Sticker shock: The ecomonics of arbitration

By Adam Glazer, Esq. and Adam Maxwell, Esq., from SFBBG

Most sales representatives share a common goal with their principals when entering into a rep agreement: to build a successful relationship and avoid disputes that can lead to costly, time-consuming litigation. Yet, over the course of a long career, disagreements might naturally arise, whether over commissions, territory or termination rights. When a dispute does erupt, the path to resolution was likely shaped much earlier, back at the contract negotiation stage.

At the beginning of a new relationship, attention is naturally given to the big-ticket items such as the territory, exclusivity, commission rates and termination rights. As counsel to ERA members, we focus on those too, but it is also our job to look closely at the “fine print,” provisions like choice of law, fee shifting, indemnity and dispute resolution. Although these terms are too often glossed over in the hurry to get the agreement signed, they can have an outsized impact should things go wrong.

A contract’s dispute resolution clause can determine how, where and at what cost you will seek to resolve any dispute. This column will shine the light on one often overlooked and widely misunderstood clause: arbitration.

Introduction to arbitration

Arbitration is often promoted as a faster, more efficient and less expensive dispute resolution alternative. The allure of confidentiality and flexibility can make arbitration sound appealing, especially to businesses looking to avoid the uncertainty of the courtroom. But the reality is more complicated: in many cases, arbitration can prove just as costly, or even more expensive than going to court, particularly when factoring in filing fees, arbitrator fees and limited procedural safeguards.

Below we compare the true cost of arbitration to traditional litigation across several key areas. Before we jump in, it is important to remember that arbitration is purely a matter of agreement between parties, which means you cannot be forced to arbitrate a dispute unless you have agreed to do so.

Filing fees are substantially higher in arbitration

Filing suit in court usually involves paying one fee, typically a few hundred dollars, which is not subject to change based on the number of parties, number or type of claims or the amount in controversy. In contrast, arbitration providers regularly impose thousands of dollars in filing fees, and some providers utilize sliding scales that increase the filing fee based on these factors.

In arbitration, you pay for your judge(s)

The cost of the decision-maker in traditional litigation, whether a judge or a jury of your peers, is built into the system. Judges and juries are paid for by taxpayers, and whatever time they spend on your case comes at no direct cost to the parties. Arbitration is an entirely different story.

An arbitration can be overseen by a sole arbitrator or a panel of three arbitrators, and every hour of arbitrator time is billed directly to the participants (often as up-front retainers). At rates that often raise between $400 and $1,200 per hour, the daily cost can easily range from $5,000 to $10,000 or higher for hearings and deliberations. Each conference call, discovery ruling and hearing day in arbitration adds to that bill. On top of that, certain leading arbitration providers add case management fees of up to 13 percent to the professional fees.

Arbitration rules generally seek to ensure “a full and fair exchange of information” prior to a hearing, but they lack the established procedural frameworks and the same enforcement tools that court rules provide. Participants frequently disagree over what discovery is necessary or fair, which leads to motion practice, discovery conferences and additional hearing time, all of which requires direct arbitrator involvement and is billed at the arbitrator’s hourly rate. These professional and administrative fees are frequently the single largest line item cost of an arbitrated dispute, and they can quickly erode the efficiencies that arbitration is supposed to provide.

All that cost for a decision you can’t appeal

With all the money invested in filing fees, administrative charges and the hourly cost of a private decision-maker, you might expect arbitration to offer enhanced benefits, such asa robust appeals process, expanded rights of review and other procedural safeguards to justify the premium. Unfortunately, the opposite is often true. Arbitration awards are notoriously difficult to overturn.

Unlike in the court system, an erroneous decision cannot get overturned simply because the arbitrator “got it wrong.” Only the narrowest grounds provide for a court to vacate an arbitration decision, such as fraud, corruption or an arbitrator exceeding his or her authority. Once the award is issued, it’s almost always final. That means the significant dollars spent in arbitration provide less of a safeguard from a rogue arbitrator than an appellate court provides from a rogue judge or jury.

Takeaways for reps and business owners

Disputes are often inevitable, and where or how you decide to resolve them, can significantly impact your leverage. Arbitration clauses are too often overlooked for the reason that arbitration is assumed to be the “cheaper” or “faster” option. As this comparison shows, arbitration can carry significant up-front costs, ongoing professional fees and provides almost no right of appeal, all while preventing your case from getting heard by a jury of your peers.

Before signing or renewing any agreement, take time to review the dispute resolution clause with counsel. Consider whether arbitration truly aligns with your goals, and if so, whether you can better allocate costs, define procedures or obtain better protections so you’re not left paying a premium for a process that can deliver less than promised.