Over at Law.com there is a story about the 5th Circuit’s opinion in Citigroup v. Bacon that rules that manifest disregard of the law by arbitrators is not a grounds for vacating an arbitrator’s award. Or as they put it:

Abandon all hope, ye who seek to overturn an arbitration award, because the 5th U.S. Circuit Court of Appeals has ruled that manifest disregard of the law by arbitrators is no longer a ground for vacatur under the Federal Arbitration Act.

This is an issue where there is a split among the circuits and we need an opinion from the Supreme Court. I disagree with the following quote near the end of the article:

“I think at some point parties aren’t going to enter into a process if there is really no reasonable basis for ensuring that the case is going to be based upon the law,” Wade says. “There are broad policy reasons for favoring arbitration….

The person who issued this quote is a former Texas state judge who is now in private practice and plans to obtain work as an arbitrator. Arbitration is good for his business so he’s a big fan of it.

My big problem with arbitration is not that the arbitrators are unfair. The biggest problem is that the case must be big enough to justify the tremendous expense burden that arbitration imposes on the parties. This makes the so called policy reasons favoring arbitration a disingenuous farce. Arbitration is significantly more expensive than a court case because the parties have to pay the arbitrators and the arbitration forum for “administrating” the case. These are huge expenses. In addition, arbitration proceedings are not any more efficient or faster to resolve than a court case. In particular, federal court, with its mandatory scheduling orders, is usually faster and cheaper than arbitration.

Because of the high arbitration fees and expenses, genuine disputes that involve a small dollar claim cannot be effectively resolved in arbitration. It’s about impossible for a lawyer to take a case on a contingency where the amount of the dispute is less than $50,000 and there is a binding arbitration provision. Disputes like these are effectively resolved on a daily basis in Mississippi state courts because it costs around a hundred bucks to file a lawsuit and the parties do not pay the court to rule on the case.

But these are not the only problems with arbitration. Arbitration forums such as the American Arbitration Association (AAA) and National Arbitration Forum (NAF) are bad at administrating cases. It is not unusual for the parties’ attorneys to cut the forums out and administrate the cases themselves to save the headache of dealing with an incompetent forum. The NAF once told me that they were closing for the Summer. It ignored repeated requests from me for details on their Summer break.

My understanding of arbitration is that its origins are from construction litigation and other areas where technical expertise by the decision maker is arguably helpful in resolving cases. I can see that logic. But the practice of jamming arbitration agreements into all sorts of consumer agreements should be banned by Congress. Arbitration agreements in everything from nursing home admission agreements to loan contracts exist for one reason: to discourage lawsuits against against business interests and protect them from the jury system.

I believe that we are in the heyday of arbitration and do not believe that society will tolerate mandatory arbitration in consumer agreements for much longer. More decisions like Citgroup v. Bacon that leave the party that required arbitration complaining about its unfairness can only speed the elimination of mandatory arbitration. Ironically, a decision that supports arbitration could hasten its legislative elimination.