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Arbitration cases a growing revenue stream for law firms

The old refrain, “See you in court!” is so last century. The latest trend in resolving contractual disputes is the less expensive, out-of-court process of arbitration. Even the Kardashians include an arbitration clause in their contracts, and you can’t get any trendier than that.

Though arbitration is intended to be cheaper and speedier than a legal trial, for South Florida law firms it also has become an important and growing revenue stream.

Twenty years ago, arbitration was considered a niche area of the law. Today, hundreds of local attorneys practice arbitration.

Arbitration typically involves less paperwork — due to limited discovery and depositions — and instead of a jury, one to three “judges’’ decide the outcome. The arbitrators — called “neutrals” — can decide the case based on the law or their own common sense. Also, like Las Vegas, what happens there stays there, unless the parties agree to go public.

But while cases can be cheaper and more streamlined, the more complex matters can take as long as a trial and be as costly. And in most cases, there’s no option for appeal.

Still, backlogs in the courts have made arbitration increasingly popular. As the number of pending cases has skyrocketed, the number of civil suits actually being heard by juries has slipped off the edge. In just six years, from 2006 to 2012, the number of cases pending in Miami’s civil court grew nearly 250 percent, from roughly 37,000 to more than 91,000. By contrast, between 2009 and 2012, civil jury trials dipped from a high of 279 to a low of 210 in 2012, according to figures supplied by Scott Silverman, a retired 11th Circuit Court judge. That’s a reduction of nearly 25 percent.

The crisis in the courts is exacerbated by a high-volume turnover in the judiciary due to recent pay cuts, says Silverman, who left the bench last year. On May 1, 2012, Silverman became one of the founders of the Miami branch of JAMS, which bills itself as “the largest private alternative dispute resolution provider in the world” with more than two dozen U.S. offices. The list of its Miami-based neutrals reads like an A-list gathering of former chief judges: former Chief Justice of the Florida Supreme Court Gerald Kogan, former Chief Judge of the Third District Court of Appeal Juan Ramirez Jr., former Chief Judge of the Eleventh Judicial Circuit Joseph P. Farina, and former Chief U.S. Magistrate Judge Ted E. Banstra.

“The court system is a mess; it’s a real mess these days,” says Jeff Schneider, managing partner of the Miami firm Levine Kellogg Lehman Schneider & Grossman. A decade ago companies with arbitration clauses in their contracts might opt to litigate, he says. “Now, if they have it in the agreement, they pursue it,” he says. “There’s simply no choice.” Accordingly, he’s seen arbitration rise from a third of his practice five years ago to 80 percent today.

Bolstering its appeal are recent U.S. Supreme Court rulings that have enforced arbitration decisions in consumer and employment contracts, giving them the full weight of a court decision. Cellphone contracts, employment agreements and nursing home arrangements all typically include clauses calling for arbitration in matters of dispute, in part because they block expensive class-action lawsuits. And because arbitration proceedings are private, they avoid the spotlight of high-profile trials.

Internationally, arbitration is also booming, especially when it comes to foreign investment in countries where laws may not protect companies as readily or where corruption has been a problem. Also, foreign firms are wary of the jury system, said experts.

Miami typically handles the third highest volume of international arbitration cases in the country, just behind New York and Los Angeles/San Francisco, says Burton A. Landy, a shareholder in the Miami office of Akerman Senterfitt and the founding chairman of the Miami International Arbitration Society.

But perhaps the biggest sign of Miami’s importance in the arbitration world, says Landy, is its connection to the International Council for Commercial Arbitration. Next year Miami will host the 22nd congress for the Hague-based ICCA, a nongovernmental organization accredited by the United Nations that helps establish the ground rules for arbitration worldwide. For arbitration experts, that’s akin to hosting a papal visit. Only one other U.S. city has held that honor, and that was New York in 1986.

“We have aspirations,” Landy says. “We see Miami being recognized as a world-class place for international arbitration.”

‘Welcoming place’

The culture in Miami, where Spanish and Portuguese can be heard in the streets, adds a comfort level for Latin Americans conducting arbitration here, says José Astigarraga, who handles complex commercial cases and serves as a vice president on the esteemed London Court of International Arbitration. Although based in Miami, the Havana-born Astigarraga co-founded the LCIA’s Latin American Users’ Council.

Additionally, Florida allows any lawyer to handle an arbitration case, not just those who are members of the Florida Bar, says Astigarraga, a ruling his firm, Astigarraga Davis, championed. “You should have any lawyer the client wants,’” Astigarraga says. “That makes Florida a very welcoming place for arbitration.”

Miami’s global status and location add to international buzz, says Adolfo E. Jimenez, the partner who oversees Holland & Knight’s international arbitration and litigation team. Even Chiann Bao, secretary-general of the Hong Kong International Arbitration Centre, remarked how Miami kept coming up in her discussions about arbitration as she toured Latin America, Jimenez says.

“They talked about Miami as the site for Latin America,” Jimenez says Bao told him. “We both said in many ways Miami is the Hong Kong of the region, of the Latin American region.”

Six-fold increase

Jimenez oversees the firm’s litigation/arbitration section, which includes eight attorneys in Miami, five in New York and three in Washington, D.C. “International arbitration matters have increased six-fold in the last 10 years and three-fold in the last five years,” Jimenez says of his firm’s practice. “The average amount at issue doubled between 2003 and 2008, and quadrupled in the last five years” — now in the tens of millions.

For many local law firms, arbitration is no longer a sidelight but a fundamental part of the practice. “In the last five years, this is no longer a phase,” he says. “This is here to stay.”

Daniel E. González agrees. He serves as co-director of the Hogan Lovells international arbitration practice, where he is a partner in the Miami office. With 160 lawyers in roughly half of the firm’s 42 offices worldwide dedicated to international arbitration, Hogan Lovells is the local industry leader.

Although international arbitration “is not necessarily cheaper or faster,” González says, international arbitration has taken off as companies expand globally. The reason, he says: Most countries conducting international business subscribe to widely practiced arbitration conventions, making an arbitral decision enforceable worldwide. In other words, winning at arbitration makes a payout more likely, even if the dispute arises in a country that lacks an independent court system.

The areas of business most suited to international arbitration include energy, telecom, financial services, construction and technology, because what they all have in common is they involve complex, cross-border infrastructure development.

Another factor: Foreign firms seeking to resolve disputes on U.S. soil aren’t always comfortable with the jury system, says Kenneth Hartmann, a senior shareholder in the Miami firm of Kozyak Tropin & Throckmorton. “Foreign companies are weary of U.S. court proceedings.’’

Inevitably, as more contracts — each with its own arbitration clause — are involved, the potential for an international dispute rises, with the promise of arbitration work for Miami attorneys for years to come.

Not always a good fit

While the need for arbitration expands, so does its evolution, especially on the domestic level. Hilarie Bass, co-president of Greenberg Traurig, says arbitration is akin to Cinderella’s slipper — one size does not fit all. Historically, arbitration is a great fit for broker/dealer disputes, Bass says, explaining that “100 percent” of those claims are handled by her firm through arbitration.

But she shies away from arbitration when it comes to multimillion-dollar business deals in the United States. When the stakes are high, she says, the arbitration process tends to get drawn out, both sides demand more discovery, and the actual arbitration hearing can often take as long as a trial and be more costly. A three-member panel of arbitrators could cost a client $5,000 a day. When a case goes to trail, taxpayers pick up the judge’s tab.

Perhaps most disconcerting, she says, is the waiver of a right to appeal under binding arbitration, especially in light of the fact that arbitrators are not required to apply the law. “Unless you write it into the contract, they can use their best judgment and equity,” she says, adding, “Misinterpretation of the law would not be grounds to overturn the arbitration decision. That’s very scary, especially when you have $100 million involved.”

Such concerns help account for the recent drop in domestic business-to-business arbitration cases. Because of the private nature of arbitration, exact figures aren’t available. However, the nonprofit American Arbitration Association shows a downward trend for construction and commercial cases over the past three years, with a small increase in employment and international cases.

Disputes on rise

But when it comes to business-to-consumer disputes in the U.S., the totals are rising, notes Joseph Matthews, a partner at Colson Hicks Eidson, a seasoned trial lawyer and an arbitration specialist. And he predicts the practice will continue to grow domestically. “The law continues to change quickly, and it is very possible/likely that most class action claims will soon be prevented entirely by arbitration clauses that include provisions barring class actions,” Matthews said via an email interview.

That’s unsettling to Matthews, whose firm handles mass disaster cases, including the BP Deepwater Horizon oil spill. Given the option, he would always choose a jury trial over arbitration. “The best results came from juries — whether I was representing the little guy or a massive corporation,” he says.