In the legal system, it is bad for a judge's career to be overruled
too often on appeal. An arbitrator can in some cases be overruled by a
follow-up lawsuit. Is this their incentive?
No.
It is virtually impossible to appeal an arbitration award on the merits. It is also next to impossible, absent an outright admission of bias, to overturn an arbitrator's decision for lack of impartiality. This is true even when an arbitrator repeatedly handles case involving the same corporate defendant and repeatedly rules in the defendant's favor.
Empirical studies clearly show that arbitrators are biased in favor of the parties that drafted the agreement containing the arbitration clause, and against people such as employees, consumers, and investors who had the clause imposed upon them.
[A]rbitrators who also represent brokerage firms or brokers in other
arbitrations award significantly less compensation to
investor-claimants than other arbitrators. This relation between
representing brokerage firms and arbitration awards remains
significant even when we control for political outlook. We find no
significant effect for attorney-arbitrators who represent investors or
both investors and brokerage firms. We report that ideology also
correlates significantly with arbitration awards - arbitrators who
donate money to Democratic political candidates award greater
compensation than arbitrators who donate to Republican candidates.
(Source)
One major consumer arbitrator was forced to leave the market on July 19, 2009 under circumstances typical of the attitudes of the industry:
The National Arbitration Forum, one of the leading providers of
consumer debt collection arbitration, left the market entirely on July
19, in the face of an action by the Minnesota Attorney General
alleging that their conduct was improper because they were owned by
the very credit card companies whose disputes they were resolving and
often ceased to employ arbitrators who ruled in favor of consumers. It
assigned a majority of its cases to just six of its 131 panelist. A
majority of cases in a Congressional investigator drawn sample
resulted in default judgments in violation of the arbitration system's
own rules and the company also appeared to have violated California's
state arbitration outcome disclosure rules.
For example, "Roughly two-thirds of consumers contesting credit card fraud, fees or costly loans received no monetary awards in arbitration" (Source).
Another source finds that:
[B]usinesses win 97% of the cases against consumers that go to
arbitration.
Similarly, employees also fare poorly in arbitration (at least in California where disclosures of arbitration results are required by law):
[In American Arbitration Association] arbitrations that occurred as a
result of clauses in employer-promulgated agreements . . . employees
won only 19.7% of their cases. Employees did even worse when they
faced employers who were repeat players, winning only 13.9% of these
cases. They won 32% of the time when they faced one-shot employers.
Employees’ odds were worst when their opponent was a repeat
player-employer who used the same arbitrator more than once. Then,
employees won only 11.3% of the time, compared to a win rate of 21.2%
in cases that did not involve a repeat employer-arbitrator pair.
These findings are consistent with earlier research which has found
that employees arbitrating pursuant to arbitration provisions
contained in personnel manuals or handbooks have relatively low win
rates. In contrast, employees arbitrating as a result of individually
negotiated contracts do quite well. In one study, they won 68.8% of
the time. In another, they won 61.3% of their cases. The employees
arbitrating pursuant to individually negotiated contracts tend to be
highly-paid managers and executives. The employees arbitrating
pursuant to personnel manuals or handbooks are likely to be lower-paid
and lower-ranking employees. . . . 15-25% of all employers have now
adopted employment arbitration. Meanwhile, the rate of unionization in
the United States was only 12% in 2006. . . . “employment arbitration
is likely already a more widespread system for governing employment
relations than collective bargaining and labor arbitration.” . . . the
mean award for employees was $23,233 (including the many cases in
which no damages were awarded to the employee), the mean arbitrator
fee was $10,351 in cases that involving a hearing and award.
Often the prospect of having to arbitrate disputes means that they are simply not brought at all. Consumer arbitration in credit card agreements almost never actually happen:
The CFPB found that large banks are much more likely than small banks
to include arbitration clauses, but that because of their market
share, around 50% of credit card loans and 44% of insured checking
account deposits are covered by arbitration agreements. (The numbers
would be far higher but for the NAF settlement, under which many
issuers removed arbitration clauses from their contracts.) The
percentages are much higher for prepaid cards.
Ninety percent of the arbitration agreements studied include class
waivers. Most contain small-claims court carve outs. The banks are far
more likely than the consumers to go to small claims court. That makes
sense. For small debts, a collection action in a small claims court
will usually lead to a default judgment, which is then immediately
enforceable. Arbitration requires two steps, the arbitration
proceeding and then the filing of the award.
Out of these millions of agreements, only about 300 arbitration claims
have been filed by consumers per year over the last three years, and
they were all for high dollar-value claims (more than $1,000). . . .
the Bureau observed that almost no consumers filed arbitrations about
disputes under $1,000. For arbitration filings involving debt
disputes, the average amount of debt at issue was over $13,000. For
other arbitration filings, the average consumer claim was for over
$38,000.
A number of arbitration clauses allow a consumer, and sometimes the
company, to use small claims courts rather than arbitration for
dispute resolution. The CFPB’s preliminary analysis indicates that not
many consumers initiate small claims court cases in credit-card
disputes. Rather, the analysis shows that small claims court cases are
much more likely to be brought by banks than by consumers. In the
states and counties studied, the Bureau was able to identify at most
870 credit card cases brought by consumers in small claims court
against large credit card issuers, but more than 41,000 cases brought
by these banks against consumers in small claims court.
Arbitrators have some sense of integrity, but miscarriages of justice in arbitration in the face of clear facts or law favoring a party drafting an arbitration clause against someone who had it imposed upon them are routine.
