Wednesday, December 30, 2009

Incentives in Arbitration

Arbitration is a process for resolving civil cases. Instead of using the court system, the parties agree to submit the decision to an arbitrator. The arbitrator is simply another lawyer who acts like a judge in the case. He'll hear motions and, if act as both the judge and jury in the trial-like arbitration. The arbitrator then makes his award which is generally binding on the parties, barring extraordinary circumstances.

Arbitration is usually preferred to court trial because it allows the parties to save some money. Courts are slow and formal, whereas arbitrators are swift and informal. Speed saves money.

Despite the similarities, it occurred to me that while arbitrators act like judges, they are unlikely to reach the same decisions as judges. I think this is for two reasons.

First, parties are less likely to appeal an arbitration decision. The standard for overturing an arbitrator's decision is higher than for a court. Appellate court generally do not defer to trial court's decisions on questions of law. Trial courts will, however, defer to arbitration decisions on these questions.This leaves the arbitrator more latitude.

Second, the arbitrator is usually selected by an agreement of the parties. That means that arbitrators are unlikely to be extremely biased in their decision. If they were, one side of a dispute would never choose them. But it also means that arbitrators are unlikely to send one party home empty handed. A lawyer that gets a really bad decision will probably never use the arbitrator again unless it was really clear that their side of the case should fail.

So, I think if you want the result that may be in tension with the law but seems fair, you probably want an arbitrator.  And if you have a technically good case but are seeking a result that seems less fair, you probably want a judge.

6 comments:

Brett said...

I've been thinking a lot about incentives lately (just finished reading Freakonomics). So how do settlements fit into all of this? From the one I've actually heard a first hand account of (my father's), it seemed like the judge acted in part the role of arbitrator. He would meet with both sides together as well as separately and negotiate/suggest a resolution.

I'm guessing that judges work on salary, so the incentive system for them would be different than for an arbitrator. They wouldn't stand to gain monetarily from a settlement, but they might have pressure to keep their caseload from getting too backed up leading to an incentive to encourage settlement (which is exactly what happened in the aforementioned case).

My father's lawyer on the other hand felt very strongly that they should go to trial. I see a large incentive for him in increased legal fees as well as a potentially larger monetary award if he wins the case. If doctors recommend unnecessary procedures, is it much of a stretch to see a lawyer recommending an unnecessary trial. Though if the lawyer felt the case had no merit he would probably not want to take the gamble.

Brett said...

Are lawyers' win/loss records public information? It could be difficult to separate those who lose because they're bad at lawyering from those who lose because they recommend going to trial too often, but it would be interesting to tease out.

Danny said...

How hard would it be to bribe an arbitrator?

Anonymous said...

Meeting with the sides at the same time (generally in different rooms) to try and settle a case is called mediation. (With a judge, it's usually called a settlement conference.) Mediator's usually do not arbitrate the cases the mediate because they know the back and forth and offers. The parties generally don't want the arbitrator to know their offers so they are free to take a more aggressive position at arbitration or trial.

Brett, I think you are exactly right that a judge's incentive is to clear his docket. For this reason, a judge is also more likely to grant a party's motion for summary judgment (a type of motion) than an arbitrator.

I actually think lawyers have an incentive to settle cases and not go to trial.

Trial is a big risk. If you settle before trial the client will never know what the trial outcome would have been. If you go to trial, the client will always know what the last offer before trial was. You can definitely tell whether you did better or worse at trial.

Trial is also a risk it is really embarrassing if you loose. A plaintiff lawyer in town, with a long career tried (as far as I know) his first case, and got nothing. People have been talking about it for months.

Trial is also hard because so few cases actually go to trial that no one really is that adept at trying cases anymore.

If Lawyer's are on commission, then they tend to prefer a bird in the hand to one in the bush. Suppose you have a legitimate 10 million dollar case. On contingency fee you'll get 3.33. But if you settle for 7 you'll get 2.31. That' a million bucks difference. But most lawyers will settle the case because they just want to get it done with and get the sure thing. An analogy from Freakonomics is how realtors sell houses for less than they are worth to get the commission.

Finally trials are a freakish amount of work. Some attorneys at our firm tried a 200,000.00ish case this summer. It was two weeks of round the clock work for 2.5 people. No one wants to do that amount of work if they can avoid it.

Anonymous said...

As far as win/loss records, there is no way to get those as far as I'm aware without doing your own research. It's also really hard to tell what a "win" is in some cases. If you ask the jury for $375,000.00 and get $175,000.00 is that a win or a loss?

Also, ultimately, the client is calling the shots on whether to go to trial. So, a good attorney might take a bad case to trial because his client won't settle, despite his advice. That happened to us recently.

A win/loss record doesn't tell you much about the merits of the case either. I just settled a case scheduled for trial this coming Monday. I would have tried the case, and I would have been confident in a victory. But that's because the facts of the case were in our favor, not because I'm some great trial lawyer.

If I was looking for a good trial lawyer, I'd look for someone that I thought knew the law, is quick on his feet, likable, and persuasive to an average person. Some trial experience is a definite plus, too.

Anonymous said...

Whether judge or arbitrator, if it becomes public that either took a bribe they are both obviously done for.

Supposing I wanted to bribe a judge or an arbitrator, I would be scared to approach either for fear that they would reject the offer and I'd be exposed. Probably you are better off bribing an arbitrator, however, because initiating communication with the arbitrator without the other party present (what's called ex parte communication) would be easier. Good arbitrators, however, will make a lot more money, so it may be cheaper to bribe a judge.

Which is easier to bribe probably depends more on the arbitrator/judge in question than on their disparate incentives.