Wednesday, January 7, 2015

Arbitration's Cancer – The Systemic Bias Created by the Co-existence of Paid Arbitrators, Arbitrator Strikes, and Award Histories

It has been said: “because bias is so subtle, it's extremely effective.” So it should come as no surprise that one of the cornerstones of the rules of judicial ethics is that bias is to be avoided or ferreted out.  Bias should be no more acceptable in an arbitration forum than it would be in a federal court.  But it seems to be just that, as a confluence of procedures in our private arbitration forums produce an "extremely effective" systemic bias. 

These facts are known to any reasonably informed arbitrator:

1)      The FINRA Member, or private party that inserted AAA or JAMS in to its commercial contract, has a procedural right to strike and rank potential arbitrators, without cause or explanation.
2)      The FINRA Member or private party will have access to the details and magnitude of the arbitrator's prior compensatory, punitive, cost and fee awards.
3)      A federal court has never vacated an arbitration award on the grounds that the compensatory award to the investor or broker wasn't big enough, or because the panel failed to award punitive damages, costs, or fees. 
4)      JAMS, FINRA, and AAA can, and have, removed an arbitrator from their roster without explanation after the arbitrator chaired over the issuance of a substantive award.

In order to combat this bias, arbitrators must first be able to identify and somehow neutralize the bias these indisputable facts generate.  But since they are subconsciously biased, neutralizing this bias is a very tall order. It is certainly an unrealistic expectation. FINRA, JAMS, and AAA arbitrators are human. And even though most, no doubt, are individuals of high integrity and intelligence, they want to serve as arbitrators, and they are compensated to do so.  Many of them are full-time arbitrators, at least partially dependent upon that compensation. 

In order to eradicate the insidious bias created by the system in favor of (statistically undeniable) depressed compensatory awards and rejected punitive, cost and fee claims, the system must be changed.  Until it is, the federal courts' rather convenient strict adherence to a purported congressional policy (lobby) in favor of arbitration will be perverted by a money-bias--the same bias the judiciary espouses to be intolerable and inconsistent within its own jurisprudence.       

How do you remove this “extremely effective” bias pressing upon compensated private arbitrators?  The solution is “simple, but not easy:”

1)      Drastically reduce or eliminate arbitrator compensation, and/or
2)      Eliminate the granting of strikes and rankings to FINRA Members and to volume-consumers of other private arbitration services (e.g. Fisher Investments).

Until arbitrators are wholly ambivalent to what FINRA Members and arbitration consumers[1] with strikes think about their past Awards, arbitrators will suffer from a subtle but highly potent bias against claimants.

[1]FINRA itself as well as the owners of for-profit arbitration services like JAMS and AAA could still, however, influence arbitrators.  For example, an arbitrator chairman that issued a multi-million dollar award to one of my clients was subsequently relieved of his duties by FINRA.  Probably just a coincidence, but... Do we need lifetime appointments for arbitrators?  Or minimum terms?