it possible for the parties to keep the entire dispute private.

Another advantage to arbitration is that arbitrators, usually individuals with industry experience, are often more knowledgeable about the subject matter of disputes they are tasked with resolving than are judges and juries. Often the time it takes to educate a judge and jury about the complexities of the subject matter of the dispute makes arbitration the most efficient resolution method.

Usually supporters of arbitration over litigation also claim that the lack of required discovery in arbitration makes for streamlined dispute resolution, and thus decreased costs. The truth is that while discovery is not required in arbitration, the large multinational corporations that often contract for arbitration nearly always (as they should) opt for it.

Moreover, the inability to obtain full discovery can be considered a cost, not a benefit of arbitration. While it may be true that eliminating or severely restricting discovery can shorten the time it takes to final resolution of a dispute, doing so actually negates one of the primary purposes of alternate dispute resolution: facilitating expedient settlements. Robust discovery provides each party with the opportunity to learn the true strengths and weaknesses of the other side’s case, which in turn permits both sides to take better and more reasoned settlement positions. Because settlement is often the most efficient way to reduce costs, the lack of discovery can actually hamper the dispute resolution process by adding unnecessary time and expense.

Another problem with discovery in arbitration is that in some jurisdictions, the arbitrator has no authority to subpoena documents from non-parties prior to the hearing. Consequently, it may be that the only time counsel is able to review critical documents from third parties is at the arbitration hearing itself, which is a clear disadvantage when compared to litigation. It’s both backward and inefficient. Without actually seeing a document beforehand, it is extremely difficult to determine its relevance to the legal proceeding.

Moreover, a witness’s presence may be completely unnecessary if a document at issue is irrelevant to the dispute; it is a waste of time and expense to require a person to appear if he or she does not need to testify. Thus the power to subpoena documents from third parties should be an available component of the arbitration process. If it is unavailable, counsel should strongly consider litigation as an alternative.

Another important consideration when deciding between arbitration and litigation is whether your client wants a jury. In many disputes against corporations, particularly those involving consumers, arbitration is preferred because there are no juries. In corporate-consumer disputes, where jurors are more likely to be swayed by the sympathetic plight of their fellow consumers, it generally makes sense to avoid a jury. Having a neutral arbitrator as the ultimate decision-maker is preferable to being subjected to a jury’s whims.

However, corporations need not always fear the jury. The “good guy-bad guy” dynamic that often permeates corporate-consumer disputes does not play a significant role in most corporate-corporate disputes. As a result, jurors are more likely to decide the issues in a dispassionate way, and rely less on sympathies or allegiances to either side. Most trial lawyers prefer a jury because it forces the parties to simplify the case as much as possible, and it highlights the persuasive powers of the lawyer in convincing the average citizen of the rightness of a client’s position. Even when those powers fail, the rules of evidence and other legal protections are designed to insulate parties from unfair jury determinations.

Before opting for litigation over arbitration, counsel in the position of defending a client should consider whether their client would likely be met with a hostile or unfavorable jurisdiction. If it’s an unfavorable jurisdiction, the opportunity to remove a case from state to federal court is available to defendants who satisfy the federal question, or the minimum amount in controversy requirement. Removal is designed to ensure fairness for such defendants.

Nonetheless, the decision to remove a case should not be taken lightly and should be carefully considered on a case-by-case basis. Litigating in federal court is usually more difficult, and can be more expensive than litigating in state court.

With regard to international disputes, arbitration is generally the better option, particularly in disputes involving international parties with relatively equal bargaining power. Too often in traditional litigation involving international parties, one party is unduly prejudiced by having to litigate under the other party’s laws and court proceedings. To avoid this pitfall, it is generally better to opt for international arbitration, with a neutral arbitrator, and with rules that both sides have chosen and specifically contracted for in the arbitration agreement.

Mediation and arbitration are often mentioned in the same breath, but while the pros and cons of arbitration and litigation are noted above, mediation only has pros. Each side learns about the strengths and weaknesses of the other’s case, and there is a chance the entire matter can be resolved before incurring the cost of litigation.

A good mediator can help bridge differences that the parties cannot bridge themselves because of prior history, personalities or other issues. Many corporate litigators complain that mediating is a sign of weakness, but that is mostly nonsense driven by something other than seeking a prompt resolution for a client. Mediation can and often does fail, but the client will benefit from the process regardless of the outcome. Therefore, whether a contract calls for arbitration or traditional litigation, the parties should include some form of mediation of the dispute before litigation commences.

When deciding between litigation and arbitration, it is critical for both in-house and outside counsel to be strategic, and to really think through the costs and benefits of both dispute resolution mechanisms. Only then will counsel be able to effectively advise a client as to the most efficient way to resolve the dispute.

If you determine that arbitration is the best route, you must be sure that the arbitration agreement completely defines the ground rules – from where it will take place and the extent to which discovery will be permitted, to whether preliminary relief will be available. Be creative. For example, if you think it will be advantageous to limit the number of witnesses, or even the number of days of the hearing itself, include language to that effect in the agreement. You can make your own rules in arbitration, but you must be sure the rules you make are the rules you want to play by.

[colored_box color=”yellow”]Anthony T. Pierce is a partner at Akin Gump Strauss Hauer & Feld LLP, where he serves as the partner in charge of the firm’s Washington, D.C., office. He has throughout his career handled a variety of arbitrations, as well as complex disputes in state and federal courts, including commercial litigation, intellectual property matters, employment matters and internal investigations.

Jonah E. McCarthy is counsel at Akin Gump Strauss Hauer & Feld LLP. He focuses his practice on complex civil litigation and arbitrations, as well as the representation of corporations in white collar internal and government investigations.[/colored_box]