Contingent fees for non-binding arbitrators?

Contingent fees for non-binding arbitrators?
What’s good for the goose…

Many court systems have adopted a form of mandatory arbitration for certain categories of cases. Though the details vary by jurisdiction, the basic structure is this: Parties file a lawsuit, and are directed to non-binding arbitration in advance of (or in lieu of) trial. In non-binding arbitration, an arbitrator conducts a hearing in which each side presents its arguments on the merits of the case. The arbitrator then issues an award. If neither party objects to the award, it is entered as final judgment and the matter is resolved. If either party rejects the award, the case proceeds to trial (sometimes called a “trial de novo,” recognizing that the parties have already been through some version of an adjudication on the matter). In almost all non-binding arbitration systems, the parties have an economic incentive to accept the arbitrator’s award. For example, in many, if the objecting party fares worse at trial than it did before the arbitrator, the objecting party must reimburse certain costs and fees of the party who would have accepted the arbitrator’s award.

Imagine for example that Nancy files a lawsuit against Sarah, claiming $80,000 in damages. (Please insert mentally whatever cause of action would cause you to remain interested in this hypothetical.) Their jurisdiction requires all disputes under $100,000 to proceed to non-binding arbitration. Andrea serves as arbitrator and issues an award in favor of Nancy in the amount of $40,000. Sarah acquiesces to the award, but Nancy demands a trial de novo. The case proceeds to trial, and the jury finds in favor of Nancy in the amount of $20,000.

Who messed up?

The theory underlying non-binding arbitration would suggest that the plaintiff, Nancy, messed up. She rejected a settlement opportunity, and (armed with the evidence provided by the subsequent jury award), we declare her rejection to have been “unreasonable.” As a result, we penalize her by forcing her to pay certain litigation costs Sarah incurred following the Nancy’s rejection of the arbitrator’s award.

But what about the arbitrator in this scenario? Didn’t Andrea mess up here at least as much as Nancy?

If the non-binding arbitrator’s job was to predict the jury award accurately, she did not do so. And if the non-binding arbitrator’s job was to name a figure that would induce settlement, again, she did not do so.

And yet, an arbitrator issuing a non-binding award faces very little prospect of sanction for messing up. There is (probably appropriately) virtually no prospect of significant private liability. There is (perhaps less appropriately, but it’s difficult to see how to get around this) little effect on the arbitrator’s reputation in such a way that the market for the arbitrator’s services would be seriously damaged.

What would be wrong with having the arbitrator’s fee hinge on the award being reasonably accurate? A contingent fee for non-binding arbitrators?

I do not know quite what this might look like. We would surely not declare the arbitrator to have messed up if her award was $19,000 or $21,000 and the jury came back with $20,000. Maybe we would focus on deviations of a particular magnitude. Many jurisdictions recognize the challenge of predicting with precision, for example, by permitting the party who demands a trial de novo some percentage of leeway before the penalties kick in.

The basic idea behind contingent-fee non-binding arbitration would be that a non-binding arbitrator would be paid if the parties acquiesce to the arbitrator’s award, or in the event of a trial de novo, if the arbitrator’s award proves to have been “reasonably” accurate.

“No fair!” one can hear the arbitration community screaming. “Who knows what a jury is going to do? It’s hard to predict with precision. Things change between the time of the arbitration and the time of the trial. Etc.” And yet, that is exactly the position we put litigants in when we impose conditional fee-shifting and put them to the test of deciding whether to accept a non-binding arbitrator’s award.

In the panoply of cushy jobs, with little risk of sanction for poor performance or bad judgment, non-binding arbitrators come nowhere near to the status of tenured law professors, to be sure. But arbitrators in non-binding arbitration systems are oddly insulated from the impacts of decisions that prove to be wrong. Perhaps we should have them bet their fees on the accuracy of their awards.

Michael Moffitt

One thought on “Contingent fees for non-binding arbitrators?”

  1. Michael-
    I like this post, and, not surprisingly, this topic. Part of this for me would turn on how the arbitrator’s contingent fee was set up. I assume you’re not talking about what I’ve called a “percentage of settlement” fee, where the arbitrator would actually get a percentage of the amount she awards–but instead something more like a contingent bonus? It sounds like you’re saying either (a) the arbitrator should ONLY get paid their regular (hourly?) fee if the parties accept the award or if the award turns out to be accurate; or (b) the arbitrator should get some bonus (above her regular rate) in those instances. Both of these are success fees; I think you’re saying (a).

    The question (for me) is whether the contingent fee would make the arbitrator partial towards one party’s interests–whether it creates a biasing interest.

    (Your proposal would also run up against some who will believe that an arbitrator should also be completely self-disinterested in the case; that neutrality requires that the arbitrator be a blank slate and have no opinions or interest in the case. I don’t think that’s right–although it’s a fun question. Thinking about the different types of neutrality we expect from mediators, arbitrators, and judges is an interesting problem.)

    I don’t think your success fee would create a biasing interest as between the parties; only a “settlement bias”–a self-interest in settlement and accurate awards. Because the award must be accepted by BOTH parties, there is no (little?) ability to increase or decrease awards out of self-interest–if the award does not seem accurate, one of the parties will reject it. (This assumes a bunch of things about the parties’ abilities to make decisions, power, etc. but let’s say it’s true anyway.)

    The tricky part is the lack of party consent to the fee structure–this is a mandatory process, and so the parties really didn’t have a chance to choose how it was set up. But could they? I think your idea would be even better if you allowed parties to opt-in or opt-out of the fee structure. Maybe the default would be a normal arbitrator’s fee, but the parties could, before the arbitration, CHOOSE the contingent success fee instead. That would give them more control over the process, and make sure that they wanted this modified type of neutrality. (It would also be a GREAT experiment.)

    I’m betting that parties would choose it, at least a significant part of the time.

    Anyway, interesting post. Now, what about success fees for judges — to speed up trials, lower costs, etc.? What sort of neutrality do we demand of them, and would success fees ruin it?

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