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When a customer or employee goes to mandated arbitration, the arbitrator is paid by the defendant; the arbitrator, or a body that picks the arbitrator, is also chosen by the defendant.

I have seen it said that they more often rule in favor of the defendant, but apparently they also occasionally rule in favor of the plaintiff. I am interested in that small second category of cases.

I am interested in retail and labor cases rather than cases between two corporations.

What incentive does an arbitrator have to rule in favor of the plaintiff?

  • Sheer decency is important. Is that it? But humans often act according to incentives, particularly when the framework in which they work, in this case the arbitration system, does not have (I think) a strong value system pushing against the incentives.
  • 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?
  • Or is there some other motivation?
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  • Can you cite laws or regulations supporting that view? Can you say what difference you see - or there could be - between 'retail or legal' cases? Can you say when arbitration might be mandated? Commented Dec 27, 2022 at 21:29
  • @robbieGoodwin , thank you. I myself don't know the answers. I will appreciate any answers to these and related questions.
    – Joshua Fox
    Commented Dec 28, 2022 at 12:38

4 Answers 4

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They get paid either way

I’m an arbitrator, adjudicator, and mediator and I’ll make this very clear:

I don’t give a rat’s arse who wins.

When I’m acting as a mediator I can go even further: I don’t give a rat’s arse if the dispute even gets resolved.

My job is to do my job. To manage the process and, if making a decision is part of the process, make a decision. My paycheque is totally unaffected by who I decide for.

Future employment prospects depend on you being good at the job. Bias is not being good at the job.

Oh, yeah. Also, it’s the law that I’m impartial.

In any event, most arbitration clauses give the parties no input in the selection of the arbitrator (e.g. by nominating the president of a professional association of arbitrators to appoint them) or require them to agree on the arbitrator.

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    You may get paid either way, but you only get paid if you get hired in the first place. I think the OP's premise is that the plaintiff will be biased to hiring an arbitrator more likely to rule in their favor.
    – Barmar
    Commented Dec 27, 2022 at 15:36
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    @Barmar - In much the same way that exam boards are supposed to judge examinees impartially, but in practice if they fail more than a tiny percentage of those taking exams, they'll just get swapped for an exam board with a more liberal attitude. In the UK that's led to pass rates that approach 100%
    – Richard
    Commented Dec 27, 2022 at 15:39
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    Thank you: "Depend on you being good at the job. Bias is not being good at the job." How is the quality of the job evaluated? "it’s the law that I’m impartial." Is the law meaningfully enforced? If so, how? A litigant files a crimnal complaint, or is there another process?
    – Joshua Fox
    Commented Dec 27, 2022 at 15:39
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    And the defendant will be biased to hiring from a professional association whose president will be biased to selecting an arbitrator more likely to rule in their favor. And the members of this professional association will be biased to pretending that this is not happening. Because if they didn't, there might be public backlash against their profession.
    – amara
    Commented Dec 28, 2022 at 17:39
  • Is it not true though that if defendants stop appointing you then your job may no longer exist? Commented Dec 29, 2022 at 16:19
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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.

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  • +1 this is a really interesting synthesis, but you more or less show that the arbitrator has little incentive, and the question wasn't about "how much" incentive, but "what" incentive. The questioner is specifically asking about the cases when the arbitrator does rule in the plaintiffs favour, where there presumably was some incentive. Are you claiming "sense of integrity"?
    – Clumsy cat
    Commented Dec 28, 2022 at 10:31
  • ohwilleke, thank you. I'll second @clumsycat's question. I see you've noted a certain constraint in an least one case "National Arbitration Forum..., left the market ... in the face of an action by the Minnesota Attorney General." So does fear of that sort of action create a minor incentive, even though as you say, "it is virtually impossible to appeal an arbitration award on the merits"?
    – Joshua Fox
    Commented Dec 28, 2022 at 12:37
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An arbitral award can only be enforced in accordance with an arbitration statute that makes it legally binding. It is invariably a feature of these statutes that an arbitrator must be impartial. For example, section 33 of the UK Arbitration Act 1996 provides:

The tribunal shall … act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent …

Any party may object to an arbitrator who appears to be biased. For example, article 12 of the UNCITRAL Model Law provides:

An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his impartiality or independence, or if he does not possess qualifications agreed to by the parties.

And the awards of a biased arbitrator will not be enforced. For example, under the US Federal Arbitration Act, §10:

… the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration … where there was evident partiality or corruption in the arbitrators, or either of them …

In practice, these statutes are usually applied to large scale commercial arbitrations, not consumer and employment disputes between an individual plaintiff and large corporate defendant (who also nominates and pays the arbitrator). In the UK and EU, contract terms which mandate the referral of such small claims to arbitration are generally considered unfair and unenforceable. I assume that in the parts of the US where this is permitted, there is a also a lax approach to enforcing the arbitrator's fundamental legal duty of impartiality. However, the incentive of "sheer decency," as you call it, remains.

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    Thank you. So that suggests that in parts of the US where this is permitted, only the sheer decency to ignore incentives, to harm one's own livelihood, can ever enable a ruling in favor of the plaintiff.
    – Joshua Fox
    Commented Dec 27, 2022 at 15:40
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    Section 10 contests under the FAA almost never prevail absent evidence of open admitted bias or a bribe.
    – ohwilleke
    Commented Dec 27, 2022 at 23:08
  • @ohwilleke, thank you. So that reinforces my original post: In the tiny fraction of the retail and labor cases where arbitrators rule for the plaintiff, why do they do that?
    – Joshua Fox
    Commented Dec 28, 2022 at 13:46
  • @JoshuaFox decency, already having enough money and/or being one of few arbitrators in an overworked specialisation so they WILL get rehired anyway
    – Hobbamok
    Commented Dec 28, 2022 at 17:05
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Possible directions, suggested by contributors. (I am not accepting this answer as (a) it is mine, yet built from various contributor's suggestions and (b) I am still not clear on some of these points.)

  • Sheer decency and integrity.
  • A lack of need for money (seems rare to me).
  • Desire for approval by peers, which affects career advancement in some (unclear) way.
  • An arbitrator's income may be unaffected by decisions (unclear why, given that the corporations choose and pay).
  • Future employment prospects may depends on being good at the job (unclear how "good" is defined in this context or how that would affect prospects).
  • The law requires impartiality: But it seems that this is rarely unenforced in many or most jurisdictions.
  • In rare cases, a court can throw out an entire arbitration company.
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