Human Resources News & Insights

Is arbitration really cheaper than litigation? Study says no

Many companies have adopted a policy of using arbitration to resolve legal disputes with employees — in the belief that it’s cheaper than fighting things out in court. New research indicates that belief might be misguided.

Alan Dabdoub and Trey Cox, writing on insidecounsel.com, cite a study of a small company that was involved in 19 cases. Of those, nine were resolved through arbitration and 10 were litigated in court.

And guess what? According to Dabdoub and Cox, the nine cases resolved through arbitration incurred a total of $710,323.50 in outside counsel fees, with an average outside counsel bill of $78,924.84. The 10 cases in litigation cost an aggregate $631,443.28 in outside counsel fees but averaged roughly $63,144.33 per case — less than $15,000 per case.

The arbitration cases incurred $921,042.22 in total costs and outside counsel fees, with an average per-case expenditure of $102,338.02. But in the litigation cases, total costs and outside counsel fees were $704,908.20, with an average per-case expenditure of $70,490.82a difference of more than $30,000 per case.

Time was a factor, too. For cases litigated in court, the median case lifecycle was 19 months. The median arbitration case lasted 21 months.

Not so fast …

In other words, arbitration turned out to be more costly and time-consuming that litigation.

But Deanne Katz, writing on FindLaw’s In House blog, says we shouldn’t necessarily give up on arbitration:

First, consider the costs, Katz writes.  The published results only looked at outside counsel expenses for arbitration and litigation. On average, each arbitration cost about $15,000 more than litigation.

But that doesn’t consider other factors like court fees and costs, discovery expenses that are often more expensive when a case heads to trial, and the cost of retaining experts if applicable.

As to the time spent resolving the cases, she says, the fact that the average arbitration process actually took longer than litigation is a concern, since the longer a case goes, the more it costs.

But here’s her final word: “The study’s results may just reflect one company’s experience when it comes to arbitration versus litigation. Before you make pronouncements about which method is best, consider collecting your own data to figure out what works best for [you].”

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