An oft-repeated truism about arbitration that isn’t really true is that arbitrators tend to issue split, compromise awards.

A recently-released survey conducted by the American Arbitration Association (AAA) shows that arbitrators are in fact quite decisive and our own survey of FINRA Awards finds a similar result.

AAA Study

According to the AAA, arbitrators issued decisions “clearly in favor of one party” in more than 93% of the cases surveyed. How does the Association arrive at that figure? It considers a compromise Award as one falling in the 41-to-60% of damages requested range, with those higher or lower being viewed as in favor of a party. Thus, says AAA, the survey of 2,384 B2B commercial arbitration Awards issued in 2015 indicates that “only 6.17% fell in the midrange category.” The results appear in the chart below:

Detailed findings are part of a Whitepaper providing breakdowns by claim size. Concludes the AAA: “These numbers are quantifiable evidence that can be used to counter objections to using arbitration because of the fear of split awards; drawing on this and additional research provides answers to expressed misperceptions by corporate counsel.” As the Whitepaper points out, King Solomon didn’t split the baby either!

FINRA Doesn’t Do It Either

FINRA has not conducted a similar study yet, so we did it for them. We separately examined Awards issued in the five and a half years between Jan. 1, 2011 and June 30, 2016 in the two main types of customer disputes (Customer-Member and Small Claims), in which the customers requested a specified amount of compensatory damages and recovered any amount of compensatory damages in a contested proceeding. We then calculated our “standard” measure of the recovery rate (i.e., compensatory damages awarded divided by total amount of damages claimed) for each Award. As an added measure, we eliminated the effect of non-compensatory damages (e.g., punitive damages, attorney fees and costs) by calculating what we shall call the “compensatory recovery rate” (compensatory damages awarded divided by compensatory damages claimed) for each Award. We judged that a panel “split the baby” when it awarded more than exactly 40% and less than exactly 60% of the compensatory damages claimed.

We found that among Customer-Member Awards, arbitrators “split the baby” in 14% of the “wins” (119/829), when judged by the standard recovery rate, and 15% of the time when judged by the compensatory recovery rate. In Small Claims cases, the figures were 10% (27/261) and 11% (30/261), respectively. This suggests that FINRA arbitrators also do not, by and large, split the difference and are even less likely to do so in Small Claims cases. (Caveat: Comparing the FINRA results to the AAA results could be “apples to oranges,” because the AAA disputes are commercial, while FINRA’s Awards are primarily retail disputes.)

The Effect of Non-Compensatory Damages

These results also indicate that the addition of non-compensatory damages has a very slight but consistent effect of pushing damage awards upward out of the middle range (indicated by a higher standard than compensatory recovery rate). We can see this more clearly by comparing the two types of recovery rate figures above 60% and below 40%. In Customer-Member cases, standard recovery rates lean ever so slightly upward, with 44% (364) above and 42% below (346) below the middle belt, while compensatory damage rates lean slightly more heavily downward, by 46% (383) to 39% (320). In Small Claims cases, where arbitrators tend to award a significantly larger share of damage requests in general, non-compensatory damages have a similar, though less pronounced, effect: the standard recovery rate is above our focus range in 68% (178) of the Awards and below in 21% (56), while the compensatory recovery rate is above in 66% (173) and below in 22% (58).

(ed: *Kudos to AAA for being so transparent. **Although SAC periodically issues surveys on FINRA Award results, it would be nice if the Authority made such data available on its Website. ***Chart reprinted with permission. Say, did you note that “win” rate of approximately 70% for Claimants in the AAA Survey? We’d like to see that parsed!) (SAC Ref. No. 2016-27-01)

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