Compel Arbitration or Oppose it?

Arbitration. Should you compel arbitration? Or oppose it? I’ve recently had a comment on Youtube asking me to discuss arbitration, and it has also come up in several recent teleconferences as members contemplated seeking arbitration. Others have wanted to know whether to oppose a motion to compel arbitration.

Let’s start with a definition: Arbitration is the submission of your case to a private entity known as an arbitrator. After some process and a hearing (most likely), the arbitrator will decide what happens in your case and issue what amounts to a judgment.

For debt cases, it’s always a single arbitrator or a company that will provide a single arbitrator that’s appointed, but for other cases it could be other things, like a panel, perhaps. In any event, there will be an arbitrator and some special rules that will NOT be your state’s rules of civil procedure and also might not be your state’s rules of evidence. But there will be rules that control the process.

Arbitration is popular because it makes it faster, easier and cheaper for people to engage in litigation. The discovery process will be limited, and the appeals process almost eliminated. That’s why rich companies and debt collectors always love it. Almost all of these things are completely and profoundly BAD for debt defendants. That’s why I’ve always suggested debt defendants should avoid arbitration.

But there is another side to the question, and there are some who argue in favor of allowing or even forcing arbitration in debt cases. What’s their argument?

I think the argument in favor of arbitration boils down to the fee, which apparently has to be paid up front by the debt collector And that can amount to two or three thousand dollars, or even a little more. The idea here is that debt collectors won’t want to put that much money down on the barrelhead just to chase a bad debt and that court is, for them, much cheaper.

There is some sense in this argument.

Debt collectors never worry about winning a case, but they do know you don’t have much money. That means that they’re sure they’ll win, but worry that they won’t collect, which is the most important thing to them. The more you make them spend, the more worried about that they’ll be. Maybe they’ll drop the case if you demand arbitration.

We often make the argument that by pursuing discovery, filing and defending motions, and preparing for trial you are driving up the costs of litigation and may make the whole thing too expensive for debt collectors to want to do. Again, not because they worry about losing, but just the amount of money they’re having to spend when their business model is designed around easy, cheap judgments. However, conducting discovery and filing and defending motions and the rest do in fact improve your chances of winning, and we think that, when it comes to a debt collector, you should win your case. These things are the way to do it, and the chance the company will drop the case is basically the icing on that cake.

In arbitration, it’s the whole cake. You should remember that.

One big question that may be more theoretical than real is, who ultimately pays the arbitrator?

I say it may be theoretical since I just said the debt collector isn’t sure you’ll have any money at all, but this won’t stop them from seeking as big a judgment as possible. And if they get a judgment, they WILL try to collect it. All. So be advised that the judgment size could matter.

Okay, but who pays the arbitrator?

I think some states may have rules that matter, and I know that California, for example, does have rules regarding employment and consumer-brought claims. In the absence of any state based rule, you
would look to the arbitration provision giving you the right to arbitration – i.e., the contract. That will often say who pays the arbitrator, and it can specify any of a number of things, from company pays all to loser pays all, to dividing it up. The contract isn’t often going to put all the burden on the company because, after all, the company wrote the contract.

If it says company pays all, though, the company can’t shift that payment to you if you lose. If it’s loser pays all, though, it obviously will. But if there isn’t a direction in the contract, that would usually mean you start by splitting the cost, but that the arbitrator can award the cost to the winner, i.e., add it to the judgment.

The rule in your case is going to depend on your own specific circumstances.

The net of all this would suggest that you will have some advantage if the contract makes the company pay, but there’s risk if the loser pays. And of course it matters a lot who pays up front, which is often the debt collector.

So… should you compel arbitration?

In a debt buyer/collector case (i.e., not the original creditor) I’d still lean strongly against. You should win this case under most state laws because of the rules of evidence, and you cannot depend on the arbitrator to enforce those rules rigorously. If it’s an original creditor, it’s a much closer question. You’ll have to consider all the things we’ve discussed here and make a judgment call.

Filing a motion to compel arbitration might trigger some settlement negotiation, but I wouldn’t think you could get the company to give you a very steep discount, but there I’m just guessing based on what I know about lawyers and not experience in these type cases.

I remain very hesitant about suggesting arbitration, but there may be value in considering it if you’re
dealing with an original creditor.