Originally prepared by Lucia Benabentos of the Cornell Law School Securities Law Clinic.
Deciding whether to file a claim
Arbitration is final and binding, subject to review by a court only on a very limited basis. Deciding whether to file an arbitration claim can be very complex. A variety of considerations must be taken into account and a cost-benefit analysis conducted to determine whether it makes sense to proceed in this manner.
Costs alone can make the process prohibitive for small claims. One associate cost are the fees required for the process to start and continue. FINRA offers a fee calculator, to help the filing party make an informed decision. A filing fee is charged at the time of filing a claim or a response; this fee is non-refundable. Additionally, there may be injunctive relief fees for those seeking a temporary injunctive order to prevent the other party from engaging in certain conduct, member surcharge fees for each member firm that is named as a party to arbitration, amended claim fees for whenever the parties wish to make any changes to their forms to respond to a new issue or claim, member pre-hearing process fees if a dispute is over $25,000, member hearing process fees for the allocation of a time and place for the hearing, adjournment fees when the party requests additional time, hearing session fees, settlement-forum fee allocation, and final forum fees. The arbitrators have the authority to decide, at the end of the arbitration process, in which shape to allocate the costs of fees to the parties. They may split the costs in half, or have one party bear the burden of the entire process.
Fees may not be the only costs associated with arbitration. The parties will need to incur costs related to legal assistance (by their attorneys), the hiring of experts to substantiate the claims, the process of discovery by which each party researches their own claims and any defenses, whether any witnesses need to attend the hearing, and many more.
In deciding to arbitrate, parties conduct this cost analysis before filing any claims. If the costs far exceed the relief sought, the party may choose to use negotiation or mediation processes for the settlement of the dispute.
Furthermore, a party may decide against arbitrating merely because of the nature of the process. While arbitration is a confidential process, it might be the case that parties will be forced to reveal private information to the other side. This information could not only be related to the finances of the parties, or what occurred during the disputed event, but criminal records, family relations and many other issues may be disputed in front of the arbitrators.
Another consideration is whether the party is willing to wait for the entire process to transpire before an award is granted. Arbitration cases vary in their length. Depending on the case, a party may be involved in a process from a few months to years. It should be considered, however, this process is much shorter than litigating the case in court.
Additionally, a party should consider the ability of the other party in bearing the costs and the ability to pay in case the relief is granted. If the broker or brokerage firm goes out of business or declares bankruptcy, there may be no chance of any recovery, even if the party received a favorable award. FINRA states that over 80 percent of all unpaid awards involve a firm or individual that is no longer in business.
While theses costs may be extremely high, it is wise to bear in mind that most arbitration cases end with a settlement between the parties either through direct negotiation or through mediation. FINRA provides that in recent years, parties agreed on a resolution in about 60 percent of all cases. Other cases were withdrawn or closed before the process began. However, settlement is not guaranteed.