Mandatory arbitration is a great solution for commercial contract disputes between parties of roughly equal bargaining power. Such parties are normally sophisticated and they want if possible to get to the heart of a dispute and get it decided comparatively quickly without a lot of wild-card elements interjected into it.

Beyond that context, mandatory arbitration has several problems. Among other things:

1. It takes away a party's right to a jury trial, thereby removing one of the most potent weapons available to an individual taking on a big company. I remember litigating a churning case years ago in federal court where an old couple had lost their life savings when a broker decided to use discretionary authority they had given him over their account to put them into high flyers, an obviously disastrous strategy. The big fight with the institutional defendant was over whether they could force the case to binding arbitration, and they fought hard over that one. When they lost, they instantly settled for the full amount. Why? Because juries award punitive damages that penalize institutional defendants for their outrageous conduct. And, guess what, a national brokerage firm that does not have the decency to pay up when one of its own has obviously fleeced a hapless old couple is just asking to get slammed. That is what happens with juries. It does not happen with arbitrators, who normally try to "split the baby" in making their awards - a bias that heavily favors defendants. In employment cases, the jury weapon and the potential for punitive damage awards are precisely the threats that induce employers to settle and pay up rather than fight it out if they have committed serious wrongs. When those weapons are neutered, they dig in and fight because the downside risk is comparatively small while the upside is that they can frustrate claimants into settling for comparatively low amounts. For similar reasons, where such economics hold sway, contingency-fee lawyers will be more reluctant to take on a case, leaving it to the claimant to have to pay for the costs of prosecuting the dispute.

2. Arbitration also takes away any effective right to do credible discovery in many cases. This means defendants can more easily hide evidence and thereby defeat meritorious claims. For all its faults, litigation does provide a potent arsenal by which one can pry documents and testimony from recalcitrant defendants. Take that away and the value of a claim is commensurately diminished.

3. There is also no effective appeal from a binding arbitration award. This means that, if you get a horrible decision from an arbitrator who did not understand the facts or the law, there is no way of correcting it unless you can show that factors extraneous to the arbitration process itself illegally influenced the result (e.g., if the arbitrator took a bribe). This, by the way, is why a startup should be extremely cautious in agreeing that disputes over contracts affecting its IP rights should be submitted to binding arbitration - if you get a bum decision saying, e.g., that some claimant owns those rights that you thought belonged to your company, there is no effective recourse. No appeal on the merits of the award. You're effectively screwed.

4. Arbitration panels can sometimes be drawn from inherently biased sources, such as "industry experts," which is fine if the dispute involves a commercial contract dispute in which industry knowledge is important. In other contexts, however, the experts tend to align themselves with the companies with whose industry they are so closely familiar. They often have worked in those industries for years and therefore know and approve of its common practices. If and when someone comes along to say that liability should result from this is that standard practice, they are loathe to disturb things. Beyond that, you just have the "good old boy" element of people who know each other. Yes, they might do a fair attempt at rendering what they see as an honest decision, but the built-in tendency toward favoritism will inevitably seep through in such cases.

Of course, not all of the above points apply with equal force to an employment dispute. I set them forth, though, because I very frequently run into entrepreneurs who axiomatically assume that binding arbitration is an unalloyed good, and it is not. You need to think very carefully about how this sort of vehicle might affect your company when you agree to contract clauses that force you to submit your disputes to that forum.

And, from an employee perspective, such clauses are almost universally bad. Take away the jury trial risk, the risk of punitive damages, the power of broad discovery, and the ability to appeal, and you find yourself effectively trapped in a forum by which you will likely obtain limited relief at best, no matter how much you have been harmed or how good your claim.