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May 1, 2002

Arbitration More Expensive Than Court – So Costly That Many Victims of Consumer Fraud, Employment Discrimination Give Up

Sens. Kennedy and Feingold Unveil Arbitration Bill to Protect Workers

WASHINGTON, D.C. – Arbitration, although widely billed as a low-cost alternative to court, is actually far more expensive for consumers and employees who seek redress for discrimination, fraud and malpractice, a new Public Citizen report reveals. In fact, arbitration costs are so high that many people drop their complaints because they can’t afford to pursue them, Public Citizen found.

Arbitration is a private legal system in which, practically speaking, no appeals are allowed. Arbitrators tend to favor businesses, and arbitration awards tend to be much lower than jury verdicts, because arbitrators often favor companies that will provide them future business.

Mandatory arbitration clauses are increasingly being written into everything from basic equipment purchase forms to employment contracts. If consumers use a credit card or cell phone, or have health insurance, they likely have signed or received a form with fine print prohibiting them from suing the company and instead requiring them to take disputes to arbitration. Employees, too, are increasingly finding out too late that they have given up their right to sue, and instead must submit disputes with their employers to an arbitrator instead of a judge.

Public Citizen unveiled the report at a Law Day press conference at which Sens. Edward M. Kennedy (D-Mass.) and Russ Feingold (D-Wis.) introduced legislation protecting employees from arbitration clauses.

According to the report, the cost of initiating an arbitration case is almost always higher than the cost of filing a lawsuit. For instance, an $80,000 consumer claim brought in the Circuit Court of Cook County, Ill., would cost $221, versus $11,625 at National Arbitration Forum (NAF), a 5,260 percent difference. The American Arbitration Association (AAA) would charge the plaintiff up to $6,650, and Judicial Arbitration and Mediation Services (JAMS) would charge up to $7,950, amounting to a 3,009 percent and 3,597 percent difference in cost, respectively. In requiring payment of these high fees up-front, arbitration destroys the benefits of attorney contingency fee arrangements, which allow plaintiffs to pursue cases without advancing funds.

"Congress, the courts and the public have been victims of a disinformation campaign, portraying arbitration as an inexpensive and impartial alternative to the public courts," said Joan Claybrook, Public Citizen president. "Today, we authoritatively debunk this myth. The grim fact is that for people who are victims of consumer rip-offs and workplace injustices, arbitration costs much more than litigation — so much more that it becomes impossible to vindicate your rights."

People caught in arbitration’s net include home buyers complaining of shoddy workmanship, employees pursuing discrimination cases, patients seeking redress for poor care from their HMOs, small business owners in dispute with franchisors and consumers who are improperly billed.

Los Angeles resident Stephanie Paul had to arbitrate a malpractice claim against her lawyer. She was charged $5,000 for filing the claim – a fee the arbitration association refused to waive even though she was unemployed. Each fiscal quarter, the association charged her $150 for processing fees. When the law firm filed a motion to have the case dismissed, Paul was charged $2,425 for the time the arbitrator spent handling it. More fees were added over time. Finally, when the bill hit $10,474, Paul dropped her claim because she could no longer afford to pursue it.

In another case, the Malkani family of Austin, Texas, had to take its dispute with a homebuilder to arbitration. The Malkanis were charged $3,500 as an initial administrative fee, followed by $1,375 in other miscellaneous fees. In the end, the family was awarded $18,819; however, the builder didn’t have to pay the family’s attorney fees or administrative fees. The arbitration fees cost the family $13,069 – not counting attorney fees.

The report also found that:

  • Arbitration costs are high under pre-dispute arbitration clauses because there is no price competition among providers. Clauses in contracts lock consumers in to a specific arbitration firm. Companies that want to use arbitration to prevent consumers and others from asserting their legal rights have no incentive to arrange low-cost arbitration. Instead, it is to their advantage to seek out the most expensive providers.
  • Arbitration costs will probably always be higher than court costs because the expenses of a private legal system are so substantial. The same support personnel that expedite cases at a courthouse, such as file clerks and court administrators, are also needed to manage arbitration cases. While it costs the Clerk of the Circuit Court of Cook County an average of $44.20 to administer a case, AAA’s administrative cost per case averages $340.63, about 700 percent more.
  • Arbitration saddles claimants with a plethora of extra fees that they would not be charged had they gone to court. For example, the NAF charges $75 to issue a subpoena, which is provided for free by courts. The NAF also charges fees for discovery requests ($150) and continuances ($100), which are also free in court.

"We challenge Corporate America and the arbitration apologists to rebut this report," said Jackson Williams, legislative counsel for Public Citizen, who prepared the report. "Show us your substantiation for the claim that arbitration is cheaper."

Click here to view the executive summary of the report.

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