Myth Busted: Arbitration Not Cheaper Than Litigation

Myth Busted: Arbitration Not Cheaper Than Litigation
Arbitration is often an alternative to court… but is it better?

Best Ohio Employment Discrimination Attorney Answer: Who pays the bill if I have to go to arbitration with my employer? How much will it cost if my employer files for arbitration? Can my employer force me to split the cost of arbitration?

Often a potential new client will come through our does saying, “I was fired today because of my…” race/color, religion, gender/sex, pregnancy, national origin, age, or disability. The employee may say “I want to sue for wrongful termination” or that “my boss is sexually harassing me.” Most every employee envisions taking the stand in front of a jury to tell their story and get vindication. Our employment law lawyers spend time with the client gathering all the facts and drafting a noticing of claims threatening to file a lawsuit. But, then the employer responds by pointing to an arbitration agreement that the employee did not realize that he or she signed on their first day of employment. So now what? Will arbitration be too expensive to pursue the claims and who has to pay for arbitration?

At The Spitz Law Firm, we have frequently discussed the topic of arbitration. (See Can My Employer Force Me To Arbitrate Overtime Claims? I Need Help From The Best Employment Lawyers And Top Wage Violation Attorneys In Ohio!; Can I Sue My Employer If I Signed An Arbitration Agreement? Best Employment Discrimination Lawyer Help In Ohio!; How Do I Get Out Of My Employer’s Arbitration Clause? I Need The Top Employment Attorney In Ohio!)

One aspect of the arbitration process that our employment lawyers have not yet discussed is the cost. Surprise! It is expensive, costing discriminating employers on average $100,000+ per dispute. Now, that’s a lot of dough! There is a myth floating around the legal community that arbitration is a cheaper, faster, and more efficient option than taking a case to trial. However, a hard look at the numbers shows that arbitration costs more and may take longer than traditional litigation.

Thankfully, most of our clients do not need to worry about the potential cost of arbitration as Ohio courts have recognized that mandatory arbitration agreements that require employees to split the cost of arbitration are unenforceable in many instances. For example, in Eagle v. Fred Martin Motor Co., 9th Dist. 157 Ohio App.3d 150 (2004), the court cited the Sixth Circuit Court of Appeals‘ decision in Morrison v. Circuit City Stores, Inc. (C.A.6, 2003), 317 F.3d 646. In Morrison, the court consolidated two cases brought by former employees who sued their employers for discrimination. Both employees had been required to sign a mandatory arbitration agreement as a condition to their employment. The two employees challenged the enforceability of their arbitration clauses. In reaching its decision the court found the “cost-splitting” provision in one of the arbitration clauses to be unenforceable. The court stated that “[a] cost-splitting provision should be held unenforceable whenever it would have the ‘chilling effect’ of deterring a substantial number of potential litigants from seeking to vindicate their statutory rights.” Morrison at 661. 

Further, many large arbitration providers including the American Arbitration Association (AAA), and the Judicial Arbitration and Mediation Services (JAMS) have policies that shift the costs of arbitration to the employer. These organizations only require an individual to pay a small filing fee, usually around $300, if the individual is the one who files for arbitration.

On the other hand, if an employer decides to move forward with arbitration, they better be ready to pay a pretty hefty bill. Even the courts have recognized the potential extra expense to employers of arbitration. As the Morrison court pointed out, courts “do not charge extra for in-person hearings, discovery requests, routine motions, or written decisions, costs that are all common in the world of private arbitrators.”

According to a recent survey in the online periodical Inside Counsel, discussed here, arbitration is not the most cost-effective way for parties, especially corporations to settle disputes when compared to the cost of litigation. According to the survey the total cost for arbitrated cases ran about $100,000 per case. Compare this to the average cost of litigated matters, which cost companies approximately $80,000 per case. Let’s take a moment to break these costs down.

The fees paid to arbitrators and arbitration corporations make up a significant portion of overall arbitration costs. For example, AAA charges an employer anywhere between $1,900 and $2,800 just to file the case, as well as a case management fee ranging from $750 to $1,000. Similarly JAMS charges $1,500 to file for arbitration as well as a 12 percent case management fee. Those fees do not cover the arbitrator’s compensation costs which according to some sources may range from $1,000 to as high as $2,000 per day! Although low-cost options do exist, these budget arbitrators are rare and are usually available only when parties can demonstrate a financial need. Even these low-cost arbitrators charge a minimum of $150 a day and may range up to $750.

Myth Busted: Arbitration Not Cheaper Than Litigation

Add to these filing and arbitrator’s fees the cost of renting the hearing room (which can cost hundreds of dollars a day), as well as the arbitrators expenses, including travel and various other miscellaneous expenses, and the costs relating to documents and witnesses produced at the direction of the arbitrator, which must be covered by the employer, and these costs add up quickly! According to one management-side firm, the “case management fees,” “hearing time fees,” and “post-hearing retainer” charged by some large arbitration providers could exceed $40,000. Can you imagine paying $40,000 just to the arbitration company? I sure am glad our employee clients don’t have to bear this cost.

While the fees charged by arbitration companies are certainly substantial, they make up only a small percentage of the total costs of arbitration. According to Expert-Evidence.com, attorney fees make up 83 percent of the cost of arbitration. While companies may think that they are paying the same attorney fees whether the case goes to arbitration or litigation studies have found that the attorneys’ fees for arbitration are actually higher than the fees charged for litigation.

In the article, Is Mandatory Employment Arbitration Living Up to Its Expectations? A View from the Employer’s Perspective. (Charles D. Coleman, 25 A.B.A. J. Lab. & Emp. L. 227 (2009-2010), the author cited a large company’s internal survey where the employer tracked their expenses for 19 employment discrimination claims, 10 of the 19 claims to proceed to litigation and the remaining nine went to arbitration. The survey found that;

The total outside counsel fees for the nine arbitrated cases amounted to $710,323.50. The total outside counsel fees for the ten litigated cases were $631,443.38. This means that the average attorney fees for an arbitrated case were $78,924.83, and the average attorney fees for a litigated case was $63,144.33. The range of the outside counsel fees for the arbitration cases was $11,462.50 to $283,583.45, and the range for the litigation cases was $5,846.75 to $215,977.70. This study found that the attorneys’ fees charged by outside counsel for the nine arbitration cases cost the employer $78,880.12 more than the attorneys’ fees charged for the ten litigation cases. Further, when you subtract the average attorney fees for a litigation case ($63,144.33) from the average attorney fees charged for an arbitration case ($78,924.83) you find that the average arbitration case cost the company $15,780.50 more than the average litigation case just in their own attorneys’ fees.

So, lets recap, an employer may have to fork over as much as $40,000 to an arbitration company in costs and fees, and then pay attorney fees for the arbitration.

When arbitration costs were added to the attorney fees discussed above the total costs for the nine arbitrated cases jumped to $921,042.22, an increase of $210,718.72! On the other hand, the total cost for the ten litigated cases was only slightly higher than the initial attorney fees. The employer paid a total of $704,908.20 for litigating ten cases, an increase of $73,464.82. This means that the average total cost of an arbitrated case was $102,338.02 while the average cost for a case to be completely litigated was only $70,490.82. This indicates that it was $31,847.20 cheaper to arbitrate cases! To help get a better picture check out the graph below.

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The heightened cost of arbitration impacts companies of all sizes. Mandatory Employment Arbitration Living Up to Its Expectations cited a 2008 survey of senior corporate counsel in the United States, which found that “among the largest companies, 23 percent spent an average of between $50,000 and $100,000 arbitrating each employment dispute, and 19 percent spent $100,000 or more per dispute.” The Cost was just as high for smaller and midsized companies as according to the survey almost one-third of smaller companies spent $50,000 to $100,000 per dispute, and a quarter of them spent more than $100,000. A quarter of the mid-sized companies spent $50,000 to $100,000 and 12 percent averaged $100,000 or more per dispute. These totals included attorney fees, discovery, and arbitration fees and costs.

Not only is arbitration more expensive than litigation, but there is also evidence that it lasts longer too. Is Mandatory Employment Arbitration Living Up to Its Expectations found that “the life cycle of the average arbitration case was twenty-one months.” Whereas, “the life cycle of the average litigation case was seventeen months.” This is similar to the findings of the Inside Counsels survey which found that arbitrated cases lasted, on average, two months longer than their litigated counterparts.

The big take away from today’s blog is that the myth that arbitration can save a party time and money is busted! On average it costs companies $20,000+ more to arbitrate cases than it does to take them to trial. If a company decides to go forward with arbitration thinking it will be a quick, cheap fix to their employment discrimination case they should think twice and take a look at the facts. Thankfully most employees don’t have to worry about footing the bill!

All aspects of the legal process have pros and cons. If you feel that you have faced discrimination including being harassed, fired, wrongfully terminated, discriminated against, demoted, wrongfully disciplined, or denied wages, then you need to call the right attorney. Our experienced attorneys at The Spitz Law Firm are ready to help you navigate the legal labyrinth through all phases be it arbitration or litigation. When you call the right attorney to schedule a free and confidential consultation, you will meet with an Employment Discrimination Attorney from The Spitz Law Firm who will help you determine the best way to pursue your legal claims. Call our Cincinnati attorneys at (513) 818-3688. Call our Cleveland attorneys at (216) 291-4744. Call our Columbus attorneys at (614) 335-4685. Call our Toledo attorneys at (419) 960-5926.

Disclaimer:

This employment law website is an advertisement. The materials available at the top of this page and at this employment law website are for informational purposes only and not for the purpose of providing legal advice. If you are still asking, “How do I sue my company”, “What should I do if I am being discriminated against,” “My boss discriminated against me because I’m black” or “I was fired for reporting sexual harassment to HR”, it would be best for to contact an Ohio attorney to obtain advice with respect to any particular employment law issue or problem. Use and access to this employment law website or any of the links contained within the site do not create an attorney-client relationship. The legal opinions expressed at or through this site are the opinions of the individual lawyer and may not reflect the opinions of The Spitz Law Firm, Brian Spitz, or any individual attorney.

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