Expense of Arbitration

A recent case, Cellinfo, LLC v. American Tower Corp.,506 F.Supp.3d 61 (Mass. 2020) explores the narrow path a litigant might take to return to court after facing financial hardship in arbitration. This case highlights the tension between the Federal Arbitration Act (FAA)'s strong preference for arbitration and a party's fundamental right to have their day in court.

The court in Cellinfo acknowledged this challenge, noting that the "overly expansive interpretation" of the FAA has marginalized the American jury system and, in many instances, barred thousands of Americans from court.

So, when can a party who was compelled to arbitrate return to court due to an inability to pay? The Cellinfo case, building on precedents from other circuits, outlines a demanding "good faith" standard. It's not enough to simply claim an empty bank account.

To lift a stay and return to court, a party must demonstrate:

• Diligent Arbitration: They must show they diligently participated in the arbitration process from the outset.

• Exhaustion of Alternative Funds: They must prove they genuinely sought alternative funding but failed to secure it.

• Attempts to Adjust Payment: They need to show they tried to negotiate payment adjustments, discounts, or delays with the arbitration association (like the American Arbitration Association, AAA).

• No Intentional Delay: They must not have intentionally dragged their feet or acted in bad faith to avoid arbitration.

• Reasonable Efforts: Overall, they must have made reasonable, good-faith efforts to continue the arbitration.

After a business relationship with American Tower soured, Cellinfo initiated arbitration as required by their contract. However, facing a significant loss of income and mounting legal fees (exceeding $1.3 million), Cellinfo struggled to keep up with the arbitration expenses, which included arbitrator fees as high as $1,200 per hour.

Despite having loyal investors who provided some financial support, Cellinfo's situation was further complicated by a protective order that prevented them from fully showcasing the strength of their case to potential litigation funders. A miscommunication with their lawyers regarding the application of funds earmarked for arbitration fees also played a significant role in their inability to pay.

Ultimately, the arbitration proceedings were suspended and then terminated due to Cellinfo's non-payment. Cellinfo then sought to reopen their case in federal court.

While the court acknowledged Cellinfo's genuine financial challenges and even noted that American Tower conceded Cellinfo's indigency, it ultimately denied Cellinfo's request to reopen the case. The crucial factor was Cellinfo's failure to demonstrate sufficient "good faith."

The court highlighted several key shortcomings in Cellinfo's actions:

• Failure to Contact AAA: Cellinfo did not reach out to the AAA to discuss their financial hardship or explore options for reduced fees or payment plans, despite the AAA's discretion to accommodate such situations.

• Withholding Information: Cellinfo withheld crucial information about their financial difficulties and the issues with their previous legal counsel from the arbitration panel.

• Inconclusive Good Faith: The evidence regarding Cellinfo's good faith was "inconclusive," leading the court to conclude that Cellinfo's conduct appeared to be a "failure or neglect to comply with the arbitration."

The Cellinfo case serves as a reminder for any party entering into an arbitration agreement. While it's possible to return to court if you genuinely cannot afford arbitration, the bar is set very high. It's imperative to:

• Document Everything: Keep meticulous records of all financial efforts, communications with the arbitration body, and attempts to resolve payment issues.

• Communicate Openly: Be transparent with the arbitration panel about any financial difficulties and proactively seek solutions.

• Understand the Rules: Familiarize yourself with the arbitration association's rules regarding fee adjustments and hardship provisions.

This case underscores that while the legal system recognizes the potential for financial hardship in arbitration, it places a significant burden on the party seeking to return to court to prove their good faith efforts to comply with the arbitration agreement