Is Arbitration Cheaper than Litigation?
Many think that arbitration is less expensive than litigation. As a result, many aggrieved investors begin the process with unrealistic expectations about how much it will cost.
They might set aside a few thousand dollars and hope for a speedy resolution. But in most cases, securities arbitration is a complicated and costly process that has a number of fixed and variable fees both claimants and respondents must remit.
In order to get the ball rolling on a FINRA arbitration case, the claimant must pay a filing fee. This fee is based on the size of the case and ranges from $50 for cases under $1,000 all the way up to $1,800 for those over $1 million. In contrast, to file a complaint in federal court in Chicago, would only cost a flat $400. The respondent must also pay a fee called a “member surcharge” to FINRA, which is generally several times more than the disgruntled investor must hand over. The reason? These surcharges help pay for FINRA arbitration, as they are a cost of doing business for the major brokerage firms.
Once the arbitration process begins, the “forum fee” meter starts running at a rate of $1,200 per day hearing session for claims of more than $500,000 involving three (3) arbitrators. And since the process typically requires a minimum of three days of hearing, that’s six sessions, or $3,600 to start. As you might expect, very few cases are resolved in only three days. More complicated cases can take two, three, even four times as long.
Because these costs are generally split 50-50 between the claimant and the respondent, the smallest bill a claimant who goes through arbitration could possibly receive would be $1,800 (50% of $3,600 forum fees plus a $50 filing fee). Due to higher member surge fees, the respondent would likely pay a couple thousand dollars more than that. But that’s just the tip of the proverbial iceberg.
Whether they take place in a courtroom or a conference room, financial cases are seldom simple. Lawyers for both sides will have to examine monthly statements, talk to witnesses, and create a convincing argument to support their client’s position. This is work that not just any attorney can do. As such, FINRA attorneys typically charge high rates than attorneys who practice in more general areas. Likewise, both claimants and respondents may require expert witnesses.
When all is said and done, both the claimant and the respondent could be looking at tens of thousands of dollars in attorney fees by the time the arbitration award is received. It is not surprising then that many of these cases, perhaps even most, are settled before the required three days of hearings.
Another often overlooked cost of arbitration is securing the services of expert witnesses. These paid professionals are brought in to testify on technical matters, which makes them invaluable in complicated, high-stakes securities arbitration cases. Of course expert witnesses know this and charge accordingly. It is not at all uncommon for them to ask for several thousand dollars for a single afternoon of expert testimony.
So, the cost of arbitration and litigation are the same then? Actually, not even close. As expensive as the assorted variable and fixed fees may be, arbitration is a more streamlined process.
There are, for example, no appeals that may lead to endless litigation that can last for several years, no real motions to dismiss, motion for summary judgment or depositions. By comparison, the average arbitration case is either settled or decided in a year to a year and a half. The cost savings on attorneys’ fees alone are enough to make it the more attractive, less expensive option.