Arbitration: Better for Claimants, Worse for Lawyers

For years, efforts backed by the plaintiffs' bar have sought to undermine arbitration¹across the U.S. court system. Those attacks are motivated by the fact that, while on average arbitration produces better results for claimants than litigation, it can often cut off plaintiffs' lawyers' ability to generate astronomical fees.

Note: "Arbitration" as discussed in this article refers to individual arbitration as it is traditionally defined. We do not discuss here, and do not defend anywhere, the highly problematic practice of mass arbitration.

Federal and State Pressure

At the federal level, there are frequent efforts to ban arbitration, either in whole or in part. The recently reintroduced Forced Arbitration Injustice Repeal Act would ban arbitration across the board in consumer, employment, antitrust, and other contexts. In addition, there are efforts to prevent arbitration from being used to resolve disputes in particular contexts. For example, the Servicemembers Civil Relief Act has been repeatedly the target of anti-arbitration amendments proffered during the debate over the National Defense Authorization Act, the annual, must-pass, defense policy bill. Engagement from the U.S. Chamber Institute for Legal Reform (ILR) and other members of the business and legal communities have thus far prevented such amendments from becoming law, but the plaintiffs' bar and its allies are likely to continue with their efforts.

Those attacks extend beyond the federal level, as plaintiffs' lawyer allies in the states attempt to erode arbitration via state law. For example, California SB 707, a plaintiffs' lawyer-supported measure, imposed punitive sanctions on the drafters of arbitration agreements who failed to pay arbitration fees within 30 days, for any reason. The U.S. Chamber Litigation Center submitted a coalition amicus brief in the California Supreme Court, arguing that this provision and various court decisions interpreting it ran counter to the Federal Arbitration Act (FAA) by disfavoring arbitration. The Court recently issued a mixed ruling that required a more flexible, less punitive interpretation of SB 707.

The Value of Arbitration for Claimants

It's worth highlighting that these and other attacks on arbitration occur even though, on average, arbitration is better for claimants than having to go through the often time-consuming, costly, and burdensome court system.

Between the years 2019 and 2022, ILR collaborated with economic research firm NDP Analytics to investigate arbitration outcomes and evaluate arbitration's performance for consumer and employee claimants who engage in it. Across three empirical studies, the results indicated that arbitration remains a fairer, faster, and better alternative to litigation, producing better outcomes on average for all parties.

"Fairer":

Claimants tend to win and collect higher awards in arbitration than they do in court. Because arbitration tends to be less complicated than the court system, claimants can more easily navigate arbitration without having to hire and pay legal counsel. Removing the need to hire personal legal counsel means that individual claimants get to keep a greater percentage of their awards. In litigation, plaintiffs' lawyers operating on contingency often take 30-40 percent or more of any settlement or award. A 2022 study on U.S. tort costs conducted by ILR found that in the year 2020, roughly 53 percent of compensation awards went to claimants, leaving 47 percent for attorneys' fees and other expenses.

Furthermore, arbitration providers such as the American Arbitration Association require companies to pay all the fees (other than a modest filing fee similar to what is charged to file a claim in federal court) charged by arbitration providers in claims brought by customers or employees, provided that the value of the claim is relatively modest and the claim is not determined to be frivolous.

ILR's research also shows that consumers who initiate and prevail in arbitration get $79,945 on average, while litigation produced only $71,354 on average. This same pattern is also true of employee claimants, with them being awarded an average of $444,134 in arbitration compared to $407,678 in litigation.

"Faster":

With many complex civil procedures required by courtroom environments, litigation processes are notorious for the time they require, giving meaning to the common phrase "the wheels of justice turn slowly." Arbitration acts as a grease to those gears.

This is reflected in ILR's study Fairer, Faster, Better III, where it was found that consumer arbitration cases lasted on average 321 days from initiation to termination, while litigation took an average of 439 days. Regarding employment cases, the average for arbitration was 659 days from initiation to termination, while litigation lasted 715.

"Better":

ILR's study also showed that, between 2014 and 2021, across arbitrations which ended with awards, consumers won 41.7% of cases they initiated, while employees won 37.7%. By contrast, across litigations which ended with awards, consumers won only 29.3% of their cases, and employees won a mere 10.8%. That gap is clear evidence that arbitration is better for claimants.

Arbitration is fairer, faster, and better for employees and consumers, and its lack of complexity and expense makes it attractive for companies too. Given the rapid rise of tort costs in the United States-with costs and compensation in the U.S. tort system reaching $529 billion in 2022 and driving up costs for consumers-arbitration also provides a much-needed buffer to this trend.

The only group that benefits from banning or eroding arbitration is the plaintiffs' bar. Thankfully for employers, consumers, and businesses, arbitration remains a viable option, and ILR and our civil justice partners are fighting to preserve it.