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Cost of Arbitration: Executive Summary
From a May 1, 2002 Report by
1600 20th Street, N.W.
Washington, D.C. 20009
"The speed and affordability
of arbitration are perhaps its most discussed benefits... "
-U.S. Chamber of Commerce
"Arbitration can save parties 70-80% of the cost of litigating
-Ed Anderson, National Arbitration Forum
"Arbitration still costs less than litigation"
-The Wall Street Journal
-Sen. Jeff Sessions
"Usually it is quicker, less expensive, and more informal than
litigation. Not always... "
-Florence Peterson, American Arbitration Association
Remarkably, although the claim is
frequently made that arbitration costs less than litigation, no research has
ever been undertaken to substantiate it. No interest group has commissioned a
study. No Member of Congress has asked for a General Accounting Office report.
Writing in 1992 about court-annexed ADR,
Stanford law professor Deborah Hensler cautioned, "Whether alternative
dispute resolution procedures will reduce private litigation costs is still an
open question. Court-administered arbitration has shown mixed results in this
regard." Recently she repeated her caveat about a paucity of empirical
research, explaining, "Because public support for ADR is so frequently
justified on cost savings grounds, program administrators especially fear
Here, Public Citizen presents the first
comprehensive collection of information on arbitration costs. We find:
- The cost to a plaintiff of initiating an arbitration is
almost always higher than the cost of instituting a lawsuit. Our comparison
of court fees to the fees charged by the three primary arbitration provider
organizations demonstrates that forum costs- the costs charged by the
tribunal that will decide the dispute- can be up to five thousand percent
higher in arbitration than in court litigation. These costs have a deterrent
effect, often preventing a claimant from even filing a case.
Public Citizen's survey of costs finds
that, for example, the forum fee for a $60,000 employment discrimination claim
in the Circuit Court of Cook County, Illinois is $221. The forum fees for the
same claim before the National Arbitration Forum (NAF) would be $10,925,
4,943% higher. An $80,000 consumer claim brought in Cook County would cost
$221, versus $11,625 at NAF, a 5,260% difference. These high costs are not
restricted to NAF; for the same $80,000 claim, 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% and 3,597% difference in cost, respectively.
- Arbitration costs are high under a pre-dispute
arbitration clause because there is no price competition among providers.
Companies that want to use arbitration costs as a barrier, to prevent
consumers and others from asserting their legal rights, have no incentive to
arrange low-cost arbitration services. Instead, it is to their advantage to
seek out the highest-cost arbitration providers. While experience has shown
that many lawyers are willing to serve as arbitrators for nominal fees, the
market provides no mechanism to match volunteer arbitrators to cases in
which they are needed the most.
The mandatory arbitration clause's
negative effect on price competition can be seen in AAA's handling of
insurance claim arbitration. From 1989 to 2000, in cases submitted to AAA on a
post-dispute basis, AAA charged each party a total of only $300 for
administration and arbitrator fees. But cases arising under a pre-dispute
clause were governed by AAA's Commercial Rules, with much higher filing
fees and regular hourly arbitrator fees. For example, a health insurer's
denial of coverage for a bone marrow transplant, submitted post-dispute under
the Insurance Claims Procedures, would cost the consumer $300. But for a case
governed by a pre-dispute clause, AAA charged a much higher fee. Tammy
Sharpton, who arbitrated such a case in 1997, was charged $5,290.23, eighteen
times what AAA would have charged had it been competing with other
arbitration providers and the courts.
- Arbitration costs will probably always be higher than
court costs in any event, 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 necessary
to manage arbitration cases. But because arbitration provider organizations
handle fewer cases over larger geographic areas, the economy of scale in a
court clerk's office cannot be achieved, increasing the administrative cost
per case. Thus, 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 if they went to court. For example, the
National Arbitration Forum charges $75 to issue a subpoena. A lawsuit
litigant can obtain a subpoena form for free from the court, oftentimes
downloading it off the Internet. NAF also charges fees for discovery
requests ($150) and continuances ($100), occurrences so ubiquitous in
litigation that they must be viewed as inevitable. The American Arbitration
Association (AAA) charges extra fees for use of a hearing room.
- Taking a case to arbitration does not guarantee that a
consumer or employee will stay out of court, making arbitration still more
costly. First, a plaintiff bound by a one-way arbitration clause, the
most common type, may be forced to go to court to litigate the same issues
that are being decided in the arbitration. This is because the other party
to the clause has retained its right to sue in court. Second, if crucial
documents or testimony must come from a third party, court litigation is
necessary to enforce subpoenas. In fact, due to a quirk in arbitration law,
sometimes two different federal lawsuits are necessary to enforce one
subpoena. Third, if a plaintiff wins a case in arbitration but the defendant
refuses to honor the award, the plaintiff must ask a judge to enforce the
- The costs of arbitration are so high that even some
businesses that choose to include arbitration clauses in contracts with
consumers and farmers have refused to pay the fees.
- High arbitration costs can also be used to bludgeon an
adversary. For instance, the party being sued can file a motion to dismiss
or a motion for summary judgment. The claimant must then advance additional
funds to pay the arbitrator to decide the motion, even if the motion has no
merit. The defendant can also refuse to provide discovery information, in
which case the claimant must advance funds to the arbitrator to decide the
discovery dispute. In one case, for which we have reproduced copies of the
arbitration bills, the claimant was unable to pay and had to abandon the
- The oft-cited benefits that arbitration can offer in
exchange for higher fees will seldom benefit consumer litigants. Not only is
there is no evidence that arbitration reduces the overall transaction
costs of litigation (e.g. witness fees, attorney fees, discovery costs),
but nobody has expounded a coherent theory to explain how arbitration could
reduce such costs except in a few categories of cases. Indeed, Public
Citizen's careful examination of the cost savings claim demonstrates that in
the vast majority of cases, arbitration will necessarily increase the
transaction costs of litigation.
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