Arbitration Costs and Contingent Fee Contracts

Abstract

A common criticism of arbitration is that its upfront costs (arbitrators' fees and administrative costs) may preclude consumers and employees from asserting their claims. Some commentators have argued further that arbitration costs undercut the benefits to such claimants of contingent fee contracts, which permit the claimants to defer payment of attorneys' fees and litigation expenses until they prevail in the case (and if they do not prevail, avoid such costs altogether). This paper argues that this criticism has it exactly backwards. Rather than arbitration costs interfering with the workings of contingent fee contracts, the contingent fee mechanism provides a means for overcoming liquidity and risk aversion barriers to arbitration. Arbitration costs are just another form of litigation expense, which attorneys should be willing to advance on behalf of clients with viable claims. As a result, even accepting the premises of the cost-based criticism, it does not follow that arbitration costs necessarily preclude individuals from bringing their claims in arbitration. Even if individual claimants cannot afford the forum costs of arbitration, at least some of those individuals - those with viable claims given the total costs of the dispute resolution process - should nonetheless be able to bring their claims. For this reason, much of the legal analysis of arbitration cost challenges is misdirected, focusing too much on the personal finances of the individual claimant and too little on the incentives for attorneys to take the case (such as the value of the claim and possible recovery under fee-shifting statutes). In the vast majority of federal court cases adjudicating cost-based challenges to arbitration agreements, the claimant is represented by counsel, and in most has asserted a claim that, if successful, would permit the recovery of attorney's fees. This evidence suggests that in most reported cases, even those in which courts invalidated the arbitration agreement on cost grounds, arbitration costs were not a barrier to asserting the claim in arbitration.