A common topic during negotiations for a sales representation agreement is whether the parties should agree to binding arbitration to resolve any disputes rather than litigation in court. Sometimes a principal will request that the parties choose binding arbitration contending that arbitration is less expensive. This may or may not be true as I discuss below.

Some Benefits of Arbitration

The benefits of arbitration can include the following:

• A shorter docket. Arbitrations can often result in a resolution in 12 months compared to 24 to 30 months or more in many lawsuits.
• The parties have more control over the process. For example, the parties can stipulate a shorter schedule and tighter hearing restrictions.
• The parties can select an arbitrator experienced in the arbitration process and the law related to sales commission disputes.
• The decision by the arbitrator has more of a sense of finality than does a decision by a court. As a practical matter, the appealability of an arbitration award is very limited.

Differences in Filing Fees

The filing fees for initiating arbitration through an arbitration association are significantly higher than the fees to file a lawsuit. One key reason is that the filing and other fees are used to pay the employees of the arbitration associations, whereas the taxpayers pay for the costs of the judge, court employees, jury, etc.

Two of the largest arbitration associations in the U.S. are the American Arbitration Association (AAA) and Judicial Arbitration and Mediation Services (JAMS). Let’s presume that there are unpaid sales commissions of approximately $1 million in dispute. The filing fee to initiate a proceeding using AAA for our example is as follows:

• Initial filing fee — $5,500
• Final filing fee — $6,825
• Total filing fee — $12,325
• The hourly rate for an arbitrator through AAA can run from anywhere from $300 per hour to as much as $1,150 an hour.* The AAA is a non-profit organization.

The filing fee to initiate arbitration for the same claim using JAMS is $2,000. The filing fee for our example using JAMS is significantly lower than the filing fee for an AAA arbitration. The difference is that with JAMS, there is a case management fee of 13 percent assessed against all professional fees plus pre-and post-hearing reading and research and award preparation fees. What this means is that unlike the AAA, JAMS shares in the hourly rates charged by the arbitrators. This would appear to create a financial incentive for the JAMS hourly rates for arbitrators to be higher than at AAA.

The problem with a JAMS arbitration is that you will never know what the total JAMS costs and fees will be before you initiate the arbitration claim. The attorney fees for a JAMS arbitrator can average from the low end of $400 per hour to $15,000 or more per day on the high end.* Presuming a 10-hour day, the $15,000 per day rate would be $1500 per hour. The 13 percent case management fee can add up very quickly and become significant. It should also be noted that JAMS is a for-profit organization. The mission of a for-profit company is to make money.

Federal Court Filing Fees

The civil case filing fee in United States District Courts is currently $405 and there is no additional charge for the cost of the judge, the judge’s staff or for the jury. The costs of the judge, jury, and other court personnel are paid by the taxpayers. Most sales commission lawsuits will end up in Federal Court if the salesperson and the principal are located in different states. The cost to file and litigate a sales commission lawsuit in Federal Court is significantly less expensive than the cost of filing and arbitrating a claim through one of the arbitration associations. The difference can be in the tens of thousands of dollars. That is a big difference.

Difference in Attorney Fee Expense

My firm handles sales commission disputes on a one-third contingent fee basis. Our fee arrangement is the same whether we are in federal court or arbitration. The main reason is that we must do the same amount of work whether the case is in arbitration or in court. The discovery process is basically the same whether we are arbitrating or litigating a sales commission claim. We generally need to take the depositions of the key representatives of the principal and get all of the relevant documents including sales numbers, purchase orders, key communications, etc. There is generally no cost saving for the sales representative to have his or her sales commission claim arbitrated. In fact, arbitration will most likely be significantly more expensive due to the filing fees and arbitrator fees. Why not take the benefit of the taxpayer-funded court system rather than the participant-funded arbitration system? It should be kept in mind that most sales commission disputes are relatively simple. The key issues are:

1. What is the agreement/commission rate?
2. What are the sales numbers?
3. How much in commissions are owed?

The Best of Both Worlds

I do not include arbitration provisions in the sales rep agreements that I draft for my clients. Saying that, we often end up arbitrating cases that we have filed in court. The difference is that the cases we arbitrate are not arbitrated through the AAA or JAMS. Therefore, there are no filing fees, administrative fees, or case management fees. The only fees are the fees the arbitrator charges for his or her time. The attorneys for both parties merely agree upon an arbitrator and the arbitration will take place in the conference room of one of the party’s attorneys, or in the arbitrator’s conference room. The arbitrators we use are generally arbitrators who also arbitrate cases for the AAA or JAMS and are very skilled. For our cases, arbitration associations add no real value to the process. Mainly they just add costs for my client.

My process can also save time. By filing the lawsuit first and then agreeing to arbitration at the right time, the parties can shorten the overall litigation process. If the parties are not able to resolve the case after the arbitration award, then one of the parties will need to have the court confirm the arbitration award in a judgment. That is much quicker to do when the lawsuit is filed first. If the arbitration came first, then a lawsuit would need to be filed after the arbitration award was issued. By filing the lawsuit first and then having the arbitration, the parties can save from 30 to more than 60 days. Once the arbitration award is issued all that is needed is a motion filed with the court to confirm the arbitration award into a judgment.

A Recent Example

We recently had a case that involved the painting of axles for a major automotive supplier. We filed the case in state court because both parties are based in Michigan. We obtained the necessary discovery while the case was pending in court and then entered into an agreement for a private arbitration with a sole arbitrator that both attorneys knew and had used previously. There was no filing fee for the arbitration and the cost of the arbitrator was very reasonable. The arbitration took place in an informal setting in the arbitrator’s conference room at a convenient time for all parties. The arbitration was concluded significantly sooner than it would have been if we tried the case in court with either a jury or a bench trial. We had an excellent seven-figure arbitration award for past commissions. The award also required payment of continuing commissions for the life of the contract. This really was an example of the best of both worlds.

My Recommendation

My recommendation is that sales representatives do not include mandatory arbitration provisions in their sales representation agreements. If there is a dispute that cannot first be resolved in an amicable fashion, then I think the attorney for the sales representative should file a lawsuit. If the parties later decide they would like to arbitrate the case, they can always agree to arbitrate the case after the necessary discovery is done.

My recommendation is that the parties mutually agree upon one arbitrator. Three arbitrators triple the arbitrator fees. Plus, the neutral arbitrator typically makes the decision anyway. Many of our cases involve principals from other states. In almost all cases, the out-of-state principals use Michigan attorneys. I have litigated sales commission disputes against almost all of the large law firms in Michigan. We all know who the best arbitrators are. I have never had a problem mutually agreeing upon an arbitrator in any of my cases over the years. Basically, I am looking for an arbitrator/attorney who knows the automotive business (most of my cases involve automotive production parts) and is very good at contract law. I also prefer arbitrators who know me and know that all I do is handle sales commission disputes.

In conclusion, I recommend that you not sign a sales representation agreement that requires mandatory arbitration through the AAA or JAMS. Arbitration through either of these associations can significantly increase the cost to the salesperson. Frankly, that is one of the reasons why the mandatory arbitration language is often included in the sales rep agreement in the first place. The more mandatory costs for the salesperson, the less likely it is that the salesperson will pursue his or her unpaid sales commissions.

---

* “Trends in Arbitrator Compensation,” Dispute Resolution Magazine, (Spring 2017), 8.

MANA welcomes your comments on this article. Write to us at [email protected].