Navigating Securities Arbitration vs. Litigation: Choosing the Right Path for Dispute Resolution

December 15, 2023

The legal road diverges into two paths when facing dispute: traditional securities litigation and securities arbitration. Each path has its unique pros and cons, so one is not guaranteed to…

The legal road diverges into two paths when facing dispute: traditional securities litigation and securities arbitration. Each path has its unique pros and cons, so one is not guaranteed to be optimal for each unique business conflict. Consider the following factors when determining which path is best for inevitable disputes.

The Securities Arbitration Path

Arbitration is similar to the conventional process of going to court yet typically quicker, simpler, and more affordable. This securities litigation alternative requires that the parties involved in a dispute choose an unbiased third party to resolve the conflict. The neutral party is an observer referred to as the arbitrator.

Arbitration centers on the arbitrator(s) hearing each party’s argument, reviewing the evidence, and then ultimately producing a decision. The decision of the arbitrator, commonly referred to as the “award”, is legally binding, meaning the parties involved in the dispute are to honor the decision.

In the context of securities, arbitrators are referred to as FINRA, short for Financial Industry Regulatory Authority. FINRA is an organization created to serve as oversight for the securities industry.

FINRA arbitration does not allow for an appeal after the decision is decided upon, meaning there is no legal avenue to file a challenge. The only caveat is that state and federal law provide some grounds that allow a court to consider a motion filed to request that an award be vacated.

Arbitration proceedings are partially shaped by claim size. The arbitration process pertaining to a claim greater than six figures involves an in-person hearing led by an arbitration panel of at least three arbitrators. A head arbitrator chairs the hearing.

Smaller claims in which less than $50,000 is disputed are determined by one arbitrator. Such a claim is decided with either a hearing “on paper”, meaning the arbitrator provides a decision after reviewing documents. Alternatively, smaller claims can be decided through a phone hearing that centers on the typical aspects of regular arbitration hearings or a conventional hearing in which both sides present evidence in person before the arbitrator.

Though arbitration tends to wrap up faster than sometimes plodding securities litigation, it is not guaranteed to be cheaper. The cost of arbitrator fees and legal consultation with that of a securities attorney who represents the company in court has the potential to be similar. Arbitration awards are not determined by legal precedent nor do they set legal precedent in the way that judgments handed down in court do.

The Conventional Securities Litigation Path

Dispute resolution through traditional securities litigation is different than securities arbitration in several ways. There is no need for an arbitrator to delve deeply into the details of his or her decision.

In contrast, courtroom judges provide lengthy explanations detailing the law including the logic behind their decisions. Though one of the parties involved in the dispute can request that an arbitrator provide sufficient explanation, there is no guarantee that such supporting information will be provided.

Conventional securities litigation also differs from arbitration regarding evidentiary rules. Traditional courts in which litigation plays out are required to abide by the conventional Rules of Evidence that are inapplicable to arbitration. Moreover, there is a comprehensive discovery process in conventional litigation in which requests for evidence and interrogatories are submitted to opposing counsel for response within a specific timeframe.

In contrast, arbitration has fewer discovery devices such as the aforementioned requests for admissions/evidence, depositions, and interrogatories. In particular, most arbitrators do not permit the use of depositions in which attorneys question witnesses and clients to collect evidence and information.

Be aware that FINRA arbitration only permits such statements in limited circumstances while they are almost always required when taking the conventional litigation path. Traditional securities litigation is also favorable in that it provides the potential for a litany of remedies.

Judges have the authority to provide a wide array of relief forms including mandatory injunctions (legalized interference with the course of business/finances), monetary damages, and more.

The Potential for an Appeal

There is no guarantee a party involved in a dispute will emerge victorious in arbitration or through traditional litigation. There is an option to appeal a litigation ruling though such appeals are rarely permitted in arbitration.

A business that loses after a litigation trial almost always has the option of appealing to a higher court with the potential for the decision to be reversed yet arbitration appeal options are limited under federal and state law.

Arbitration Vs. Litigation: Which is Best?

FINRA arbitration is often considered favorable as it provides the opportunity to participate in selecting the arbitrator who hears the case. Take the litigation route and the case will be assigned to a judge without a say in the selection.

Those seeking full confidentiality should be aware that arbitration is typically fully confidential while court filings are available to the general public. Moreover, arbitration procedures tend to be more flexible than legal procedures that govern securities litigation.

The potential for a lucrative appeal following a litigation loss is too tempting for some litigants to pass up, meaning dispute resolution through the traditional courtroom process has an inherent allure. It is also worth noting that arbitration proceedings tend to have sometimes unnecessarily complex regulatory/legal hurdles that will necessitate legal guidance.

Parties involved in legal disputes are encouraged to obtain legal guidance from an experienced securities attorney before choosing the arbitration or litigation path. Meet with an accomplished securities attorney to determine if there is a viable arbitration or securities litigation claim. Such legal guidance propels parties involved in a contentious dispute forward in full confidence knowing the time and financial investment required for the pursuit of justice is worthwhile.