In the second half of the 20th century, the U.S. experienced a “litigation explosion” that enriched some lawyers but cost American businesses and consumers dearly. The cost of lawsuits in America remains uncommonly high; but the growth rate in liability costs has fallen below that in the broader U.S. economy in recent years. The slower growth of U.S. litigation costs is largely attributable to alternative dispute resolution mechanisms like arbitration—essentially, private parties opting out of the courts, in advance, through binding contractual language.
- The principal benefit of arbitration is that it is significantly less costly than litigation and pays out claims more quickly. A 2009 study by Northwestern University School of Law found that individual consumers were more likely to prevail in arbitration than in court, after controlling for variations in case characteristics. The study also found “no statistical difference in the amount they were awarded as a percentage of the amount sought.”
- After Republicans retook the House in the 2010 elections, congressional action to attack arbitration faltered, but that merely set the stage for the Obama administration, which began taking executive actions, promulgating new regulations, and adopting new regulatory interpretations to eliminate arbitration and reopen the door for what the Manhattan Institute calls Trial Lawyers, Inc.
- The Obama administration has taken anti-arbitration steps in three main areas: labor law, consumer finance, and nursing-home care. In all three, consumers stand to be the losers, while trial lawyers stand to collect substantial fees—and impose huge costs that all other Americans will bear.
James R. Copland is a senior fellow and director of legal policy at the Manhattan Institute. Rafael Mangual is the project manager for legal policy.