Arbitration Alternative

November 2010  – As seen in the SmartCEO MagazinePrint Article

The pros and cons of dispensing with litigation

Originally, the whole idea behind arbitration was that if we have to fight, let’s do it quicker, cheaper and friendlier. Litigation that is, battling it out in court had turned into multi-year and often multi-million dollar death matches. The parties to these court battles were distracted by depositions and the obligation to turn over literally roomfuls of documents. Then they were drained of focus, energy and cash by seemingly endless hearings, motions and trials. Worse, the loser might appeal the judgment.

So people started turning to neutral third parties to act as rent-a-judges in less formal, less expensive, but binding private trials. This new invention was arbitration. State laws were passed authorizing arbitration agreements. Even the U.S. Congress got into the act, passing the Federal Arbitration Act, which declared that written arbitration agreements would be just as binding as any other contract.

What could be wrong with any of this? Everyone would save time, trouble and money by arbitrating certain disputes instead of jousting and limping through litigation.

But most every battleground favors one party over another. By definition, arbitration does not involve a jury of your peers. Instead, you are pleading your case to, in effect, a judge. You might not get the sympathy factor from an arbitrator that you could possibly get from a jury. On the other hand, some think that an arbitrator does not observe technicalities as strictly as courtroom judges. Or you might be concerned that the arbitrator is selected from a pool of candidates that tends to favor the other side. Still other folks – ones with deep pockets – might decide they want long, expensive litigation to wear down an opponent and force it to settle or abandon its claims.

Regardless of the reason, many people started challenging the enforceability of arbitration agreements. A number of courts agreed with those challenges and started striking down certain arbitration agreements. State legislatures also got into the act, mostly in an attempt to protect “the little guy” in perceived David versus Goliath battles, passing laws that regulate arbitration agreements.

Today, the near-unanimous support has crumbled, and there is a lot of uncertainty about whether your arbitration agreement will be binding.

The Basics

First, to establish binding arbitration, you need a written statement documenting the parties’ agreement to arbitrate certain disputes. In one case, where an employer emailed employees a new dispute resolution policy mandating arbitration of all employment disputes, the court held that the employees were not bound by the policy. The judge determined that the employees were not sufficiently notified that they would be contractually bound to arbitrate.

Second, spell out – in the agreement – who will be the arbitrator(s) or how they will be selected.

Third, specify the rules for the arbitration. Typically, this ingredient takes the form of a clear reference to certain rules of a widely recognized arbitration organization.

Wouldn’t it be nice if that were all that was required to have an enforceable arbitration agreement? But, like so many other things, arbitration has gotten complicated.

Consumer Arbitration

The courts have accurately observed that employees and consumers are often at a big disadvantage when entering into arbitration agreements, especially with large companies. These agreements are often take-it-or-leave it deals. If you want to work here, sign this agreement – or, if you want this credit card, sign here. No questions. No negotiating. Hence, judges often harshly scrutinize arbitration agreements between parties of vastly different bargaining power.

So be fair and even-handed. Fast-paced, high-pressure situations, where a consumer or employee must sign the agreement on the spot, with little time to consider it and no time to consult with an attorney, can render the arbitration contract unenforceable. Even requiring a consumer to pay one-half of the cost of the arbitrator could be considered unfair and negate the arbitration agreement in part or whole.

Mutuality of obligations is also an important requirement. In one case, an employer included the arbitration agreement in an employment policy manual, but the employer reserved the right to modify these policies. The court observed that this modification right could enable the employer to extricate itself from arbitration as it sought fit. The judge nullified the arbitration agreement because the employer hadn’t truly committed to arbitration.

Additional Pointers

When two businesses enter into an arbitration agreement, you have much more freedom to seek advantageous provisions. For example, specify that the arbitration will take place in your city. This provision can give you a home-field advantage. If your opponent is from out of town and must hire new, local counsel and travel across the country to arbitrate, it may be discouraged from pursuing claims in the first place and more likely to resolve a dispute peacefully. In addition, it is almost always a good idea to require the losing party to pay the legal fees of the prevailing party. Such legal fees provisions enable you to pursue meritorious, but smaller, claims, knowing you might recover some or all of your fees in pursuing them. These loser- pays-legal-fees provisions also discourage people from pursuing cases to bully another party that has shallower pockets.

Drafting an arbitration agreement is no longer a simple affair, especially if your contract will be used in multiple states or on a widespread basis. Local requirements alone can trip you up. In at least one case, an arbitration agreement was rejected because it failed to comply with a state law requiring that the contract include notice of the arbitration provision in 10-point capital letters. Other cautionary lessons seemingly arise out of left field. In June 2010, the National Labor Relations Board, which regulates union activity, issued a memo that arguably affects how to draft every arbitration agreement with non-union employees. Still other machinations concern whether to address class actions in your arbitration agreement and whether to include “e-discovery” – that is, the right to examine things like your opponents e-mail and servers – as part of the arbitration process. To borrow a phrase, this is not your father’s arbitration agreement anymore.

Still with the skyrocketing expense and distraction of litigation, arbitration can be an invaluable tool for resolving disputes. Get good advice on when arbitration works and then skilled assistance to create an arbitration agreement that will work.

Jack Garson is the founder and a principal of the law firm Garson Law LLC in Bethesda, MD, and is also the author of “How to Build a Business and Sell It for Millions.”

Jack Garson
Garson Law LLC
(240) 507-1750

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