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Badger: Using arbitration clauses to reduce potential liability risk

Steven Badger
January 16, 2013
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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.•

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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.

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  1. Good riddance to this dangerous activist judge

  2. What is the one thing the Hoosier legal status quo hates more than a whistleblower? A lawyer whistleblower taking on the system man to man. That must never be rewarded, must always, always, always be punished, lest the whole rotten tree be felled.

  3. I want to post this to keep this tread alive and hope more of David's former clients might come forward. In my case, this coward of a man represented me from June 2014 for a couple of months before I fired him. I knew something was wrong when he blatantly lied about what he had advised me in my contentious and unfortunate divorce trial. His impact on the proceedings cast a very long shadow and continues to impact me after a lengthy 19 month divorce. I would join a class action suit.

  4. The dispute in LB Indiana regarding lake front property rights is typical of most beach communities along our Great Lakes. Simply put, communication to non owners when visiting the lakefront would be beneficial. The Great Lakes are designated navigational waters (including shorelines). The high-water mark signifies the area one is able to navigate. This means you can walk, run, skip, etc. along the shores. You can't however loiter, camp, sunbath in front of someones property. Informational signs may be helpful to owners and visitors. Our Great Lakes are a treasure that should be enjoyed by all. PS We should all be concerned that the Long Beach, Indiana community is on septic systems.

  5. Dear Fan, let me help you correct the title to your post. "ACLU is [Left] most of the time" will render it accurate. Just google it if you doubt that I am, err, "right" about this: "By the mid-1930s, Roger Nash Baldwin had carved out a well-established reputation as America’s foremost civil libertarian. He was, at the same time, one of the nation’s leading figures in left-of-center circles. Founder and long time director of the American Civil Liberties Union, Baldwin was a firm Popular Fronter who believed that forces on the left side of the political spectrum should unite to ward off the threat posed by right-wing aggressors and to advance progressive causes. Baldwin’s expansive civil liberties perspective, coupled with his determined belief in the need for sweeping socioeconomic change, sometimes resulted in contradictory and controversial pronouncements. That made him something of a lightning rod for those who painted the ACLU with a red brush." http://www.harvardsquarelibrary.org/biographies/roger-baldwin-2/ "[George Soros underwrites the ACLU' which It supports open borders, has rushed to the defense of suspected terrorists and their abettors, and appointed former New Left terrorist Bernardine Dohrn to its Advisory Board." http://www.discoverthenetworks.org/viewSubCategory.asp?id=1237 "The creation of non-profit law firms ushered in an era of progressive public interest firms modeled after already established like the National Association for the Advancement of Colored People ("NAACP") and the American Civil Liberties Union ("ACLU") to advance progressive causes from the environmental protection to consumer advocacy." https://en.wikipedia.org/wiki/Cause_lawyering

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