Avoiding Litigation: The Truth About—and Alternatives to—Arbitration

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June 2012
by Steve Gillen

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Conventional wisdom holds that litigation is a prohibitively expensive, slow, and burdensome way to resolve commercial disputes and that the wiser course is to have your contracts include a provision mandating use of alternative forms of dispute resolution, notably arbitration. There is a kernel of truth here, but the real story is considerably more complex; and a failure to appreciate the nuances can leave you, like two Bible publishers from the Midwest, in a devil of a predicament.

Performance Unlimited had developed a series of children’s illustrated Bible-story books published by Questar Publishers under the title The Beginners Bible. In negotiating their contract in 1989, Performance and Questar included a dispute-resolution provision which, though rich in inspiration, was impoverished in meaningful detail. It provided:

The Licensor and the Publisher agree that God, In His Word, forbids Christians to bring lawsuits against other Christians in secular courts of law . . . and that God Desires Christians to be reconciled to one another when disputes of any nature arise between them. . . . In their resolution of any disputes that may arise under this Agreement, each party agrees that the provisions for mediation and arbitration set forth below shall be the sole and exclusive remedy for resolving any disputes between the parties arising out of or involving this Agreement. [italics added here and below]

It is further agreed that the Licensor and the Publisher hereby waive whatever right they might otherwise have to maintain a lawsuit against the other in a secular court of law, on any disputes arising out of or involving this Agreement.

In the event of such a dispute, the Licensor and the Publisher agree to take the following steps, in the order indicated, until such a dispute is resolved:

The Licensor and the Publisher shall meet together, pray together, and purpose to be reconciled. . . .

The Licensor and the Publisher shall invite other witnesses, who may have knowledge of the actual facts of the dispute or whose knowledge would be helpful in resolving the dispute, to meet together with both parties, to pray together, and to purpose to be reconciled. . . .

Both the Licensor and the Publisher shall each appoint one person as a Mediator; these two persons chosen shall then appoint a third Mediator. The three Mediators shall together determine the process of mediation, to which the Licensor and the Publisher agree to comply, and shall be free to act as Arbitrators, to whose authority the Licensor and the Publisher agree to submit. . . .

Then—you guessed it—the parties had a falling out. When Performance defaulted on an obligation under the contract, Questar stopped paying royalties. Faced with looming insolvency, Performance turned to a federal district court, where it sought immediate relief in the form of a preliminary injunction. Apparently, Performance had not foreseen the possibility of an indefinite interruption in its primary source of cash when it agreed to meet, pray, and purpose to be reconciled.

Snared by Unimagined Consequences

The district court was unsympathetic. It found the quoted language to constitute a clear and unambiguous mandatory arbitration provision and, after a hearing on the motion one month later, sent Performance packing.

Performance then looked to the court of appeals. After eight more months without cash flow, the appellate court sent the case back to the district court for a hearing on the injunction motion, holding that court-ordered interim relief to preserve the status quo is not inconsistent with a public policy favoring arbitration of the underlying dispute.

So, far from providing a faster, cheaper, spiritually superior alternative to the secular courts, the parties who wrote this provision doomed themselves to litigation up and down the circuit, many months of delay, and doubtless many tens of thousands of dollars in expense, all the while doing battle over a collateral issue (the injunction) and never getting to the substance of their original dispute (the default Performance had been accused of).

What Other Options Offer

If you are inclined to specify an alternative to litigation in contracts, pay careful attention to choosing it and to drafting its mechanics. Arbitration is not the only option, and almost certainly not the one to propose first.

Also consider:

Informal negotiation. This probably is the alternative to propose first. It is the least expensive and least disruptive, and it is most likely to preserve the relationship between the parties.

But to improve its chance of success, you need to move the negotiation away from people most immediately involved in the dispute.

You can do this internally, with an escalation protocol that places negotiations farther up the chain of command on each side of the dispute so that negotiators will have a broader, and depersonalized, perspective on the objectives important to a business resolution.

Or you can involve a neutral intermediary to facilitate communications, inject some objectivity into the discussions, scale back unreasonable expectations, and probe for overlap in the parties’ positions. IBPA offers this sort of service for members with its Dispute Resolution Program (ibpa-online.org/benefits/dispute.aspx).

Regardless of the approach you choose (in-house or with help), spell out the steps to be taken and the time in which they must be completed so that the process does not drag on indefinitely.

Formal mediation. A more rigorous alternative to informal negotiation is formal mediation with a trained, professional mediation service.

Like informal negotiation, mediation is a further attempt to get the parties to a voluntary resolution. Since the mediator is not empowered to force a settlement, mediation is not guaranteed to reach a resolution. But unlike informal negotiation, it imports a skilled professional to manage the process and requires that the parties invest in preparation for and participation in a formal process. That investment raises each party’s stake in a successful outcome.

Because it requires the cooperation of the parties, formal mediation is probably best viewed as a substitute for informal negotiation and not a natural next step. If you have already tried, and failed, to find common ground informally, the odds are that additional time spent in formal mediation will not be productive.

On the other hand, since mediation involves voluntary participation, it can start or restart any time the parties agree that it might be productive. Even if formal arbitration has begun, the parties can agree to suspend the arbitration while they mediate or run both processes on parallel tracks. Note, though, that if you use mediation successfully after arbitration has begun, you will not necessarily get a refund of the arbitration case management fee or even part of it. But you will avoid the separate cost of the arbitrator.

Understanding Arbitration

Regardless of which process you start with, neither informal negotiation nor formal mediation is guaranteed to get the parties to a resolution when the gap between their resistance points is unbridgeable. And you very well may not know whether you are confronting such a gap until you have exhausted the process. So if you are to avoid litigation, you will need a commitment from the beginning to surrender the final decision to a neutral decider—such as an arbitrator.

Arbitration is a creature of private agreement, entirely customizable by the parties. This can be a good thing. On the other hand, an arbitration clause can reflect the focus of the drafter instead of the interests of the client. Drafted by a lawyer who focuses on transactional work, it may provide too little structure for the process; drafted by a litigator, it may result in a process that takes on the trappings of litigation, with provisions for elaborate discovery (sometimes with reference to the federal civil procedure rules rather than the expedited arbitration rules), long cycle times to accommodate motion practice, a provision for appealing the arbitrator’s decision, and resulting high cost and lack of finality. One size does not fit all.

A professional experienced in using alternative dispute-resolution strategies will be able to tailor contract language to your specific needs, specifying expedited rules for disputes with less at risk, and comprehensive rules for complex, large-dollar disputes.

You can compress or expand document production and depositions to suit the likely circumstances of a dispute; provide for one arbitrator (to keep the cost down) or three (to lessen the likelihood of a runaway result); or give the arbitrator(s) the power to award interim or injunctive relief or carve those remedies out of the scope of arbitrable disputes and reserve them for a state or federal court. Also, you can provide for a hearing, with live testimony and evidence, or limit the proceeding to paper submissions, and you can make the proceedings confidential (they will not be unless you specify this). See “Sample Contract Provisions” below, and remember that you need to factor in your specifics.

One of the oft-cited advantages of arbitration over litigation is its finality. Unlike litigation, which includes a process for appellate review of lower court decisions for reversible error, arbitration decisions are seldom reviewable except in extraordinary circumstances.

This is good if you are on the winning side, and bad if you are on the wrong end of a bad result wrongly decided. One way of addressing this risk is to expressly provide for an arbitral appeal (i.e., review for error by a second arbitration panel). This obviously sacrifices some speed, expense, and finality for the sake of a just result (but without the greater expense and delay that Performance Unlimited incurred when it had to turn to the federal appellate court).

Another way to introduce more certainty and control is to provide for a final-offer arbitration, sometimes called baseball arbitration because of its genesis in Major League Baseball salary cases. In the final-offer protocol, each side is required to submit its last best offer in writing to the arbitrator, who must select the one closest to the award he or she would otherwise have made. This gives each party an opportunity to structure the final award while at the same time encouraging each toward compromise to avoid having its offer rejected in favor of a more reasonable offer from the other side.

As you consider choosing arbitration over litigation, and then writing the dispute-resolution provision into your contracts, get advice and assistance from a lawyer with experience in mediations and arbitrations—not just a transactional lawyer or a litigator. Reconciliation is a fine goal, but take a lesson from the Bible case and put your faith in a thoughtfully crafted arbitration provision, remembering who’s in the details.

Steve Gillen is a lawyer and partner in the intellectual property firm of Wood Herron & Evans and has focused his practice on publishing and media matters for 30 years. He is a member of IBPA and a frequent contributor to the Independent. To reach him: sgillen@whepatent.com; 513/241-2324, ext. 470.

Sources of Help and Information

How do you choose among the bewilderingly complex array of options when you want to avoid litigation? Fortunately, several national and international providers offer menus, including menus of general and special arbitration and mediation rules, specimen contract provisions, and panels of professional neutrals.

Perhaps the most widely recognized of these providers is the American Arbitration Association (adr.org). The AAA will administer your case for a fee ranging from $1,000 (for claims valued at up to $10,000) to nearly $20,000 (for claims over $10 million), and it offers a 60-day expedited process for claims under $75,000. In addition to the case administration fee, you will have to pay the arbitrator $200 to $1,000/hour, and you will have to pay your own lawyer’s fees.

Another well-known provider is the International Institute for Conflict Prevention & Resolution (cpradr.org). CPR is a membership organization primarily focused on the study and improvement of dispute-resolution processes and less focused on delivery of case-administration services. It does provide a variety of general and special rules sets (including a 100-day expedited process); it offers specimen contract provisions and a la carte support services, and it maintains a list of neutrals available free to members and for a fee to nonmembers.

JAMS, a large, private international provider of dispute resolution services (jamsadr.com), also offers specimen clauses, general and special rules sets, and a panel of neutrals including many retired judges. It does not publish its fee schedule online, suggesting perhaps that if you have to ask how much, you can’t afford it.

Your local state or municipal bar association probably offers a dispute-resolution service too, or has access to a private service provider. In many cases, these services will be less expensive than the ones described above.

And, as noted, IBPA provides a dispute-resolution program to its members at no cost. This program focuses on informal negotiation and mediation and does not guarantee a resolution. So while it may suffice to resolve a dispute, it can’t be the last or only option for those who want to be certain to forestall litigation.

Sample Contract Provisions

Dispute resolution. Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section, which shall be the sole and exclusive procedures for the resolution of any such disputes. [In some cases, you might want to begin this provision with “Subject to either party’s right to seek injunctive relief . . . ”]

Negotiation. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between representatives of each party with sufficient authority to settle the claims. Any person may give the other party written notice of any dispute not resolved in the normal course of business. Within 14 days after delivery of the notice, the receiving party shall submit to the other a written response. The notice and response shall include (a) a statement of that party’s position and a summary of arguments supporting that position, and (b) the name and title of the person who will represent that party. Within 28 days after delivery of the initial notice, the designated representatives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence.

Arbitration. Any dispute arising out of or relating to this Agreement, including the breach, termination, or validity thereof, which has not been resolved by negotiation as provided herein within 42 days after the date of the initial notice, shall be finally resolved by arbitration in accordance with the [specify agency of choice and the particular set of] rules, in effect on the date of this Agreement, or the rules of another arbitration entity agreed upon by the parties. In any case, regardless of any rules of the selected arbitration entity to the contrary, only one arbitrator acceptable to both parties or, if they cannot agree, one arbitrator appointed by [specify agency] shall preside over and decide the arbitration. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. §§1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The place of arbitration shall be [city, state].

Final-offer arbitration. The parties agree that they will exchange and provide to the arbitrator a copy of written proposals for the amount of money damages they would offer or demand, respectively. In rendering the award the arbitrator shall be limited to selecting only one of the two proposals submitted by the parties.

Mediation [you would probably use this in place of, and not in addition to, the Negotiation provision above]. In the event of a dispute arising out of or relating to this Agreement, including the breach, termination, or validity thereof, either of the parties has the right to request non-binding mediation through [specify the agency of choice]. If mediation fails to resolve the dispute within 42 days after the call for mediation, the parties agree to submit the matter in dispute to binding arbitration.

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