Thursday, July 12, 2007

The End of Mandatory Arbitration?

Every few years, some group or another starts up the "mandatory arbitration is unfair" argument, and it looks like it is that time again.

CCH Wall Street has a column today regarding Congressional interest in ending mandatory arbitration in the securities industry. I won't repeat the arguments, most of us know them by heart.

There is no doubt that arbitration is a faster and less expensive method of dispute resolution. And there should not be any doubt that faster and less expensive benefits the party with fewer resources and less experience in dispute resolution. In customer arbitrations, that would be the customer...not the brokerage firm.

Of course, there are many benefits to the brokerage firms from arbitration, but my point is that customers benefit as well.

Studies like the one prepared by Daniel Solin and Ed O'Neill (a claimant's attorney and a claimant's expert witness) do nothing to shed light on the issue of "fairness" since they ignore the fact that 70% of all securities arbitrations are resolved by the mutual agreement of the parties.

But the real issue is what is the alternative to mandatory arbitration? Arbitration is a creature of contract. Without the agreement of both sides to arbitrate, there can be no arbitration. If Congress forces the industry to abandon arbitration clauses in customer agreements, will it also force the NASD and the NYSE to abandon their requirements that firms arbitrate disputes at the request of the customer?

We can't have it both ways. Either arbitration is mandatory for all parties, or it is not. It seems to me that investor groups want it both ways. They want to arbitrate when it suits them, and they want to go to court when that suits their needs better.

That is not the law of arbitration, nor should it be. If we are going to do away with mandatory arbitration, we should do away with it completely.

Of course that leaves us with the problem of the investor with $100,000 in losses who is forced to bring a court case, and can't, because the court process is too expensive.
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