As arbitration becomes a more prevalent form of dispute resolution, many attorneys who infrequently or never handle cases in arbitration continue to view it as a monolithic process that is essentially the same regardless of the forum. In fact, where one’s case is arbitrated can make a significant difference not only in how the process unfolds, but even in the final result.
There are three major arbitration providers available to parties in New York City: the American Arbitration Association (AAA), JAMS and the Financial Industry Regulatory Authority, or FINRA. Organizations and individuals considering which forum to use should be aware that there are substantial differences among the pre-hearing processes used by the three providers, with some resembling court litigation in important respects while others use pared-down procedures more consistent with the traditional arbitration model of a speedy, less formal mechanism. And, although FINRA is the required forum for disputes “aris[ing] out of the business activities” of members and “associated persons,”1 financial services institutions are still free to select AAA or JAMS in their mandatory pre-dispute arbitration agreements with employees.
In the labor and employment law context, two Supreme Court decisions within the last 25 years have given a significant impetus to arbitration and played a major role in its expansion. In Gilmer v. Interstate/Johnson Lane,2 the court upheld an individual’s agreement with the New York Stock Exchange, FINRA’s predecessor, that he would arbitrate all disputes with his employer as a condition to working as a securities dealer whose trades were executed on the Exchange. Ten years later, the court decided Circuit City Stores v. Adams3 and held that, except for transportation workers, the Federal Arbitration Act covers all employment contracts and can be used to compel arbitration of employment-related claims. As a result, more individuals and companies than ever find themselves facing arbitration, as opposed to a court proceeding, when they become embroiled in a dispute they fail to resolve at a pre-litigation stage.
Before committing to arbitration as their preferred dispute resolution mechanism, parties should carefully consider the advantages and disadvantages that the different procedures and rules of the three main forums present. What provider is selected may influence not only the result, as noted above, but also the cost of arbitration. Discussed below are some of the most important ways in which the AAA, JAMS and FINRA differ with respect to the tools provided to and restraints placed upon parties who undergo arbitration under their auspices.
Number of Arbitrators
Both AAA and JAMS provide that a single arbitrator (unless both parties prefer a panel) will preside over hearings and decide whether there will be an award and what amount, if there is an award, it will be. FINRA employs a different approach, linking the question of whether there will be one arbitrator or a panel of three to the amount at issue. In cases where the amount is $100,000 or more, a panel is mandatory; if it is under $25,000, a single arbitrator is mandatory. For cases where the amount at issue is between $25,000 and $100,000, there is a single arbitrator unless the parties prefer a panel. Here, of course, the issue is not whether the process favors the tactical interests of the claimant or respondent, but the extent to which costs may be critical for one side or the other. Because the fees for a single arbitrator are significantly less than those for a panel, both AAA and JAMS are favorable forums for individuals as opposed to companies. Individuals are usually well advised to insist on a single arbitrator when before AAA or JAMS.
Statutory claims are a controversial subject, with many in the plaintiffs’ bar long taking the position that such claims do not belong in arbitration at all. The rules of neither AAA nor JAMS even address the subject. Thus, in circumstances where an individual signs a mandatory pre-dispute arbitration agreement that includes statutory claims as a condition of gaining or keeping employment, and AAA or JAMS is designated as the forum, the case would be heard by that provider and its general rules would apply to how the process is conducted.
Again, FINRA handles this issue differently. The FINRA rules provide that a statutory claim may be litigated before it only if both parties consent, and unless the parties agree otherwise all employment discrimination claims of $100,000 or more will be heard by a panel. Additionally, the panel’s award in such cases—in contrast to the awards issued after hearings involving business disputes—must contain a summary of the issues and a statement regarding the disposition of the claim or claims.
Statement of Claim
JAMS and the AAA have virtually identical rules with regard to when a respondent must submit an answer to a statement of claim: the answer must be served within 14 days of service of the statement of claim under the JAMS procedures, and 15 days from the AAA’s acknowledgement that it has received the statement of claim. FINRA gives the respondent more time to respond and both parties more latitude in deciding when the statement of claim must be responded to. Specifically, the respondent must serve its answer within 45 days of receipt of the statement of claim. However, should the parties agree to shorten or lengthen this time frame, they are free to do so.
In situations where the respondent fails to answer within the designated number of days, the three providers differ significantly. If no answer is filed in an AAA case, the respondent is simply deemed to have denied all of the statement of claim’s allegations. FINRA is more stringent. A party that does not timely serve its answer is in default, but is permitted to serve a later answer at any time prior to the issuance of an award. JAMS does not address this question at all in its rules, suggesting that in many cases it will confer with the parties and permit the respondent additional time to reply to the statement of claim.
Limited discovery in arbitration has been viewed both as a virtue, in that it makes the process faster, and as a vice, in that it may place an individual claimant—who likely relies on it far more than a company—at a distinct disadvantage. This issue continues to be debated among the proponents and critics of arbitration, and that divide is reflected in the different ways discovery is handled by AAA, FINRA and JAMS.
The most restrictive approach is that taken by the FINRA rules, which allow document requests and interrogatories to be served within 45 days after the statement of claim has been served on the respondent. Interrogatories (referred to as “requests for information”), however, are confined to “identification of individuals, entities and time periods related to the dispute” and “standard interrogatories” are not permitted.4 Discovery requests must be responded to within 60 days of being served. In other respects, FINRA’s discovery rules mirror those in the Federal Rules of Civil Procedure: Parties may object to what they consider irrelevant or otherwise improper requests, and motions to compel may be made.
FINRA all but prohibits depositions, which are “strongly discouraged.”5 Arbitrators may allow depositions, but only under extremely limited circumstances such as an ill or dying witness or one unable to travel to a hearing, or because a case is “large or complex.” The one exception to these very narrow grounds is “cases involving claims of statutory employment discrimination.”6 In such cases, the arbitrators have the latitude to permit one or more depositions. Some practitioners have criticized FINRA as being a forum where the arbitrators are hostile to and do not understand employment discrimination claims, and the carve-out for depositions may represent a response to such critiques.
In contrast, the AAA allows its arbitrators broad discretion in determining the content and boundaries of discovery. AAA arbitrators are empowered to order whatever discovery—including multiple depositions—they deem justified to allow a “full and fair exploration of the issues in dispute.”7 This open-ended rule can be and is used to stifle discovery as well, for it allows arbitrators to prohibit any depositions and permit only limited document production. Unlike FINRA, the AAA gives arbitrators significant power to control the amount and kind of information a party will be able to obtain in discovery. In some cases, AAA arbitrators’ discovery rulings have a major impact on which party is able to acquire the evidence it needs to prevail.
JAMS takes a middle path, requiring an exchange of all relevant, non-privileged documents at the outset of the case. Interrogatories are not allowed, although the parties must disclose the names of all individuals they may call as witnesses at the hearing. Each party is allowed to take one deposition, and the parties may request permission for one or more additional depositions from the arbitrators.8
The divergent approaches to discovery of the three main arbitration providers likely reflect the continuing tension between the traditional view of arbitration as a no-frills, speedy approach to dispute resolution and the concern that increasing arbitration of statutory claims requires that claimants be provided with at least some of the means to acquire the information they need to prove their cases that they would be provided with in court.
Perhaps the most contentious issue in arbitration procedure is whether dispositive motions should be permitted in arbitrations. Opponents of dispositive motions, often counsel who represent individuals, take the position that such motions defeat the entire purpose of arbitration by prolonging the process and potentially denying a claimant the right to a hearing. Advocates of dispositive motions argue that they help to winnow out frivolous claims that should never go to arbitration. The positions of the three major arbitration providers reflect this divide.
The AAA allows dispositive motions, but only if the arbitrator determines that “the moving party has shown substantial cause that the motion is likely to succeed.”9 The AAA rule vests authority in the arbitrator to disallow most dispositive motions, and precludes many motions that a defendant might elect to make in a court proceeding.
FINRA, however, all but prohibits such motions, providing that they are “discouraged in arbitration” and must be made at least 60 days before the scheduled hearing.10 Further, the FINRA rule prohibits arbitrators from deciding such a motion prior to the conclusion of a party’s case-in-chief unless they determine that the moving party “was not associated…with the conduct at issue”11 or the non-moving party signed a release. In that the moving party is usually the respondent, this is a very difficult obstacle to surmount. If the motion is decided against the moving party, that party must pay the forum fees for the hearings on the motion.12
JAMS is the least hostile of the providers to dispositive motions. The JAMS rules allow the arbitrators to permit dispositive motions without placing any limits on their discretion. A party need only request that it be permitted to make a dispositive motion without any showing that the motion is meritorious, and no time limitations are imposed on when the motion must be made.13 The only constraint against dispositive motions in a JAMS arbitration is an arbitrator who is hostile to them.
Before signing an arbitration agreement, parties are well advised to think ahead and attempt to anticipate the nature of an arbitration—should one occur—before agreeing to a particular forum. Whether such a case is likely to require relatively expansive discovery or is one where a dispositive motion may be desirable, for example, are factors that should be taken into account before agreeing to a particular arbitration forum.
Geoffrey A. Mort is of counsel at Kraus & Zuchlewski.
1. FINRA Code of Arb. Proc. R. 13200(a).
2. 500 U.S. 20 (1991).
3. 532 U.S. 105 (2001).
4. FINRA Code of Arb. Proc. R. 13506(a).
5. FINRA Code of Arb. Proc. R. 13510.
6. FINRA Code of Arb. Proc. R. 13510.
7. AAA Employ. Arb. R. and Med. Proc. 9.
8. JAMS Comp. Arb. R. & Proc. Rule 17(b).
9. AAA Employ. Arb. R. and Med. Proc. 27.
10. FINRA Code of Arb. Proc. R. 13504(a).
11. FINRA Code of Arb. Proc. R. 13504(a)(6)(B).
12. FINRA Code of Arb. Proc. R. 13504(a)(9).
13. JAMS Comp. Arb. R. & Proc. Rule 18.