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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. Do I have to hire an attorney to get co-guardianship of my brother? My father has guardianship and my older sister was his co-guardian until this Dec 2014 when she passed and my father was me to go on as the co-guardian, but funds are limit and we need to get this process taken care of quickly as our fathers health isn't the greatest. So please advise me if there is anyway to do this our self or if it requires a lawyer? Thank you

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  3. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  4. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  5. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

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