Arbitration Aggravation

Donald A. Burleson has a confession to make. He's the general counsel of Jani-King International Inc., an Addison (Tex.) commercial-cleaning operation with 12,500 franchisees worldwide. Because franchising is such a contentious business, companies in it frequently use arbitration agreements to keep disputes out of court. But Burleson doesn't like arbitration. One reason: These days, he says, it too closely resembles the courtroom litigation it was supposed to replace.

Burleson is not alone. Business attorneys say arbitration is losing its luster among a growing number of their clients. "There was this notion back in the 1980s that arbitration would be a more streamlined, more cost-effective mechanism to resolve disputes," says J. Cary Gray, at Looper Reed & McGraw in Houston. "I'm telling you that it's not."

In arbitration proceedings, a single arbitrator, or sometimes a panel of three, considers evidence and then issues a ruling. The proceedings are conducted in private, and the decision in most cases is not subject to court review. As originally conceived, the system was supposed to be faster and cheaper than going to court.

But often as not, Gray says, arbitration clauses seem to generate litigation, not skirt it. Parties can go to court to battle over whether arbitration is required; then, if it is, they can end up back in court fighting over the award or trying to get it enforced.

Discovery, the protracted pretrial exchanging of documents and taking of depositions, is supposed to be sharply limited in arbitration. The reality, however, is that many arbitrators are allowing extensive and expensive discovery. Attorneys bear some of the blame, says Larry A. Jordan, a retired judge who now handles arbitration and mediation at a private Seattle firm, Judicial Dispute Resolution. "They're used to a complete discovery," he says. "They feel obligated to do that."

Jordan's services aren't free. While taxpayers pick up judicial salaries, arbitrators draw their big paychecks from the parties who appear before them. Houston litigator David E. Warden says that for an arbitration he has scheduled later this year, the three panel members are each asking for retainers of $40,000. Another concern is that arbitrators, who often specialize in areas such as construction claims, may have trouble being truly impartial because they are beholden to the industry they work for. The worry is that the arbitrators, who want repeat business, won't want to offend either side and so will essentially split the baby to resolve disputes. Warden says his firm, Yetter & Warden, has energy industry clients who now regret some of the mandatory arbitration clauses they are subject to. Says Warden: "They're looking around and saying, 'Maybe the court system isn't so bad--at least you get due process at some point.'"

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