Some of my clients simply cannot enough bad things about the arbitration process. It is expensive. It is unfair. There’s no industry panelist anymore. Claimants can get away with anything. Panels are sometimes comprised of people who care more about how many sessions they can get paid for than the merits of the case. Or who can’t stay awake to hear the evidence. It has come to the point where some broker-dealers have simply removed the arbitration clause from their customer agreements in an effort to induce customers to duke it out in court. Moreover, given a relatively recent decision from the Second Circuit that reduces the number of people who actually constitute “customers” capable, under FINRA rules, of compelling a BD to arbitrate, there is an increase in cases going to court that, historically, could have been arbitrated.
All I can say is, be careful what you wish for. Yesterday, following a seven-week trial – yes, seven weeks – a California state court jury returned a verdict against MetLife for a total of $15 million in punitive damages. Notably, the plaintiff had only invested $279,769 in the product she was complaining about. Which, by the way, was not sold by MetLife. Or approved by MetLife. Indeed, the plaintiff was never even a MetLife customer, which is why the case went to court and not arbitration. Apparently, the jury didn’t much care about those facts.
So, here’s the thing: arbitration is hardly perfect, and many of the complaints I hear are totally valid. But, before we all rush headlong into litigation, it is necessary to take a deep breath and consider these facts:
- Yes, there is discovery available in litigation that is not available in arbitration. But…that is one reason that litigation is so expensive. I have no idea how many depositions were taken by the parties in the MetLife case, but there had to have been at least a dozen. Every one of them has to be prepared for and attended (perhaps involving travel), and transcripts have to be purchased and digested. The amount of legal fees incurred on this alone must have been staggering.
- Yes, the case is run by a judge, who knows how to do it. But…judges make funny rulings as often as chairmen of arbitration panels. And judges are completely in control, whereas in arbitration, as long as the parties agree, they can usually compel the panel to do what the parties jointly want. For instance, the judge here, as I understand it, only held sessions Mondays – Thursdays, from 10 – noon, and then from 2 – 4, or thereabouts. No wonder it took seven weeks to try the case.
- Yes, there is a jury of one’s peers, which suggests enhanced fairness. But, as this case amply demonstrates, juries can be swayed by emphathy as easily as arbitration panels.
- Yes, there are pretrial dispositive motions available that are not available in arbitration. But, (1) that does not guarantee they will be granted, and (2) it can be very expensive to prepare and argue such a motion.
- Yes, a jury verdict can be appealed as a matter of right, while there are only limited grounds, both statutory and non-statutory, on which to base an appeal of an adverse arbitration award. This one I must concede is a real plus for litigation. (In this case, it is my understanding that the verdict is going to be appealed.)
Arbitration was designed to be faster and cheaper than litigation. And, for the most part, it is. So, in light of the nasty fact that juries are capable of doing things just as crazy as arbitrators, as MetLife just experienced, I would counsel against condemning the arbitral process as being too flawed to survive. Sometimes, better the devil you know. You know?
 This doesn’t mean that no customer disputes will ever be arbitrated. Under Rule 12200 of FINRA’s Code of Arbitration Procedure, even in the absence of an arbitration agreement, a customer can still compel arbitration of disputes with a BD and/or the BD’s reps merely by asking for it. And, as FINRA noted just last month in Reg Notice 16-25, any such arbitration must be before FINRA.
 In the interest of full disclosure, the jury also awarded a much, much smaller amount – less than 3% of MetLife’s number – of punitive damages against MetLife’s agent, on whose behalf I was retained as an expert witness.