Business Conflict Blog
A recently posted paper, reporting on the results of an empirical study, reveals unsettling facts about consumer understanding of arbitration contracts. Titled “Whimsey Little Contracts” With Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, the paper explores the extent to which consumers are aware of, and understand the effect of, arbitration clauses in connection with their purchases of goods and services.
The authors report “a profound lack of understanding about the existence and effect of arbitration agreements among consumers.” Fewer than half of those surveyed recognized that a sample contract included an arbitration clause, and more than half of those respondents believed that the clause not deprive them of a right to seek judicial redress.
So in whose book is this a contract?
This work — reported by St. John’s Law professors Jeff Sovern, Elayne E. Greenberg, Paul F. Krigis and Yuxiang Liu — deprives any court of the ability to rely upon classic contract theory to enforce these “agreements” by analogy to arbitration agreements that are entered into intentionally between merchants, in collective bargaining agreements, or in other contexts. Put simply, the authors of this paper demonstrate that, as a matter of provable fact, one party to these consumer agreements either doesn’t know that he agreed, or doesn’t know what he agreed to, or (most frequently) both.
The study involved an online survey of 668 consumers. Each was shown a credit card contract with an arbitration clause, and asked eight questions concerning it and about “an imaginary contract containing a ‘properly-worded’ arbitration clause.” The arbitration clause in the contract was printed in bold type and portions appeared in italics and ALLCAPS. The arbitration section was preceded by the sentence “It is important that you read the entire Arbitration Provisions section carefully.” Some findings:
- Only 43% of respondents recognized that the sample contract contained an arbitration clause. A majority of respondents either thought that they had not agreed to arbitrate, or did not know.
- Only 14% of respondents realized that the contract banned litigation in court.
- Less than 9% realized both that the contract had an arbitration clause, and that it would prevent them from suing in court.
- More respondents thought an arbitrator’s decision was not final than thought it was. Less than a fifth realized that the arbitrator’s decision would in fact be final.
- More than 70% failed to realize that the contract prohibited class claims.
The paper contains a very tidy and responsible review of the history of arbitration and the development of American arbitration law. It also includes — most helpfully for the purposes of the survey — data on how few consumers even read sellers’ statements of terms and conditions, much less comprehend them. One study of 45,091 households found that only one or two shoppers out of every thousand access the license agreement when purchasing software. And were they to do so, they would have their work cut out for them; many agreements are of daunting length. Write the authors, “the iTunes contract is reportedly 32 feet long, even when printed in 8 font type.”
The import of this study seems simple and direct: There may be legal foundations for binding a consumer to an agreement to arbitrate in connection with a purchase, but consent is not one.
And as the Supreme Court held in Volt Information Sciences v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 479 (1989), “Arbitration under the [Federal Arbitration] Act is a matter of consent.”
Following up on a prior post, two recent cases have tested the enforceability of “agreements” that one party unilaterally propounded and the other party had no idea existed. Though the Ninth Circuit found both to be non-binding, the logic in both cases implies that knowing consent — an element of contract law that is emphasized in law school as fundamental — seems no longer to be a requirement in “agreeing” to arbitrate future disputes.
In Nguyen v. Barnes & Noble, (CTA 9 August 18, 2014), Kevin Nguyen purchased two Touchpads on Barnes & Noble’s website. The order was cancelled “due to unexpectedly high demand” and Nguyen filed a suit in California state court on behalf of himself and others similarly situated, alleging that the company had engaged in deceptive business practices and false advertising. The company removed the action to federal court and moved to compel arbitration.
The second opinion, Knutson v. Sirius XM Radio, (CTA 9 November 10, 2014), involved the purchaser of a Toyota vehicle that included a 90-day subscription to Sirius XM satellite radio. Upon purchasing the vehicle, Knutson began getting telephone calls from Sirius and an unsolicited mailing that included a purported “Customer Agreement.” He brought a class action suit alleging violations by Sirius of the Telephone Consumer Protection Act. The district court granted a motion to compel arbitration, based on a provision in the “Customer Agreement” that Sirius had unilaterally drafted and unilaterally sent to Knutson. The “Agreement” provided, among other things, that Knutson would be bound thereby unless he took action to the contrary, and that Sirius could modify the terms of the Agreement by “unilateral amendment.”
Sirius’ Agreement contained a provision requiring Knutson to waive the right to go to court, waive the right to assert claims on a class basis, and submit to binding arbitration. Knutson ignored the Agreement because he did not think he had entered into any legal relationship with Sirius when he purchased his Toyota. The Ninth Circuit agreed, and reversed the district court’s order compelling arbitration.
“Applying well-settled principles of contract law,” the court determined that Knutson had never assented to Sirius’ Customer Agreement. In particular, the court held that Knutson had evidenced no “outward manifestations of consent” that would lead to the conclusion that, as offeree, he had consented to Sirius’ offered terms. Knutson reasonably thought he had entered into a contract only with Toyota and was under no obligation to open, read, or act upon notices provided to him by Sirius. “There was no evidence that Knutson purchased anything from Sirius XM, or ever knew that he was entering into a contractual relationship with [it].”
The legal basis of the court’s conclusion is one that most first year law students would recognize: “A party to a contract cannot be held to the contract’s arbitration provision where the plaintiff does not know a contract exists.”
So far so good. But are we really saying that, if Barnes & Noble repositions its “Terms and Conditions” button, a “clickthrough” purchaser of a book knows that she’s entered into an agreement to arbitrate? Or, if Sirius adjusts its marketing a bit, that the purchaser of a car could be obligated to the radio signal supplier? Has the law of Section 2 of the FAA so devolved that not only is no written consent required, but “clicking” a button or turning on a radio constitutes consent? Is buying a Toyota, or buying a watchband, or visiting a website, an agreement to waive class action rights?
Two questions present themselves: What is sufficient to evidence contractual consent, and how does one determine whether a party knows what she is consenting to? The second question may be framed: “Say you present a purchaser of a gallon of milk with a piece of paper that says that, if she leaves the store with the milk, she must arbitrate any claim against the seller. Does she know what ‘yes’ means?”
That question will be discussed in distressing terms in a subsequent post.
The College of Commercial Arbitrators is perhaps the definitive authoritative body for best practices in commercial arbitration from the perspective of practitioner arbitrators. Its promulgated standards are widely respected and its leaders are leaders of leaders.
It is therefore with great satisfaction that I note that the CCA has selected its first female President, Deborah Rothman.
Deborah’s being the first female President of this prestigious organization is of a piece with her life and career. She was the first person in her family to go to college and, therefore, to go to law school and, therefore, to practice law. She was a segregation-breaker as a participant in the first-ever small-scale exchange of college students to test the impact of coeducation on their single-sex schools, and was one of 10 Vassar undergrads to spend second semester of sophomore year at Trinity.
She transferred to Yale College as one of the first undergraduate women to matriculate in the College. Her class was the first coed graduating class in Yale’s history. She believes, but cannot prove, that she was the first Yale College graduate to work as a cocktail waitress in the French Quarter.
Continuing this pattern, while studying law at NYU Deborah was one of the first law students to participate in a 4-year joint JD/MPA program with the Woodrow Wilson School at Princeton, garnering one of the first joint JD/MPA’s from the 2 schools. Some years later she co-created the first-ever consumer show for the pregnancy-through preschool market: “Baby Fair.” Adopting a full-time career as a mediator/arbitrator in 1991, she says that she cannot claim to have been one of the first. But I am hard-set to name one who came before.
So cheers to Deborah. And with no disrespect, let’s join conductor Marin Alsop, who, speaking last year from the podium as the first woman to conduct the “Last Night of the Proms,” yearned for the day when there would be no more “firsts” for women, and dedicated the concert to “the second, third, fourths, fifths, hundredths to come.”
As recently as 1995, the Supreme Court observed, in First Options of Chicago v. Kaplan, that arbitration was a creature of contract: “[A] party who has not agreed to arbitrate will normally have a right to a court’s decision about the merits of its dispute.”
Yet what constitutes an agreement to arbitrate seems to be very much in play since First Options was decided. In that case, owners of an investment company were held to have agreed to arbitrate disputes involving that company, but were held not to have agreed to arbitrate disputes in their personal capacities. The analysis parsed the distinct legal capacities of informed and sophisticated parties, and determined that the same people consented to arbitrate in one capacity, but did not consent to arbitrate in another — and that they had done so intentionally, strategically and with a particular purpose in mind that the courts were bound to respect.
These days, no such informed, strategic and knowing consent to arbitrate is required. Nor is a written agreement required. Consent to arbitration may be found by virtue of an individual’s going to work in the morning. Or it may be found in the act of using a credit card to buy carrots at the A&P.
It can even be found by clicking on a “Buy With 1-Click” button on Amazon (the logic being that the click signifies not just an intent to buy the used watchband advertised on the website, but also informed consent to Amazon’s “Terms of Agreement,” which include a non-negotiated, non-negotiable, obscure, unilaterally propounded waiver of certain rights set forth in consumer protection laws and the Federal Rules of Civil Procedure).
Some call this kind of arbitration agreement “cram-down.” Some call it “forced.” Everyone calls in “enforceable.” But none dare call it an “agreement.” I know of no law school that teaches Amazon’s Terms of Agreement in Contracts class.
The heart of the problem, as Tom Stipanowich keeps trying to remind us, is our shared notions of fairness. The notion that your intention in buying carrots at the grocery store, or in arriving at work, is equivalent to an intention to waive legal rights if you later discover that the store is price-fixing or the employer is discriminatory, strikes many, many people as simply unfair. And when that happens, both arbitration and the law itself are undermined.
With this background, comes now the California State Legislature and Governor Brown, who on September 30 of this year enacted and signed a bill titled AB 2617. It provides in part:(1) A person shall not require another person to waive any legal right, penalty, remedy, forum, or procedure for a violation of this section, as a condition of entering into a contract for goods or services…. (2) A person shall not refuse to enter into a contract with, or refuse to provide goods or services to, another person on the basis that the other person refuses to waive any legal right, penalty, remedy, forum, or procedure…. (3) Any waiver of any legal right, penalty, remedy, forum, or procedure for a violation of this section, including the right to file and pursue a civil action or complaint…. shall be knowing and voluntary, and in writing, and expressly not made as a condition of entering into a contract for goods or services or as a condition of providing or receiving goods and services. (4) Any waiver of any legal right, penalty, remedy, forum, or procedure…. that is required as a condition of entering into a contract for goods or services shall be deemed involuntary, unconscionable, against public policy, and unenforceable. (5) Any person who seeks to enforce a waiver of any legal right, penalty, remedy, forum, or procedure for a violation of this section shall have the burden of proving that the waiver was knowing and voluntary and not made as a condition of the contract or of providing or receiving the goods or services. It has been noted that the word “arbitration” does not appear in this legislation. The Supreme Court’s lacunae in Concepcion notwithstanding, the Federal Arbitration Act plainly exempts from its scope state-law defenses to agreements that are based on “such grounds as exist at law or in equity for the revocation of any contract,” and this state law seems to speak to any contract, not just a contract to arbitrate. Now let’s see whether California can protect its citizens from “gotcha” arbitration “agreements” or not.
The October 2014 issue of Dispute Resolution International (the journal of the Dispute Resolution Section of the IBA) features an excellent article by Chicago mediator/arbitrator/attorney Paul Lurie and Swiss/Israeli mediator/attorney Jeremy Lack on “Guided Choice Dispute Resolution Processes: Reducing the Time and Expense to Settlement.” As the title suggests, the logic of the piece stems from the fact that nearly all business disputes are resolved, and that savings are therefore best realized by reducing the time between commencement to resolution.
The starting point for the process that Lurie and Lack recommend is also refreshingly practical: They address disputes at the point of impasse, not at the point of emergence. We are dealing, after all, not with disagreements, but with disputes in which “the parties are deadlocked and unable to reach agreement.” After the threshold decision to engage a facilitator to assist, the first task of that neutral third party is to assist the parties in diagnosing why they were unable to resolve that matter themselves. In that process, “they key protagonists and the stakeholders can take a step back and gain a better mutual understanding of what underlies their past impasses, and how to adjust the settlement process to prevent and overcome further impediments to settlement.”
The process to move forward is, then, a function of the diagnosis. Mediating a narrow negotiation is different from — and can be more expensive than — processes that arise from option-generation with the informed guidance of the facilitator. Collaborative discussions, targeted information exchange, reference of discrete legal issues to narrowly-tailored adjudicative processes, all are custom-selected by the parties in order to overcome obstacles that they themselves have identified. And even if negotiations are suspended during these events, the facilitator remains available to advise, coach, transmit information, and assist either or both of the parties in roles that they themselves define.
The Guided Choice analysis is a valuable one, not only for its simplicity but for its continual reminder that we are dealing, not with a “conflict,” but with a settlement effort that has come to the point of impasse. Identifying the reasons for that impasse, and overcoming obstacles to agreement, defines the role of the facilitator. “By using Guided Choice, the parties can safely explore how to make the best use out of each of the dispute resolution options available to them, and possibly combine them, to reach faster, cheaper and better outcomes.” Indeed, the authors suggest that “the best way to customize arbitration is by using a facilitator as a process mediator who can work independently and confidentially with the parties and the tribunal.”
On Wednesday October 22, 12:50 – 2:15 pm, New York Law School’s ADR Program is offering a reprise of a very successful panel from last April’s ABA Business Law Section meeting in Los Angeles: “Calling All Deal Lawyers: Why Transactional Attorneys Should Get Involved in Dispute Resolution.”
The program features James Freund, Mediator and former partner, Skadden, Arps, Slate, Meagher & Flom LLP; Richard Hall, partner, Cravath, Swaine & Moore LLP; Joan Stearns Johnsen, Mediator and Arbitrator; and Richard Lutringer, Mediator and former partner, Schiff Hardin LLP. The program description notes:
Transactional attorneys are highly trained, highly skilled, and highly experienced in negotiating complicated and sophisticated agreements. Yet too often, when something involving those agreements goes amiss, deal lawyers are not called upon to help resolve the problem. Why is it that, when litigation is threatened or even commenced, the lawyers who know the deal, know the documents, and know the players are not involved in solving the problem? Is it time to give clients more value by getting deal lawyers involved in the resolution of disputes arising from their deals? A light lunch will be served prior to the program.
CLE credits are offered, lunch is served from 12:30 pm, the price is right at $35, and reservations can be made at www.nyls.edu/CallingAllDealLawyers.
Mediation in Italy has for many years seemed like teenage sex — more people talk about it than actually do it, and those who do it, do it poorly.
And it has also been a target for humor, compassion, anti-lawyer spleen-venting, and constitutional mish-mash. It seems that every few months there is another statute, constitutional challenge, administrative edict or judicial pronouncement.
Our good (and good-humored) friend Giuseppe De Palo has directed our attention to a new article on the topic, summarizing the status of things (at least for now — don’t blink). It opens with a quotation from Machiavelli and closes with a comment citing Shakespeare. So you know it’s erudite, at least. And coming from Sr. De Palo, it can hardly be more authoritative.
Christian Fabian of Mayer Brown made a valuable contribution to a discussion at the ABA Business Law Section last month on collaborative legal practices in merger, dissolution and other business contexts. Click here for a posting on that excellent panel.
He has recently written an excellent article titled “Breaking Up is Hard to Do: Is Collaborative Law and Option?” Readers are encouraged to review it for some out-of-the-box, in-the-money ideas on handling post-closing M&A disputes .
Emma Ewart of the International Mediation Institute writes:
Earlier this year we circulated the article ‘Time for Another Big Bang in Alternative Dispute Resolution’, by Michael Leathes and Deborah Masucci: http://imimediation.org/global-pound-conference, proposing a new conference to wake up the field of ADR. We appreciated your words of support in response to that article, and before the official invitation goes to the wider IMI community, we would like to let you know of the upcoming convention ‘Shaping the Future of International Dispute Resolution’, which is the first planned in a series of conferences.
The official invitation can be seen below. All information plus a registration link can be found at:
We hope that you might be able to join us at this ground-breaking interactive convention!
A host of cooperating organizations are joining this effort. Unfortunately, the invitation did not include an offer to appear as a speaker, and worse yet was not accompanied by a round-trip ticket to London. Nevertheless I urge those who can, to attend, and to let us know how it went.
The third and final part of the morning-long Commercial Finance and Dispute Resolution Symposium at the recent ABA Business Law Section Annual Meeting was a discussion, among audience and experts, of some hypotheticals implicating the obligations of attorneys who negotiate dispute resolution clauses and who represent clients in ADR procedures.
The experts were Stan Sklar of Chicago and Alex Wald of Boston’s Cohen and Gresser. The audience included some of the sharpest minds in commercial negotiation and dispute resolution. And the hypos brought out some clever analysis, even if not every one led to clarity. The scenarios, and a capsule of the discussion of each, follow.
Tom Transactional is negotiating a multi-million deal for Clyde Client. Counsel for the other side suggests a “stepped clause” that requires mediation as a first step and then arbitration thereafter. Tom asks his partner Larry Litigator for advice. Larry says no way, mediation is worthless, all you do is provide cheap discovery without court control. Same with arbitration, I want court rules, I want discovery, I want right of appeal. So the final contract excludes any dispute resolution procedure. Five years later, the deal is in shambles. The parties have been in court for the past two years. Clyde Client tells Tom that he now understands that, if they had gone the arbitration route as proposed, the case would be over by now — and that Tom never really explained the rationale behind not doing so. Clyde’s new lawyer, Sarah Sue-Me, will be filing a malpractice action against Tom and his Firm. Did Tom and Larry breach their duty to Clyde?
The audience approached this as a dual question: whether any ethical obligation was breached, and whether the firm opened itself to malpractice, which is a different legal standard. The experts noted that very few jurisdictions expressly require counsel to advise a client facing the prospect of litigation of non-litigation alternatives. And more than one attendee noted that advice was sought and given — the fact that it may be contested with hindsight doesn’t give rise to a challenge to its validity at the time. In other words, this is not a case of neglect. Nevertheless, the group agreed with the experts that best practices would dictate advising a client of alternatives to litigation in a manner somewhat more nuanced than Larry Litigator did here.
A lender engages a mediator pursuant to an arrangement by which the lender is obligated to pay the mediator’s services. The lender proposes that the mediator’s fee be some fraction of the amount recovered during the mediation. Is the offer ethically proper? May the mediator ethically accept? What about if both parties agree to split the fee equally, and both parties also offer the mediator a 30% “incentive premium” in the event that a deal is struck by the mediator prior to close of business on Friday (i.e., a “success fee”)?
At first this was greeted as the opportunity to shoot ducks in a barrel: No one even remotely entertained the propriety of either offering or accepting a mediator fee that was a function of the amount collected by one of the parties. A nicer question arose, however, as to a “kicker” to a mediator’s fee, that would be based on whether an agreement was reached — any agreement — by a certain time. Many thought it gave the mediator an unhealthy incentive to push reluctant parties to agree to a deal that is not in their best interests. Yet it was pointed out that Rule 4.5.5(c) of the CPR/Georgetown rules for attorneys as third-party neutrals permitted such an arrangement, as long as the parties knew what they were getting themselves into. Put otherwise, principles of informed party autonomy dictate that a neutral is not rendered unethical by accepting to do what informed parties ask her to do, the way they want her to do it.
Hearings have closed and Panel cannot agree on the interpretation and applicability of a legal issue. A Panel member in a large law firm volunteers to have her summer associates do some research on the issues. Is there an ethical problem with arbitrators’ conducting independent legal investigation, and relying upon it in framing their award?
This is a topic on which there is much heat but not all that much light. Binding outcomes based on law that the parties did not have the opportunity to brief seemed to most of the audience to be something to be avoided. But then so is an outcome based on law that the arbitrators, but not the attorneys, know to be inapplicable or overruled. The consensus was that the panel should alert the parties to their concern on the question, and direct preparation of briefing addressing that concern, but that they should not go off and draft an award that is based on their own legal research.
Midway through an arbitration a young associate informs you that she has determined that the sole arbitrator’s law firm had represented an affiliate of the adversary party four years ago, before the arbitrator joined the firm. This had not been previously disclosed. Do you raise it at the next hearing, even though the arbitration seems to be going well for your client? If you decide not to press the issue, and an award issues against your client, may you ethically raise the undisclosed conflict in a motion to vacate?
Readers of this blog know that this is a scenario about which I have concerns. Expert Stan Sklar noted that the ADR providers (AAA, CPR, JAMS, etc.) have developed new rules concerning ongoing disclosure requirements by arbitrators, but the audience seemed to agree that the disclosure requirements of counsel who has learned of a possible conflict are not so clearly regulated. Nor do doctrines of waiver or laches dispose of the problem. The group left this one puzzled and uncertain.
The parties have come to an agreement in mediation, the lender taking a steep discount in light of the borrower’s persistent assertions of inability to pay. While the lender and his counsel are outside the room preparing copies of the MOU, the debtor (who has represented himself) shows the mediator photos of the McMansion he is building on the lakefront. The mediator concludes that the deal – predicated on the debtor’s indigence — is unfair at best, fraudulent at worst. Does the mediator have any ethical duty to act? Does the answer change if the debtor is represented by counsel? Does the answer change again if the mediator is a member of the bar in a jurisdiction imposing a reporting duty?
The experts agreed that the variation in which the party is represented imposes on that attorney a requirement to withdraw in the event of fraud. But a surprising number of the audience also advocated that the mediator should also withdraw, despite the fact that the withdrawal would necessarily be pretty “noisy.” Expert Wald stated what was on my mind: How does the mediator know it’s fraudulent? How does the mediator know who built it with whose money and what entity owns it and what entity is the debtor and how it is encumbered and on and on and on. Moreover, whose job is it to run an asset search on the debtor before agreeing to forgive a debt? Is the mediator there to prevent the consequences of sloppy lawyering? And who says it’s sloppy? Maybe they ran the asset search and know perfectly well what they’re doing. Who knows how important it is for the lender to get the default off its books? A minority (and count me in) felt strongly that mediators are not enforcers of either the law, or ethics, or morality, but rather facilitators of consensual — even if unwise — agreements between parties who make decisions — even if unwise — on their own accord and for their own reasons.
John Levitske of Duff & Phelps, who serves as Vice-Chair of the ABA Business Law Section’s Dispute Resolution Committee, assembled a provocative panel in Chicago on the topic: “Whether Collaborative Law Can be Used to Effectively and Efficiently Resolve Post-Merger and Acquisition Disputes.” He described it as an effort to articulate the intersection between a little-known technology and a felt business need.
Paul Faxon of Massachusetts posed some introductory questions. Who should be the “sovereign” of the dispute resolution process — the client, the neutral or the attorney? When in the life of the dispute should it occur? Should your attorney’s interests be aligned with yours? Should the neutral be a subject expert? Are key relationships and reputation valuable as pertains to this particular deal? Are clients aware of the breadth of ADR options available?
Anne Shuttee explained that Collaborative Law is a tested method, first used in American family law but now accepted in many jurisdictions. The International Academy of Collaborative Professionals noted that 86% of matters using the technique were settled, and more than 80% were satisfied with the costs and the process. It is a joint problem-solving process (and so many business issues are joint problems) that is voluntary in which lawyers are committed to find a resolution, and are not only not retained to prepare for litigation, but are contractually disqualified from pursuing litigation in the event that settlement effort fail. Thus the interests of lawyer and client are both aligned towards early resolution and resources are committed to settlement as a primary goal, rather than a tangential detour of a litigation effort.
Meetings involve clients directly. They are conducted pursuant to agenda, prepared, off-the-record, and confidential. There may or may not be a facilitator at the meetings. Concerns and goals are identified and articulated; relevant information is gathered, including from jointly engaged experts whose reports are not prepared for use in litigation; settlement options are developed and assessed for viability; and a selection is made. If the process fails, clients can engage trial lawyers and negotiate the utility of any of the information gained.
Paul Faxon used this process in business disputes, successfully. He said that the use of a joint expert alone can advance the problem-solving effort and substantially reduce costs. Parties can include certain of these steps as provisions of a deal agreement, anticipatorily, rather than waiting for a dispute to arise.
Christian Fabian of Mayer Brown is an M&A attorney who came to the concept of collaborative processes in that context. Fabian identified five buckets of private M&A disputes: Breaches of reps and warranties; purchase price adjustment disputes; disputes arising from expected earn-outs indicated prior to the deal; breaches of obligations post-closing (such as non-competes); and claims of intentional nondisclosure/misrepresentation (fraud). Some of these are susceptible to collaborative problem-solving but others (such as breach of a non-compete or fraud) are not, in Fabian’s view. Issues such as technical compliance with GAAP might be amenable. Purchase price disputes could well be better resolved through collaboration than adversarial arbitration. Dissolution of joint ventures seem highly suitable – they involve, at heart, a business divorce. Fabian did have hesitations about the concept of disqualification of counsel from trial work, or ethical considerations that may be needed distinct from those that now exist. He also doesn’t assume that the parties will always act in good faith, and wondered what the consequences may be from failure to do so.
The consequences of disqualification were pursued by the audience. How does it work that an M&A firm can act as a collaborative lawyer, knowing that his firm would have to withdraw? Or should a different firm be brought in to do the collaborative process, with the firm retained as M&A and also as litigator.
Christine Castellano, General Counsel of Ingredion Incorporated, noted that her company doesn’t necessarily choose her deal lawyer’s firm as litigators, and would likely retain a collaborative specialist to collaborate. Her company has grown almost exclusively through acquisitions. Without realizing it, she already engages in these practices. Litigation is a loss and arbitration not much more attractive. The company was already building “executive resolution” into its protocols, because the company relies on relationships. Joint experts are often used outside the United States, often appointed by the court, so its use was also familiar to Castellano.
Anthony C.S. Pagano of Royal Bank of Canada echoed this experience. His company seldom enters ripe post-merger disputes because executive negotiation is by far the most effective means to resolve business issues. By contrast, non-competes or restrictive covenants tend not to be negotiated because of a lack of shared interest or trust. Questions of future pay-outs and joint ventures are critical to negotiate because the relationship going forward is so important. The disqualification procedures of collaborative law do raise an issue for Pagano, increasing cost of bringing another firm on board in the event of failure of the negotiating process.
Melissa K. Bjella of CF Industries Holdings agreed that there are concepts of collaborative law that are almost intuitively observed and practiced – using a “time out” for business people directly to work on terms of resolution, or the informal use of joint experts. Disqualification posed problems and inefficiencies for her, too. For one thing, collaborative lawyers’ interests are not so aligned as one would think; the collaborative lawyer has a high incentive to settle on any terms and the client wants a settlement only on acceptable terms. The panel discussed why the disqualification principle needed to be “hard-wired” for the process to be successful. Ms. Shuttee said that, at least in the case of family law, disqualification poses an obstacle for parties to leave the table and go to court. By contrast, a company wants to control its business, not to achieve wins, and sitting with a collaborative counselor is often more promising than sitting with a litigator.
There may be a conceptual boundary to the applicability of collaborative law to business deals. Disputants in family law have shared interests that can almost always be satisfied without litigation as a fallback. By contrast, business disputes ought to be able to be settle by skilled negotiating and counseling lawyers, without the added burden and cost of a quadripartite agreement disqualifying counselors and adding costs and settlement pressures.
The second offering of the three-part Symposium on ADR and Commercial Finance at the ABA Business Law Section Annual Meeting addressed disputes arising in long-term, high-budget, tightly-scheduled, deeply interdependent projects — like building an airport — where “divorce is not an option.” According to Deborah Mastin, the issue is how clients manage unplanned adverse events that occur during projects, mitigate their impact and resolve the issues they present.
Was the unplanned event discussed with experienced people prior to the project’s beginning? Was there an agreement on how unanticipated events will be handled with a minimum of time? Delay in a construction project like an airport can cost hundreds of thousands of dollars a day, so the response to problems that threaten delay in the work must be timely and the solution must be accepted by everyone.
The Dispute Board is the appropriate engine to facilitate both dispute avoidance and dispute mitigation. Designees to serve on a Dispute Board must know both the industry and the particular project. Lawyers bring less to the table than industry veterans to. So well-recognized are the benefits of a Board that some players won’t bid on a project that doesn’t have a DRB. World Bank has required a DRB since 1995.
Success depends upon the people and the process. People need to be neutral trained, available, authoritative, and respected. The heart of the process is two contracts – one between parties and the other between parties and neutrals. The first sets forth both formal and informal expectations. In regular informal periodic meetings, all discussions should be considered confidential settlement negotiations, with no minutes taken, in order to allow frank discussion of problems. The Board facilitates a team approach to addressing the unexpected occurrence. The team meets with each other weekly, and meets with the DRB monthly.
Members of the team buy into a solution quickly; the added cost of the cure usually is substantially less than the added cost of both cure and argument and delay. In its meetings, the Board is free to raise issues that the parties haven’t raised, if addressing them will save money. The meetings are not restricted to contractually bound parties: Lenders, engineers, tenants, and other stakeholders should be invited to participate in meetings because they are impacted by delay and added costs that may flow from the problem.
Mastin emphasized that this is not a claims adjudication process; it’s a way for critical players in the project to get informal guidance — or formal decisions – needed to keep the project on track. The Board can also conduct formal arbitrations, but does so without sworn presentations or cross examinations, and seldom attorney engagement. A binding or nonbinding decision may ensue, depending on what the parties seek. DRBs present a project management process, not an adjudicative process.
The tantalizing question was then raised by Tom Walsh, of Brown & Walsh in Haverhill, MA: May this approach have application for commercial finance, including real estate finance? Indeed, is this perhaps a model for managing disputes that arise from all sorts of interdependent, long-term enterprises subject to project management, in which all parties will do well as long as the project is not diverted by prolonged adjudication of unanticipated contingencies?
The ABA Business Law Section has turned its back on the August Annual Meeting of the Association and is now convening its own Annual Meeting in Chicago a month later. It is a resounding success by any measure, but certainly from the perspective of the Business Law Section: Over 1,500 attendees, 500 of whom are first-timers.
One of the many ambitious and rewarding CLE offerings at the Section Meeting was a three-part Symposium on ADR in Commercial Finance. It was an extraordinary example of collaboration among three committees in a usually highly silo-ed organization: Commercial Finance, Project Finance and Development, and Dispute Resolution.
The first program addressed “Dispute Resolution in Commercial Finance: Protecting the Value of the Deal.” Each speaker addressed a particular aspect of a transaction and the challenges of problem-solving.
Pamela Corrie, Head of Global Litigation for GE Capital, addressed the front end of the deal. She reported that, when negotiating a dispute clause, the case for arbitration is by no means clear. Her company monitored 25 cases on an arbitration track and 25 similar cases on a conventional litigation track, and the results were hardly conclusive: arbitration was no cheaper, no faster, and sometimes actually slower. However, in arbitration she could select own neutral, and that has substantial value. On the other hand, the absence of appeal of a wrongly analyzed award has risk.
So the choice of adjudicative process is a function of the nature of the risk/reward analysis that is particular to the deal. For example, in matters where a commercial client of longstanding is involved, preserving the relationship is easier through ADR – when it is done right. Ms. Corrie has 12 businesses to serve, and drafts arbitration clauses specifically to meet needs of each and the nature of the interests of the counterparties involved.
The culture of the client also influences the level of risk aversion and the attitude towards conflict management. Outside counsel can create opportunities by offering education and training on ADR and assisting transactional lawyers to analyze and draft clauses. Nevertheless, one approach will not fit all needs. The solution needs to be appropriate to deal size, client, counterparty, etc. Competent drafting can avoid pitfalls, but the drafter must understand what that particular client has, wants and needs.
Judith Miller, of Jaffe Raitt Heur & Weiss, addressed what happens when the deal, now underway, starts to crater. By this time the lender has a history with a borrower and the lender wants some assurances before entering into a forbearance agreement. Arbitration or mediation both have a place but, again, individual assessment of needs and interests is critical to the process. Confidential dispute resolution such as arbitration can be good if there is sensitivity to the risk of publicity, or concern about lender liability. Arbitration may, but is not necessarily, be less costly; sometimes is more costly because those in control of the dispute process want a robust procedure yielding a reliable outcome, because it can’t be appealed. There is always uncertainty on the merits, whether issued by a judge or an arbitrator; but you have certainty on the process, including the qualifications of the adjudicator, and that is why many prefer arbitration.
If troubled loan ends up in Chapter 11, the viability of an arbitration clause is subject to bankruptcy court’s determination whether it is a core issue. Even if an arbitration is alreadyb in process at the time of bankruptcy filing, there is no assurance that it will continue. By operation of Bankruptcy Rule 9019 it can continue, but other creditors may be prejudiced and may object, particularly if it will impact on the disposition of entire debtor’s assets. By contrast, mediation has been proven very effective in bankruptcy proceedings, most recently in Chapter 9 municipal filings.
Stuart Widman, of Miller Shakman & Beem, addressed how to select a neutral, and how to get the most out of a neutral. If the idea is to protect the value of the deal, then mediation is preferred. Arbitration tends to tear the parties apart; it yields a binary outcome; and it’s not good for solving business issues. Particularly if there is an intention to go forward with the deal, then the agreement can be modified through mediation rather than enforced through arbitration.
Key characteristics of good neutral are authority, management skills and a willingness to make the call. Two most important things in assuring useful and practical ADR processes are the selection of the neutral and the drafting of the clause, so transactional lawyers must have skills in papering in anticipation of the deal’s going sour.
Widman agreed that not every arbitration is quicker and less expensive. But he believed that whether it is depends on the parties and their counsel. If the parties insist upon a 3-person tribunals, full discovery, and so on, then the process will be designed for what the parties wanted. And it can be tweaked once the process starts, and costs are getting out of hand. Indeed, every aspect of arbitration can be modified or created; Widman reported an arbitration agreement providing that rulings of law that are made by the sole arbitrator can be reviewed by a second “appellate” arbitrator, but findings of fact could not.
Widman closed the session with a welcome reframing of the familiar acronym: ADR = Appropriate Deployment of Resources. Whether in arbitration or mediation, the neutral must respect the parties’ decision how to deploy their own resources.
Tom Stipanowich has posted a new article, “Managing Construction Conflict: Unfinished Revolution, Continuing Evolution,” at the Pepperdine Law Library’s Legal Studies Research Paper Series. Stipanowich is a trained architect, an experienced construction lawyer, and a very experienced construction arbitrator, and his article speaks authoritatively on the past 20 years of change in construction dispute practices.
He concludes that the promise of innovation that so dominated the field 20 years ago — DRBs, statutory “adjudication” in the UK, collaborative contractual platforms, real-time on-site conflict resolution — has failed to take hold in a way that has fundamentally altered the way disputes are handled. In the past five-year period, mediation is down and arbitration is way down. And the cause? The industry has “lawyered-up,” concludes Stipanowich, and it’s the dispute professionals, not the parties themselves, that drive the dispute resolution processes and derive the main benefit from them.
Twenty years ago, says Stipanowich, construction professionals were partnering, collaborating, DRB-ing and creating “integrated project delivery systems.” Mediation was fast becoming an inescapable feature of construction disputes, and construction arbitration processes were being revised with an eye to cost and efficiency. But, he notes,
…we underestimated the grip and staying power of the litigation-oriented legal culture, and the “gravitational pull” it exerts on everything it touches, especially mediation and arbitration. The legal profession inhabits and dominates these vast swathes of the commercial conflict management landscape and is the primary determinant of its contours. Within these realms lawyers largely control the shape and timing of dispute resolution processes, who gets in, and who runs or facilitates the process (usually lawyers); the shadow of litigation and the litigation model hangs heavy over the scene.
He acknowledges that programs anchored on the jobsite and conducted in “real time” persist. Collaborative platforms can be found. “In the “layered” domains of mediation and arbitration, however, the irresistible force of the revolution in conflict resolution collided with the immovable object of the legal culture and its litigation orientation.”
Many construction practitioners regard mediation as unavoidable, but merely as a “whistle-stop on the litigation line.” Construction mediation has become dominated by construction lawyers, both as advocates and as neutrals, resulting in “hegemony, a takeover of the mediation work and a slow but steady disenfranchisement of non-lawyers.” Similarly, in construction arbitration, there is a “drift” toward a litigation model and what Stipanowich calls the “demise” of the multi-disciplinary tribunal.
Some may regard this as a step towards — or perhaps a reflection of — the professionalization of the dispute resolution field. But the consequence is a diminution of party control, a lack of professional diversity, and arbitrations involving parties who are construction professionals, appearing before a tribunal with no construction professional on board — only lawyers. Says Stipanowich, “As an arbitrator alongside two other lawyers, I occasionally feel like I am in a boat with all the oars on a single side: in some respects our collective expertise is redundant, and in other respects insufficient.”
Stipanowich identifies five “transformative trends” that may disrupt this landscape: technology (including its promise of efficiency in communication during dispute resolution processes), globalization (and its call for cross-cultural ADR processes); insights through behavioral science (such as the developing field of heuristics and cognitive barriers); longer productive lives and the anticipated entry of older lawyers into the dispute resolution arena; and professional credentialing.
Just how these “disruptions” might answer the challenge of the development of ADR processes that are not client-driven, and whose benefits are not client-directed, Stipanowich does not reveal.
Mediator Mallory Stevens sends the provocative summary of a recent meeting of the World Mediation Organization, via Maria Volpe’s ListServe (reproduced with Ms. Stevens’ permission):
In early July, I was fortunate enough to attend the World Mediation Organization’s inaugural World Mediation Summit and thought some of my fellow listserv members might be interested in having a flavor of the event. The conference was held July 1 – 4, 2014, in Madrid at the Escuela Técnica Superior de Ingenieros Industriales (Industrial Engineering School) of the Universidad Politécnica de Madrid. The next scheduled, and newly renamed, “WMO Symposia” are to take place later this year in Hong Kong, Dallas and Manila, with a June 2015 WMO Symposium to be held in Berlin.
The dream of Daniel Erdmann, Ph.D., of Berlin, director general and founder of the World Mediation Organization (WMO) and professor and director of the School of Mediation at Euclid University, the concept of these symposia was designed to gather ADR professionals from around the world to connect, share their expertise and discuss topics related to conflicts of cross-border and international interest. The initial conference drew more than 100 mediators, attorneys, barristers, judges, scholars and diplomats from 18 different countries, representing Europe, North America, South America, Asia, Australia, the Middle East and the Caribbean. The four days were replete with informative presentations, panel discussions and training sessions – as well as plenty of enlightening and invigorating networking.
It appears that only relatively recently has mediation begun to be understood as “important and necessary” in Europe and other areas. Supportive legislation has even been enacted within the last few years. Here are but a few succinct, country-related highlights from some of the presentations.
• Romania: Pursuant to a 2006 law, mediation began to be organized as a profession. A 2008 European Union mediation directive has helped regulate services, quality of training, equal treatment, etc.; nonetheless, in the words of the representative from the Romanian Mediation Council, the only mediation regulatory agency in that country, “Romania is still fighting for mediation.” According to the representative, the country has 9,000 mediators, only a third of which are actually working. They’re still in the process of promoting mediation everywhere, especially in mass media. The government is said to be uninterested in mediation, though the courts are more receptive. Currently, it’s not considered constitutional to require mediation.
• Spain: Here too, the courts are beginning to appreciate the importance of mediation. A July 2012 regulation “made mediation a reality” for civil and commercial disputes. Our conference host, the Escuela Técnica Superior de Ingenieros Industriales, has formed an organization of mediation-trained engineers (Institución de Mediación de Ingenieros); thus far, 350 have been trained, all with at least 150 hours of training. Elsewhere, since 2006, there have been localized, restorative mediation activities for criminal cases. Valencia, a city of more than 815,000 inhabitants, has instituted a successful police mediation program; it’s been catapulted into a “Proyecto Europeo” (European Project), so as to share the model with other European countries, and has been working well in Italy and Greece, though not as well in Bulgaria.
• Greece: Although mediation has been practiced in Crete since the 13th century, Minoan era, efforts to institute mediation in Greece commenced only in 2007; 350 mediators have now been trained.
• Eastern Caribbean (9 states): As long as a lawsuit is filed, case management or a high court judge will refer cases to mediation; it’s not compulsory, but if the court refers you, compliance is obligatory.
• Italy: There was no real mediation until 2009, when it became compulsory, and in 2010 the Italian Ministry of Justice adopted an executive regulation that called for easy access for all professionals; it involved a “low-intensity,” 50-hour training course and minimal requirements for mediator trainers. A “chaotic” situation ensued, with lawyers divided: While some have seen this as a new professional opportunity, the majority has considered mediation as a “calamity” for their own businesses; they immediately boycotted it, even going on strike. Many other professionals expressed interest in mediation, seeing it as a way to supplement their earnings. Judges were initially confused and suspicious: “Only judges make justice. Mediators do something completely different that is not giving justice to people.” In time, they changed their minds. An October 2012 law overturned a July 2012 law that had mandated mediation, due to the government’s lack of power to impose it. Ultimately, in May 2013, the UE Commission gave its support to mediation and in August of that year enacted a new law that simply required parties to be informed about mediation prior to their initiating a claim. There is said to be poor quality of training, and increased demands from mediation with few resulting mediations.
Some other interesting presentations and workshops included (presenters’ countries indicated parenthetically):
• Mediating complex large group conflicts (Canada): Highlighted was a very challenging, client-services group conflict that involved forty employees, four managers and twenty-nine different ethnicities
• Cross-border divorce mediation and the “two-day attorney-assisted model” (USA): 98% of cases are resolved within two days
• Online dispute resolution (ODR) for mediation (India and UK): Challenges and benefits; new software and processes (ODR was frequently highlighted during the conference)
• Challenges experienced in restructuring complex programs with local governments in war zone environments (Afghanistan)
• Indigenous communities in India (Amnesty International) and other areas (Philippines and Myanmar): Circumstances, conflicts, protections
• Strategies for providing the non-violent resolution of international conflicts (Mediators without Borders): Capacity-building projects that build local organizational and peace-building skills, advocacy projects that promote the appropriate use of mediation worldwide, facilitating dialogue
• Applying psychology to conflict resolution (UK)
• The process and theory of mediation (Spain and Italy)
• Mediating complex cases for international corporations and nations (USA): Fortune 500 companies could take 4 – 9 months
• Missing children of Europe – Family mediation involving transporting children beyond borders (Belgium): Of 700+ cases studied, 47% solved through amicable solutions; must be co-mediated
• Israeli-Palestinian conflict (Egypt and Palestinian Territories)
• Brains matter: The art and science of using the mind in conflict resolution — Neuroplasticity (USA): Every time you learn something new, it changes your brain! (Admittedly, this session was one of my personal favorites!)
For more information about this valuable conference as well as upcoming WMO Symposia, you might wish to contact Dr. Erdmann directly at firstname.lastname@example.org or visit http://worldmediation.org/symposia/.
All the best,
Mallory J. Stevens
Mallory Stevens LLC
Conflict Resolution Services
The Ninth Circuit, and California courts in particular, have been very strict in maintaining the confidentiality and inadmissibility of statements made during mediation. Two recent cases have allowed such statements to be admitted, on interesting grounds. An Arizona District Court decision allowing mediation statements was affirmed by the Ninth Circuit on grounds of both federal law of evidence and theory of waiver. And a California District Court permitted evidence of mediation statements to be presented to a jury on notions not only of waiver, but of due process.
(Tip of the hat to Clinton Burke, Jacob Glasser and J.D. Hoyle, whose summaries of these and other cases appear in the Summer 2014 issue of Dispute Resolution Magazine.)
In Wilcox v. Arpaio (9th Cir. June 2, 2014), the District Court issued an order enforcing a settlement agreement of a Section 1985=3 case that had been reached during mediation. The parties relied on the memorialization of the agreement that was found in several emails between the mediator and counsel for the settling parties. One of the issues raised was whether, in examining the enforceability of a contract extinguishing both state and federal claims, state or federal privilege law should be applied by a federal court. That question was answered by the court’s finding that, where claims sound both in state and federal law, the court is not limited only to state rules of privilege.
More intriguingly, the court found that the protesting defendant had waived any challenge to the admissibility of the mediation communications by failing to contemporaneously object to their introduction at trial. Assuming that state law prevailed, it failed to argue that the evidence was inadmissible under federal law, and thus failed to preserve the issue.
In Milhouse v. Travelers Commercial Insurance Company (C.D. Cal. Nov. 5, 2013), the claimant sought payment pursuant to a policy of insurance when his residence burned for a total loss. Efforts to settle were unavailing and the insured brought suit not only for the loss but also for damages resulting from alleged bad faith, as well as attorney fees and punitive damages. The compensatory claim succeeded but the bad faith claim and punitive award failed. Both parties filed post-trial motions.
The insurer’s motion for JNOV was denied on the ground that substantial evidence supported the conclusion that it breached its contract of insurance. It granted the insurer’s motion for remittitur of damages or, in the alternative, a new trial on that question.
The claimants argued that they were prejudiced in their efforts to prove bad faith by the introduction of statements and positions taken during a mediation. The court found that, while the evidence supported Travelers’ breach of contract, it did not support Travelers’ having acted with undue delay or in bad faith. In particular, it was the claimant who delayed in responding to the insurer’s persistent efforts to settle the claim. And, most interesting to our concern, it was the claimant who demanded, in mediation, that it receive $7,000,000 on a policy limited to $519,400, and that their attorney — who had the file for about six weeks — be paid an additional $800,000 – $1,000,000. Again, two grounds were cited in denying the post-trial relief.
The first was waiver — that the claimants had failed to object to the introduction of the testimony both prior to the trial or during the trial itself. An objection first heard post-trial is untimely and ineffective.
But the court went a step further, saying that if objection had been made in a timely manner, it nevertheless would have been overruled. Throughout the trial, claimants’ counsel repeated the basis for the bad faith claim - that Travelers refused to enter into negotiations, refused to send someone with authority to discussions, refused to cooperate in good faith. In fact, the claimants’ demands during mediation were several millions over the policy limits; and at trial claimants’ counsel continued to seek such sums, saying not only that bad faith damages of $8,325,860 should be awarded, but that, in addition, “Travelers’ conduct was so reprehensible, punitive damages were required: ‘The very least you can award thus company for punitive damages… is $9,079,182.’”
Travelers’ efforts to settle the claim were thus the very issue in contest, and the court permitted evidence to be introduced to the jury supporting the conclusion that settlement was not reached, not due to Travelers’ acting fraudulently or in bad faith, but rather due to the claimants’ excessive demands. “To exclude this crucial evidence would have been to deny Travelers of its due process right to present a defense.”