Looks Like Arbitration is Here to StayDecember 7, 2017 | James G. Kozelek, Esq.
On October 24, 2017, with relatively little fanfare, the United States Senate used the Congressional Review Act to repeal the CFPB's Arbitration Agreements Rule. Although the President must sign off on the repeal, it appears as though arbitration is here to stay.
While the CFPB's Arbitration Agreements Rule focused on consumer contracts such as those for credit cards and other financial services, arbitration provisions are also prevalent in medical care contracts, employment contracts, and commercial supply contracts, just to name a few areas.
The rationale for including an arbitration provision in a written agreement can range from prevention of class action lawsuits to the desire to resolve disputes privately and outside of public purview.
Because any written agreement that contains an arbitration provision is subject to private dispute resolution, now is a good time to consider the pros and cons of the arbitration process as a whole.
Costs. Arbitration costs far exceed traditional court costs. While filing a $15,000 court action may cost between $250 and $400, the same size matter will cost about $1,300 in initial arbitration filing fees. Thereafter, and depending on the complexity of the matter and the particular court, a typical court action of this size would cost between $150 and $250 to reach judgment. Conversely, a creditor can anticipate between $750 and $1,200 in additional fees to reach the award stage when arbitrating a documents-only matter and from $2,500 to $5,000 in additional fees to reach the award stage in a live-hearing matter.
Speed. Overall, and depending on the size and complexity of the claim, a typical arbitration proceeding takes about 90 days from filing to award. The standard procedure calls for filing of the demand, submission of a conflicts checklist, selection of the arbitrator, acceptance of appointment by the arbitrator, objection to appointment of the arbitrator, a scheduling conference (or scheduling order if done on documents only), a hearing date/submission date, closing of the hearing, and the rendering of a decision. In addition, in most arbitrations, and unless the arbitrator allows, there is no discovery. (If the matter is contested and a hearing is to occur, the parties are required to exchange all documents in advance of the hearing.) There is also no motion practice in arbitration (such as dispositive motions, motions in limine, etc.).
Pay to Play. Unlike traditional legal actions, where a party defendant can assert a counterclaim against the plaintiff for a nominal cost, if any cost at all, in arbitration a counterclaim is considered to be a separate matter. Therefore, a filing fee will apply when asserting a counterclaim. In collection legal actions, counterclaims are sometimes filed to gain leverage in negotiations, as there is little to no associated cost. In arbitration proceedings, this is not the case and counterclaims are far less common.
No Defaults. If a lawsuit is filed, the defendant is served and the defendant does not respond in the appropriate amount of time, the filing party may move for a default judgment. Typically, no additional evidence is required and the complaint and motion for default are sufficient to prove that a claim has been stated, there is liability and the plaintiff is entitled to damages. Arbitration proceedings are different and, by rule, there are no defaults. No initial response to a demand for arbitration is required and, even if no initial response is filed, the claim is deemed to be disputed and the filing party must present its proof. However, and based on the size of the claim, proof can be presented in the form of a brief with affidavits and exhibits and no live hearing will occur.
Relaxed Requirements. Because arbitration is structured and promoted as a fast, efficient means of disputed resolution, many of the "trappings" of traditional litigation do not apply. For example, it is not necessary that an incorporated entity be represented by an attorney. Outside of arbitration, a nonlawyer representing an incorporated business would be considered to be engaged in the unauthorized practice of law. A business that has a contract that contains an arbitration provision can, if it so chooses, file arbitration matters on its own. Whether filing or responding to a demand for arbitration, a business does not need to retain an attorney to represent its interests. It can represent itself if it so chooses. In addition, under many states' interpretation of ABA Model Rule 5.5, a licensed attorney in one state can represent a party in an arbitration in another state without being licensed to practice in that state and without the need to seek pro hac vice admission.
Arbitration Awards Are Not Self-Executing. When a court action is filed and judgment is rendered, the prevailing party may begin the process of turning the judgment into a lien on any real property located in the county where the judgment was entered and it may also begin execution. That is not the case with an arbitration award. An arbitration award has no legal effect until it is confirmed in a court of law. Most states have adopted a version of the Federal Arbitration Act, which sets forth the process for reducing an arbitration award to a state court judgment. However, state rules vary so it is important to review the applicable statute before proceeding. That said, the general process is to file an application to reduce the arbitration award to judgment setting forth that an agreement to arbitrate exists, an arbitration was commenced and an award was rendered, the award remains unpaid and, pursuant to statute, the award should be converted to a judgment. How courts process these actions varies as well, and many courts treat them as if a new lawsuit is being filed. Therefore, it is important to review the process before filing and to keep a close eye on the court docket to ensure that the award gets converted in the quickest allowable time.
Hard to Overturn Arbitration Awards. Unlike judgments entered in courts of law, arbitration awards are very difficult to vacate. As discussed earlier, it is very important to review the particular state's codification of the Federal Arbitration Act because the statutes vary and there are a few exceptions based on notice. That said, most states will allow an arbitration award to be vacated, corrected or modified only upon a showing that: (1) the award was procured through corruption, fraud or undue means, (2) the arbitrator was corrupt or partial, (3) the arbitrator engaged in misbehavior or misconduct, or (4) the arbitrator exceeded his or her powers. It is important to note that these grounds can only be alleged within a certain time period. Typically, a motion to vacate, correct or modify must be filed within 90 days of the delivery of the award, but some states impose a 30-day limit while others allow up to 120 days to file. If a motion to vacate, correct or modify is filed after the deadline, the court does not have authority to even consider the motion.
In light of the congressional repeal of the CFPB's Arbitration Agreements Rule, it is clear that arbitration as a means of dispute resolution will continue to be available. Therefore, it is important for creditors and practitioners to consider the pros and cons of arbitration and to understand the arbitration process in order to optimize efficiency, minimize cost, and maximize return.
For more information, please contact James G. Kozelek, Esq. Mr. Kozelek is the Shareholder managing the Commercial Collections Group of Weltman, Weinberg & Reis Co., LPA. Exclusively focusing on commercial collections, litigation, and arbitration, he partners with banks and businesses both local and national in scale to offer comprehensive recovery strategies. He has been recognized for his professionalism and legal ability by the media with his inclusion in the list of "Ohio Rising Stars" by Ohio Super Lawyers (2010-11), an honor awarded annually to no more than 2.5 percent of attorneys in the state.
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