What is the difference between arbitration and litigation in financial services?

What is the difference between arbitration and litigation in financial services?

Arbitration and litigation are two ways to resolve legal disputes.

Arbitration is a private process in which the parties present their cases to one or more arbitrators who make a final decision. It is often faster and less formal than litigation. In investment fraud cases, arbitration is required by brokerage firms under their contracts. The Financial Industry Regulatory Authority (FINRA) also requires its members to undergo the compulsory FINRA arbitration process, which is designed to be faster, more affordable, and less complex than traditional litigation.

Litigation, on the other hand, involves filing a lawsuit in court. A judge or jury decides the outcome. Unlike arbitration, litigation follows strict court procedures and can take years. In investment fraud cases, litigation is not an option because FINRA rules and the underlying contracts between investors and broker-dealers generally require arbitration. Erez Law dives into the similarities and differences between the two.

The Differences Between Traditional Litigation vs. Arbitration

Arbitration and litigation resolve legal disputes in different ways. Arbitration is a private process in which arbitrators review evidence and issue binding decisions. It moves faster than litigation and follows more straightforward rules. Generally, there are no depositions, and discovery is more limited in FINRA arbitration than in litigation. Additionally, there are very limited grounds to challenge or appeal an arbitration award. The FAA and State Arbitration Acts enumerate the limited grounds for an appeal or challenge. In this way, arbitration decisions are more final and less subject to post-decision challenges than trial verdicts.

Litigation happens in court, where a judge or jury decides on a resolution after formal legal proceedings. Court cases take longer and involve more legal procedures. Discovery may be long and extensive. The losing party may have various grounds for an appeal.

In investment fraud cases, brokerage firms require arbitration versus court. Investors must file claims through FINRA arbitration rather than suing in court. These arbitration and litigation differences matter because arbitration allows investors to resolve disputes more quickly than litigation, potentially enabling them to recover investment losses faster than they would with a traditional litigation route.

Similarities Between Litigation and Arbitration

Arbitration and litigation both resolve legal disputes by allowing each side to present evidence and arguments. Both processes involve legal representatives, rules for evidence, and final decisions that both parties must follow. In investment fraud cases, arbitration or litigation can result in financial compensation for investors. However, the key difference between litigation and arbitration is that arbitration takes place outside the courtroom, while litigation occurs in a courtroom.

Arbitration vs. Litigation in FINRA Cases

FINRA cases go through arbitration, not litigation. Investors who bring claims against brokerage firms must follow FINRA’s arbitration process. In FINRA arbitration, an arbitrator or panel of arbitrators reviews evidence, hears arguments, and makes binding decisions. This process moves faster and costs less than a court case.

Litigation happens in court, but it is not an option for FINRA cases. Investors cannot sue brokerage firms in court due to FINRA rules.

The Benefits of Arbitration

Arbitration offers several benefits as an alternative to litigation. It moves faster than court cases, which allows investors to resolve disputes more quickly. Investors do not have to wait years for a court ruling to reclaim their investment losses. Instead, they receive a final decision within a set timeline.

Arbitration also costs less because it doesn’t involve legal fees and litigation expenses. Finally, the process is private, which keeps sensitive financial details out of public records.

This story was produced by Erez Law and reviewed and distributed by Stacker.