As any of my clients will tell you, I’m not a fan of arbitration for many reasons, which I detail here and here. One of the reasons is the biases of the arbitrators that can creep into the process—sometimes subtly, sometimes not. According to a study just released by three law school professors, they found that arbitration awards in securities cases were 7.5% lower when the arbitration panels were composed of attorneys who also represented brokers and brokerage firms.
The authors studied over 6,700 awards from the Financial Industry Regulatory Authority (“FINRA”) (which was formerly known as the National Association of Securities Dealers). FINRA has apparently come under fire in the past for using arbitrators with potential conflicts-of-interest due to their brokerage ties. According to the study, over 82% of the arbitrators were attorneys.
7.5% might not sound like a big deal, but if an investor is awarded $1 million, that extra $75,000 sure helps to pay attorney’s fees and other costs. And bias is bias any way you look at it. But this is hardly surprising and nothing new. In one of my articles, I talk about the favoritism that arbitrators can show one side or the other, depending upon their background and how they’re chosen.
The important thing to glean from this article, which applies to ANY type of arbitration no matter what the type or size of the claim, is that the “background of the arbitrators matters to the outcome.” When you have a choice in the matter, make sure that you or your attorney carefully consider the backround of any potential arbitrator. (Actually, if you have a choice in the matter—which many contracts these days don’t give you—litigation really may be the best option sometimes, as painful as it sounds. It depends on the circumstances.)
For example, when possible, I generally like to choose former judges as arbitrators and typically (but not always) steer clear of other attorneys. First, many judges, depending upon how long they were on the bench and on the court upon which they sat, have a paper trail that allows you to take a look at their past decisions to get a sense of how they may have decided issues germane to your case, as well as their judicial temperments. Most lawyers don’t have such a trail.
Second, judges are trained to be fair to both sides. Lawyers are trained to be advocates for one side. Even though they may undergo training to be arbitrators, lawyers are inherently advocates. After all, are you hiring your lawyer to be fair to the other side or to zealously represent your interests? This is why the study didn’t really reach any groundbreaking conclusions as far as I’m concerned, i.e. lawyers that represent brokers as clients favor them as arbitrators.
Finally, judges are often put in the position of having to make unpopular decisions. They know that someone will almost always be unhappy. Over time, they’ve typically developed a thicker skin so they may be more willing to make the tough call. This isn’t always the case, but all judges recognize that being unpopular comes with the job. I like to believe that even after they leave the bench and join the world of alternative dispute resolution, they keep some of these important characteristics. But there are always exceptions, too. Former judges have to make a living also. They need to be vetted like anyone else.
Of course, as mentioned above, all of this depends upon whether you have a choice in the matter. Depending upon the arbitration clause, you may be robbed of this as well. Still, knowledge is power and as this study concluded, bias is an ever-present problem in arbitration. So I try to avoid it when I can. Does that make me biased?
