LITIGATE OR ARBITRATE?

You are the chief executive of a corporation that manufactures or uses technical or engineered products and systems.  You have become embroiled in a dispute with a supplier or customer about some deficiency, quality control, lateness, patent or other typical business problem.

You have heard the horror stories about how long a court case could take and the attendant costs.  Maybe you are getting advice from other principals in the company who think that your case is strong, and that "we should go to the mat on this one."

Then you realize that even if you win your case, it's not necessarily over.  Either you or your opponent can appeal any decision, thereby dragging out the case for who knows how long.  Meanwhile, the costs and aggravation will continue.

Fortunately, one of your executives is familiar with arbitration and suggests that might be a good way to resolve the dispute with some finality, and with arbitrators who have some knowledge about the technical fields involved.

Maybe you're lucky and you already have a standard arbitration clause in your contract with all your business partners.  In that case, you can call for arbitration and set the process in motion.

But even if there is no existing arbitration clause (and if not, that's something that you should incorporate into future contracts), then you could always discuss that possibility with the other party.  Since it will be in both your interests to gain the advantages of arbitration, it might not be a hard negotiation. 

But there is one thing that is very important in keeping the costs of an arbitration less than a litigation, and that is the the rules that apply.  More on this in a future posting.

SHIFTING TIDE?

Peter Benner has written a short article for the Connecticut Law Tribune on the possible effect of the revision of the Commercial Rules by the AAA, and whether that will solve the organic problems within arbitration.

The problem is that arbitration is becoming just as lengthy and expensive as litigation.  When that happens, the attorneys representing clients are likely to choose litigation (unless the contact between the parties prevents that), because it gives them more flexibility in chasing after evidence and offers the chance to appeal any decision.

It seems to me that this is an opportunity for administrative associations like the AAA to aggressively promote the use of arbitration clauses in corporate contracts.  If the parties do that, then at least the rules can be defined in advance, and if enforced by the arbitrator(s), will limits abuse of the process by overly-aggressive attorneys.  But success does require the arbitrators to take control of the hearings and not allow 'fishing expeditions' for evidence, for example.

If the parties do not have a arbitration clause already in force, and have to agree after the dispute to settle on rules, then those rules can be so loose as to defeat the basic purpose of arbitration - to provide a forum that is quick, final and relatively inexpensive.

It seems to me that arbitrations should be less expensive and quicker than litigation, but does require stern management of the process.

BAD BEHAVIOR

Three years ago, the America Invents Act replaced our 220 year old first-to-invent system with a first-to-file system.  Now, large corporations with their great resources have a decided advantage against independent inventors like me.

Now, Congress is at it again.  They are attempting to shield large corporations from nuisance lawsuits and demand letters by "trolls", non-operating entities who acquire patent rights from inventors for the primary purpose of extorting money from corporations whom they accuse of infringement. 

That problem has some validity in fact.

But the new legislation would go much further, and would undermine the ability of legitimate inventors to defend themselves from infringers, especially when they are deep-pocketed corporations.

Some of these changes would let infringers force a delay in proceedings by requiring the Patent Office to reexamine the validity of the patent in question, even multiple times. And worst, if the inventor loses, which would be likely if they are fighting the battle alone, then they would be required to pay the infringer's attorney fees.

Why does Congress continually side with large entities, when it was independent inventors who produced the inventions that have fueled our economy for so many years.  Why?  You know why.  Follow the money.

PRO-SE PARTIES

Sometimes, a disputant decides to represent himself in the arbitration, called pro-se.

Just as in a courtroom setting, this is not a good idea, since the party isn't likely to be familiar with the arbitration process, the kind of evidence to be presented, the applicable rules, and so on.

What's worse, most of the cases I've seen are an individual against a large corporation.  The fact that the resources are so stacked against the pro-se party makes matters even worse and can tip the balance in the corporation's favor when the evidence does not support such a condition. 

I have had parties self-represent themselves, and the problem it presents to the arbitrator is that the unrepresented person often will not know to challenge a piece of evidence that should be challenged, or not present evidence that exists and would be helpful to them.

The standard intelligence is that the arbitrator(s) should let the parties do what they are going to do, without interfering or trying to present a case or challenge either side.  But it is frustrating when we see that the case is being mishandled in that way.

In such a circumstance, and in an attempt to know the truth, if a key piece of evidence is not questioned by the pro-se party, I will ask a few clarifying questions that help define the differences between the two sides.

In my opinion, the best suggestion any arbitrator can offer to a pro-se party, since the stakes can be high, is to recommend in the strongest terms that they engage an attorney, or at the least, bring an adviser who can help present their case.

ONE, TWO OR THREE?

So you are a principal of an important case.  You feel confident that your side will prevail, since you think you have the best evidence and most credible witnesses.

One of the next decisions that need to be made, unless it already has been made in the pre-dispute contract, is how many arbitrators should be on the panel.

Generally, on small cases, perhaps under $50,000 claimed, a single arbitrator is sufficient.  The cost for a larger panel escalates quickly, particularly if transportation costs are involved.  Most such cases can be resolved in a day or so which also keeps costs down.

Yet, if the claims in the case are $1,000,000 or more, then the stakes are that much higher, and it can be useful or prudent to have a larger panel, usually three, to make sure that the issues are given full consideration.  In those cases, the ancillary costs including transportation and administration will be proportionally small.

For a three-person panel in a case involving technology, I strongly recommend that at least one of the arbitrators be technologically-knowledgeable.  He or she can then advise the other panel members when matters arise that are outside their experience.  You can check out my relevant background here.
Another possibility is that the arbitration clause calls for two arbitrators, where they appoint a third.  I don't have any personal experience with this arrangement, but it seems to me that whenever the parties appoint their "own" arbitrator, already the neutrality of the process is compromised.  

POST-DISPUTE ARBITRATION CLAUSES

You are the chief executive of a manufacturing firm, and have gotten embroiled in a dispute with one of your suppliers or customers.

Other executives in your firm encourage you to "go to the mat" on this one, meaning that you should spend what ever monies are necessary to win, since they think your case is so strong, and "it's the right thing to do."

Yet you know that a court case will be very costly, lengthy and will have no sense of finality and closure, since either side can appeal the decision of the court.

Your corporate attorney advises you that arbitration may be a viable option to litigation, but there is not an arbitration clause in your existing contract with your opponent.

No problem.  You should be able to convince the other party that it is in both your interests to arbitrate rather than litigate. Since the benefits are so strong, it might not take much convincing unless they are emotionally attached to their position.  The process then involves incorporating an addendum to your contract and adding one of the standard arbitration clauses, such as this one from the AAA:

"We, the undersigned parties, hereby agree to submit to arbitration
administered by the American Arbitration Association under its
Commercial [or other] Arbitration Rules the following controversy:
[describe briefly]. We further agree that a judgment of any court having
jurisdiction may be entered upon the award."

ARBITRATION COSTS - Part 2

There are so many aspects to the cost of any dispute resolution process.  One of the most significant is the fees charged by the attorneys and their staff on both sides of the case.  The fees charged by the arbitrator(s) are usually less, because their time is spent primarily on the hearings, and not on the extensive evidence gathering and client meetings performed by the attorneys.

In a courtroom litigation for example, the actual court costs can be a small percentage of the total costs.  Any attorney wishing to represent his client to the fullest will no doubt take advantage of every opportunity to confound his opponent by taking extensive depositions of every potential witness, preparing interrogatories, demanding copies of every possible document, relevant or not, and filing motions.  For obvious reasons, this aggressive effort is called a "fishing expedition."  Often it produces no more results than a true fishing expedition would.

All of this can run up the cost of the litigation to the point where it can make the principals wonder why they ever thought it was a good idea to pursue the case.

Enter arbitration.  While arbitrations are not cheap, they do avoid the kind of intensive investigation and evidence gathering that a litigation does, and so can have a much smaller bill for professional fees of all kinds.  When one considers the fact that arbitrations are not subject to appeal (except on the occurrence of various malfeasances on the part of the arbitrator(s), the time spent on the case is proportionally reduced, along with the cost.  

ARBITRATION COSTS - Part 1

One of the putative benefits of arbitration is that because of its relaxed rules and finality, it can cut costs compared to litigation with its lengthy and costly appeals and evidence-gathering processes. 

In order for this assumption to work, though, it is important for the arbitrator(s) to exercise control over the process.  For example, attorneys, in their zeal to represent their client, can aggressively challenge every piece of evidence, each instance of which disrupts the process.

To avoid these disruptions, the arbitrators must set the tone and discourage frequent challenges.  On one hand, they cannot refuse to allow an instance of evidence that later might have proven to be important.  So the way this is handled is by giving the arbitrators the flexibility to assign different weights to various pieces of evidence.

To avoid this becoming an issue, it is important that the arbitrators tell the attorneys at the start of the hearing, that generally speaking all evidence will be allowed, but not necessarily given the same weight when it comes to preparing an award.

In my view, this is one of the major advantages of arbitration versus a courtroom setting, in that the arbitrators being professionals, are able to make such determinations, whereas a citizen jury may not be.