ILNews

Badger: Using arbitration clauses to reduce potential liability risk

Steven Badger
January 16, 2013
Back to TopCommentsE-mailPrint

By Steven M. Badger
 

badger-steven Badger

In the first part of this column, I outlined the advantages and disadvantages of arbitration as an alternative to litigation in court and concluded that neither arbitration nor litigation is preferable in all situations. This second part provides more specific suggestions on when to use arbitration in certain high-risk, “bet-the-company” situations. Businesses must navigate litigation risks proactively to minimize exposure to large potential liabilities. Arbitration clauses can serve as a key element in such a strategy.

Use of arbitration to reduce risk of class actions

Class-action litigation in the United States poses one of the greatest liability risks to businesses. Even insignificant monetary claims that would never be worthy of litigation can, when aggregated in a class action, create substantial liability risks that are often difficult or even impossible to foresee. A class action is like a nuclear bomb in its capacity to inflict widespread devastation in a single salvo. The mere filing of a class-action lawsuit can compel risk-adverse companies to pay large sums to settle even meritless claims. Fortunately, in recent years, policymakers in Congress and jurists at the highest levels of the judiciary have worked to curb some of the abuses of class-action litigation.

One of the most significant of these developments enhances the ability of companies to reduce their exposure to class-action litigation by including carefully crafted arbitration provisions in agreements. In its 2011 decision in AT&T Mobility, LLC v. Concepcion, the United States Supreme Court overturned a series of lower court precedents that had barred enforcement of arbitration clauses against claimants seeking to bring class actions in court. Concepcion makes clear that arbitration agreements are fully enforceable even when the provisions would foreclose potential claimants from litigating or arbitrating their claims as a class action.

The advantage of limiting or avoiding class actions is too powerful to ignore. Where such risks are particularly acute, such as in consumer contracts and warranties, contracts should include well-tailored, mandatory arbitration and class-waiver provisions. However, the United States Supreme Court will be re-examining class waivers and mandatory arbitration during 2013, so legal developments could affect the utility of such contractual provisions.

Next month, the Supreme Court will hear whether a class-action waiver provision in a contract between retailers and American Express is enforceable when the claimants have shown that the expense required to vindicate their alleged rights under a federal statute individually (as distinguished from collectively in a class action) is cost-prohibitive. A federal Circuit Court ruled, both before and after Concepcion, that American Express’s mandatory arbitration provision was unenforceable because the only practical way for retailers to enforce their alleged rights under federal antitrust laws was through a class action.

The American Express case has the potential to undermine the utility of class-waiver arbitration provisions because the same argument by the retailers in American Express could be made in virtually any case brought as a class action. For that reason, it is unlikely the Supreme Court will adopt the retailers’ argument. During 2012, the Supreme Court repeatedly reaffirmed Concepcion and overturned efforts by lower courts to limit its impact. Yet, the American Express case certainly bears watching for those seeking to utilize mandatory arbitration clauses to limit their exposure to class actions.

The distinct advantages of litigation in other “bet-the-company” situations

In other commercial disputes with large potential liabilities, litigation in court is usually preferable to arbitration. Arbitration’s informality of processes, broad discretion in a single decision-maker or panel, and finality pose distinct disadvantages in major cases.

First, a judge is more likely than an arbitrator to terminate litigation before a trial or hearing by granting a motion to dismiss or motion for summary judgment. Such robust motion practice in courts of law offers companies defending large-exposure cases a relatively risk-free opportunity to challenge a claim on legal grounds before a trial. If a motion to dismiss or summary judgment is denied, that denial results in no liability or final decision on the merits. In contrast, testing such claims in arbitration is more likely to require an arbitration hearing and final decision on the merits. That means the outcome of arbitration often rides entirely on a single event – the arbitration hearing.

Second, when the stakes are very high, placing virtually unbridled discretion in the hands of an arbitrator or panel places the party at greater risk of individual bias, misperception or outright human error. In contrast, court procedures for case management, discovery, pre-trial motion practice and other aspects of the proceedings are refined in minute detail. Even more importantly, litigants in a court of law have the right to appeal an adverse decision. Thus, the losing side in litigation has recourse against the erroneous application and interpretation of contracts and law. In arbitration, the arbitrator’s decision generally is not subject to appeal even if it can be shown the arbitrator’s decision was in “manifest disregard” of the law.

An expanded right to appeal and other due process rights that would otherwise be denied in arbitration can be specifically incorporated into an arbitration agreement. However, as addressed in Part 1 of the column, such an approach dilutes the key benefit of arbitration in providing a swift and efficient dispute resolution mechanism. Rather than trying to reshape arbitration procedure to create appeal and other procedural rights, it is preferable simply to limit the scope of arbitration by amount or nature of claims so that larger and more complicated legal disputes must be resolved in litigation.

In sum, carefully crafted arbitration agreements offer businesses a viable way to control exposure to class-action litigation. Legal counsel should be consulted concerning the structure and scope of such agreements, however, to ensure such benefits are realized and that important due process and appeal rights are preserved in appropriate “bet-the-company” situations.•

__________

Steven Badger is a member of Benesch Friedlander Coplan & Aronoff LLP’s litigation practice group in Indianapolis and represents business clients in commercial litigation, arbitration and appeals. The opinions expressed are those of the author.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Indiana State Bar Association

Indianapolis Bar Association

Evansville Bar Association

Allen County Bar Association

Indiana Lawyer on Facebook

facebook
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

  2. As a lawyer who grew up in Fort Wayne (but went to a real law school), it is not that hard to find a mentor in the legal community without your school's assistance. One does not need to pay tens of thousands of dollars to go to an unaccredited legal diploma mill to get a mentor. Having a mentor means precisely nothing if you cannot get a job upon graduation, and considering that the legal job market is utterly terrible, these students from Indiana Tech are going to be adrift after graduation.

  3. 700,000 to 800,000 Americans are arrested for marijuana possession each year in the US. Do we need a new justice center if we decriminalize marijuana by having the City Council enact a $100 fine for marijuana possession and have the money go towards road repair?

  4. I am sorry to hear this.

  5. I tried a case in Judge Barker's court many years ago and I recall it vividly as a highlight of my career. I don't get in federal court very often but found myself back there again last Summer. We had both aged a bit but I must say she was just as I had remembered her. Authoritative, organized and yes, human ...with a good sense of humor. I also appreciated that even though we were dealing with difficult criminal cases, she treated my clients with dignity and understanding. My clients certainly respected her. Thanks for this nice article. Congratulations to Judge Barker for reaching another milestone in a remarkable career.

ADVERTISEMENT