Charles Forer. Charles Forer.

ADR

Editor’s note: This article describes a hypothetical situation.

Whenever Bob discusses arbitration with a client, he talks about the advantages of avoiding court proceedings. His first words always are, “You save so much money.” Bob has learned that his clients like to save money and that these savings are more important to them than the speed of arbitration or the ability to pick the decision-maker or the many other benefits that arbitration provides.

So it came as an ironic shock when Bob’s adversary sought to dismiss an arbitration proceeding because the proceeding would be so expensive. Talk about turning things upside down. Here is what happened.

Bob’s client, Arthur, owned a small business. Arthur fired Jesse for sleeping on the job, constant absenteeism and poor work habits. A few months later, Jesse sued Arthur and his business, claiming violations of federal and state statutory laws, and seeking lots and lots of compensatory and punitive damages.

Bob had written the employment contract and he greeted a despondent Arthur with a snappy burst of enthusiasm: “The arbitration provision in Jesse’s employment agreement is just what the doctor ordered. You will get a speedy decision. You will get a confidential decision. You will avoid a jury. And Jesse won’t be able to take any depositions. How great is all that?”

Always Johnny on the spot, Bob moved to dismiss Jesse’s lawsuit in favor of the agreement for arbitration. Jesse’s lawyer then did the strangest thing—to Bob anyway. Jesse’s response did not contest the existence or applicability of the arbitration provision. Instead, he contended that this employment dispute should not be arbitrated—now or ever—because the costs and expenses of arbitration would undermine the fairness of the proceeding.

Bob laughed out loud. (LOL to his kids.) After all, hadn’t Jesse read Bob’s articles that talked about how arbitration saves money? Didn’t Jesse know that arbitration was an antidote to expensive litigation proceedings?

Bob’s client, Arthur, didn’t laugh. “How much will you charge to respond to Jesse’s motion? How long will it take for the court to decide?” Bob’s “trust me” reply was not what the doctor ordered; Arthur’s anxiety level rocketed.

And here is the not-so-funny thing: the court did not dismiss Jesse’s motion out of hand. Instead, the court directed Jesse to put meat on the bone by filing supplemental papers that detailed the costs of arbitration versus the costs of litigation. All of this put Bob into a pickle. How would Arthur respond when a now chagrined Bob informed him that the court still had not ruled on the LOL issue; there was going to be yet more briefing on the LOL issue; and in view of the need for more briefing, the cost advantages of arbitration were going down the tubes?

Had Bob met his match? Or did Jesse get lucky by finding a judge who gave some credit to an otherwise laughable arbitration-is-more-expensive-than-litigation rant? Yes and no.

Jesse is not seeking to make new law here. Numerous courts have thrown out arbitration proceedings on the very ground that Jesse was arguing—that one party would be prejudiced because the proceeding would be too expensive. In Green Tree Financial Corporation Alabama v. Randolph, 531 U.S. 79, 92 (2000), the U.S. Supreme Court held that “where … a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, the party bears the burden of showing the likelihood of incurring such costs.” Although the Green Tree Court did not detail what the movant should do to invalidate an arbitration agreement, the court held that the “risk” of “prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.”

So instead of relying on speculation, courts determine the issue of financial ability to arbitrate on a case-by-case case basis. They consider, at a minimum, whether the party can afford to pay the arbitration fees and costs; the anticipated cost difference between arbitration and litigation; and whether the difference in costs, if any, is so substantial as to deter bringing claims in an arbitration proceeding. Courts do not make these fact-sensitive decisions on the briefs; they need to consider the facts regarding a party’s financial ability.That requires a record.

Which means Bob should not have laughed away Jesse’s attempt to dismiss the arbitration proceeding. Instead, Bob should have demonstrated why Jesse’s conclusory arguments did not cut the mustard. Here are some lines of attack that Bob could have used:

  • Jesse’s papers failed to specify his income and assets. After all, consideration of a party’s financial ability to arbitrate does not look only to the costs of the intended arbitration proceeding; the court also must consider whether the party is unable to pay because of his or her financial circumstances.
  • Jesse’s papers failed to set forth the expected costs of arbitrating the dispute and litigating the dispute. After all, consideration of a party’s financial ability to arbitrate means that the court must compare the difference, if any, in the anticipated costs of arbitrating versus litigating.
  • Jesse’s papers failed to demonstrate that the costs of arbitrating would be materially more than the costs of litigating. After all, this cost issue boils down to comparing costs of arbitration versus litigation; showing that arbitration costs and fees will be exorbitant does not alone satisfy the need to show that arbitration would be materially more expensive than the alternative.

These arguments quickly can get complex. For instance, the movant may well contend—accurately—that arbitration filing costs and arbitrator fees will be substantial. But what about the costs of litigation? Not just filing fees and service-of-process costs. But also the more substantial costs of depositions and experts. After all, a party in Bob’s shoes could contend, the anticipated arbitration proceeding will have fewer depositions and more streamlined expert presentations—and it will be far less expensive than litigation, even after considering the arbitration filing costs and the arbitrator’s fees.

And then there is option “B.” If Bob really believed that arbitration was preferable to litigation, his response to Jesse’s motion to dismiss the arbitration proactively could include his client’s offer to pay a greater share, if not all, of the arbitration filing costs and the arbitrator’s fees. Faced with that offer, a court would be hard pressed to dismiss the arbitration proceeding on the ground that Jesse could not afford to pay costs and fees that he no longer must pay.

One last thing. As the drafter of the arbitration provision, always prescient Bob should have foreseen that Jesse and any other employee could well try to avoid an arbitration proceeding because of its perceived high costs and expenses. Under these circumstances, shouldn’t Bob have designed an arbitration program that would be cost effective—to the employee anyway—and warded off the attack that Jesse launched in response to Bob’s attempt to steer this dispute into arbitration? After all, as Bob always says, drafting an arbitration agreement is just like playing chess. You always must think of the future.

Charles F. Forer independently provides arbitration, mediation and all other neutral services. He is a former chair of both the Philadelphia Bar Association’s alternative dispute resolution committee and fee disputes committee. He is a frequent lecturer and writer on the use of ADR in a variety of settings. Contact him at 610-999-5764 and cforer@foreradr.com.