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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. Yes diversity is so very important. With justice Rucker off ... the court is too white. Still too male. No Hispanic justice. No LGBT justice. And there are other checkboxes missing as well. This will not do. I say hold the seat until a physically handicapped Black Lesbian of Hispanic heritage and eastern religious creed with bipolar issues can be located. Perhaps an international search, with a preference for third world candidates, is indicated. A non English speaker would surely increase our diversity quotient!!!

  2. First, I want to thank Justice Rucker for his many years of public service, not just at the appellate court level for over 25 years, but also when he served the people of Lake County as a Deputy Prosecutor, City Attorney for Gary, IN, and in private practice in a smaller, highly diverse community with a history of serious economic challenges, ethnic tensions, and recently publicized but apparently long-standing environmental health risks to some of its poorest residents. Congratulations for having the dedication & courage to practice law in areas many in our state might have considered too dangerous or too poor at different points in time. It was also courageous to step into a prominent and highly visible position of public service & respect in the early 1990's, remaining in a position that left you open to state-wide public scrutiny (without any glitches) for over 25 years. Yes, Hoosiers of all backgrounds can take pride in your many years of public service. But people of color who watched your ascent to the highest levels of state government no doubt felt even more as you transcended some real & perhaps some perceived social, economic, academic and professional barriers. You were living proof that, with hard work, dedication & a spirit of public service, a person who shared their same skin tone or came from the same county they grew up in could achieve great success. At the same time, perhaps unknowingly, you helped fellow members of the judiciary, court staff, litigants and the public better understand that differences that are only skin-deep neither define nor limit a person's character, abilities or prospects in life. You also helped others appreciate that people of different races & backgrounds can live and work together peacefully & productively for the greater good of all. Those are truths that didn't have to be written down in court opinions. Anyone paying attention could see that truth lived out every day you devoted to public service. I believe you have been a "trailblazer" in Indiana's legal community and its judiciary. I also embrace your belief that society's needs can be better served when people in positions of governmental power reflect the many complexions of the population that they serve. Whether through greater understanding across the existing racial spectrum or through the removal of some real and some perceived color-based, hope-crushing barriers to life opportunities & success, movement toward a more reflective representation of the population being governed will lead to greater and uninterrupted respect for laws designed to protect all peoples' rights to life, liberty & the pursuit of happiness. Thanks again for a job well-done & for the inevitable positive impact your service has had - and will continue to have - on countless Hoosiers of all backgrounds & colors.

  3. Diversity is important, but with some limitations. For instance, diversity of experience is a great thing that can be very helpful in certain jobs or roles. Diversity of skin color is never important, ever, under any circumstance. To think that skin color changes one single thing about a person is patently racist and offensive. Likewise, diversity of values is useless. Some values are better than others. In the case of a supreme court justice, I actually think diversity is unimportant. The justices are not to impose their own beliefs on rulings, but need to apply the law to the facts in an objective manner.

  4. Have been seeing this wonderful physician for a few years and was one of his patients who told him about what we were being told at CVS. Multiple ones. This was a witch hunt and they shold be ashamed of how patients were treated. Most of all, CVS should be ashamed for what they put this physician through. So thankful he fought back. His office is no "pill mill'. He does drug testing multiple times a year and sees patients a minimum of four times a year.

  5. Brian W, I fear I have not been sufficiently entertaining to bring you back. Here is a real laugh track that just might do it. When one is grabbed by the scruff of his worldview and made to choose between his Confession and his profession ... it is a not a hard choice, given the Confession affects eternity. But then comes the hardship in this world. Imagine how often I hear taunts like yours ... "what, you could not even pass character and fitness after they let you sit and pass their bar exam ... dude, there must really be something wrong with you!" Even one of the Bishop's foremost courtiers said that, when explaining why the RCC refused to stand with me. You want entertaining? How about watching your personal economy crash while you have a wife and five kids to clothe and feed. And you can't because you cannot work, because those demanding you cast off your Confession to be allowed into "their" profession have all the control. And you know that they are wrong, dead wrong, and that even the professional code itself allows your Faithful stand, to wit: "A lawyer may refuse to comply with an obligation imposed by law upon a good faith belief that no valid obligation exists. The provisions of Rule 1.2(d) concerning a good faith challenge to the validity, scope, meaning or application of the law apply to challenges of legal regulation of the practice of law." YET YOU ARE A NONPERSON before the BLE, and will not be heard on your rights or their duties to the law -- you are under tyranny, not law. And so they win in this world, you lose, and you lose even your belief in the rule of law, and demoralization joins poverty, and very troubling thoughts impeaching self worth rush in to fill the void where your career once lived. Thoughts you did not think possible. You find yourself a failure ... in your profession, in your support of your family, in the mirror. And there is little to keep hope alive, because tyranny rules so firmly and none, not the church, not the NGO's, none truly give a damn. Not even a new court, who pay such lip service to justice and ancient role models. You want entertainment? Well if you are on the side of the courtiers running the system that has crushed me, as I suspect you are, then Orwell must be a real riot: "There will be no curiosity, no enjoyment of the process of life. All competing pleasures will be destroyed. But always — do not forget this, Winston — always there will be the intoxication of power, constantly increasing and constantly growing subtler. Always, at every moment, there will be the thrill of victory, the sensation of trampling on an enemy who is helpless. If you want a picture of the future, imagine a boot stamping on a human face — forever." I never thought they would win, I always thought that at the end of the day the rule of law would prevail. Yes, the rule of man's law. Instead power prevailed, so many rules broken by the system to break me. It took years, but, finally, the end that Dr Bowman predicted is upon me, the end that she advised the BLE to take to break me. Ironically, that is the one thing in her far left of center report that the BLE (after stamping, in red ink, on Jan 22) is uninterested in, as that the BLE and ADA office that used the federal statute as a sword now refuses to even dialogue on her dire prediction as to my fate. "C'est la vie" Entertaining enough for you, status quo defender?

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