In Robinson Brog Leinwand Greene Genovese & Gluck, P.C. v. John M. O’Quinn & Assocs., No. 12-2915, 2013 WL 1707897 (2d Cir. Apr. 22, 2013), law firms were fighting about whether the Robinson firm was owed money under a joint representation relationship.  Three documents governed their relationship: a “Client Agreement” setting forth the contingency fee rate, defining the clients, and requiring arbitration; a Joint Responsibility Referral Fee Letter Agreement setting forth how the law firms would share attorneys’ fees, without an arbitration agreement; and a Client Consent document that told the clients about the law firms’ joint representation and the fact they were splitting fees.

Robinson started an action in federal court to recover fees, and the defendants successfully moved for dismissal based on its argument that the claims must be arbitrated.  The Second Circuit affirmed.  It found that the Client Agreement was “the foundation of these interdependent documents,” because without an attorney-client relationship there could be no basis for sharing attorneys’ fees.  Robinson argued its claims arose only out of the Joint Letter Agreement, but the court concluded no claims could arise solely from that agreement between the law firms, since it did not “contain an independent means of generating the pool of funds from which those fees would be paid.” Therefore, even though Robinson was not a party to the Client Agreement, the court held it was bound by the arbitration agreement in that document by the doctrine of equitable estoppel.

The Sixth Circuit had recently reached the opposite result by applying similar rationale.  In Dental Associates v. American Dental Partners of Mich., No. 12-1008, 2013 WL 1272086 (6^th Cir. March 28, 2013), a group of dentists brought suit for breach of contract and tortious interference against a service provider that had purchased most of their assets.  The defendant, ADPM, had executed two agreements with the plaintiff: an Asset Purchase Agreement (through which its parent company bought many of the plaintiff’s assets) that contained an arbitration agreement; and a Service Agreement detailing the administrative services ADPM would provide to the plaintiff, which lacked an arbitration agreement.  The Service Agreement also required the plaintiff to execute employment agreements with three dentists – those Employment Agreements all called for arbitration of disputes.

The defendant in this case was unsuccessful in dismissing the plaintiff’s claims and compelling arbitration in the district court, and the Sixth Circuit affirmed.  The appellate court stated the relevant rule as: “Where there are multiple contracts between the parties, a dispute is arbitrable pursuant to the arbitration clause in a related contract if ‘the arbitration clause is part of the umbrella agreement governing the parties’ overall relationship.’”  However, even if the umbrella agreement has an arbitration provision, claims can be heard in court if the action can be maintained “without reference” to the umbrella agreement.  In this case, the court concluded that the APA was not an umbrella agreement, because it did not “create the relationship between the parties” and instead governed the “one-time purchase and transfer of assets,” while the Service Agreement defined the ongoing business relationship.  The court also found that the plaintiffs’ claims could be maintained without reference to the APA.

The lesson of these cases for drafters is clear: make sure that any time multiple agreements will function interdependently, their arbitration clauses mirror each other (unless the parties intentionally want some claims to go to court, in which case that should be made explicit).  For litigators, the lesson is that when multiple agreements are at issue, you need to find an argument that the agreement whose arbitration clause (or lack thereof) you prefer is the “foundational” or “umbrella” agreement.

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

Sanofi claimed that Genentech’s drug sales had infringed Sanofi’s patents. The parties had a licensing agreement, which called for the application of German law and for arbitration of disputes with the International Chamber of Commerce. The alleged infringement started in 1997 and constituted a breach of that agreement, but was first raised by Sanofi in 2008.  Once it was raised, Genentech terminated the agreement.

Sanofi started an ICC arbitration on October 24, 2008.  Genentech then filed an action in U.S. federal court, asking the court to find no infringement of the patent.  Genentech won; the district and appellate court found it had not infringed the patent.  However, the district court refused to enjoin Sanofi from continuing with the ICC arbitration.

[In a prime example of how proceeding in multiple venues can lead to conflicting results, the ICC arbitrator then ruled against Genentech.  Applying German substantive law, it found Genentech liable for damages under the licensing agreement.]

Genentech appealed the denial of its motion to enjoin the arbitration.  The federal circuit affirmed the district court’s decision.  A three-factor test applies when district courts decide whether to enjoin parties from pursuing foreign arbitration or litigation: whether the parties and issues are the same, whether the foreign case frustrates a U.S. policy, and “whether the impact on comity would be tolerable.”  Here, the first factor was dispositive.  The U.S. case had determined whether Genentech infringed the patent under U.S. law after the agreement was terminated, while the foreign arbitration centered on whether under German law Genentech had breached the agreement while it was in effect.  Because of those differences, the issues were not the same and the U.S. policy of res judicata was not frustrated.  Furthermore, the court found no reason to override the parties’ selection of the ICC as the forum for disputes under the agreement.

One judge wrote a concurring opinion to make sure this decision would not be misused.  That opinion emphasized that the U.S. policy favoring enforcement of forum selection clauses is not, by itself, enough to prevent the injunction of a foreign proceeding.  If the issues raised in the U.S. courts had been identical to those in the international forum, the judge wrote, “the patent holder should not be allowed to make an end run around the U.S. determination by later invoking an international proceeding.”

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

First, a caveat.  I will not include draft language here.  That would be what my marketing team calls “giving away the store.”  They frown upon that.  But, here is a list of items that should be in your arbitration agreement, and others you should at least seriously consider putting in your arbitration agreement.

Ingredients You Must Have

• A clear statement of the types of disputes that should be arbitrated (Think broad! “Any and all disputes arising out of” the contract is a good place to start.)
• A clear statement of whether the Federal Arbitration Act will govern or a particular state’s Uniform Arbitration Act will govern instead (state acts may provide more authority for third-party discovery or judicial review, but the federal act is very strong in enforcing arbitration agreements)
• A separate delegation clause (meaning that even disputes about the validity of the arbitration agreement will be decided by the arbitrator, taking advantage of Rent-A-Center — because in my view, if you are going to arbitrate, arbitrate everything)
• An identification of who will administer the arbitration (AAA? JAMS? CPR? or will the arbitrators self-administer it?) and what rules will govern
• A reasonable limitations period on claims, or an indication of what law will set statutes of limitations
• Clear language about whether class (or even multiple-claimant) arbitration is or is not authorized (taking advantage of Stolt-Nielsen)
• A severability clause (so that if any part of your arbitration agreement itself is invalid, the rest will be enforceable)
• A statement that the prevailing party may turn the arbitration award into a court judgment in a specific court (taking advantage of Section 9 of the FAA)

Considering Sprinkling In:

• A required hearing location
• A required number of arbitrators (a single arbitrator is cheaper, but increases the chance of a wacky award; alternatively some provider’s rules say claims under a certain dollar amount will be heard by a single arbitrator, while those over that amount will be heard by a panel of three)
• Required qualifications of the arbitrators (should it be someone from a particular industry?)
• The availability of emergency equitable relief (with the AAA, this can be done by incorporating the “Optional Rules For Emergency Measures of Protection”)
• A requirement that the arbitrators issue a reasoned award (otherwise you reduce your already limited ability to try and vacate any potential wacky award — but if you anticipate only small claims, this may unnecessarily drive up expense)
• The availability of a quick appeal through the arbitration provider
• Required mediation either before, or during, the arbitration process
• Requiring that the loser pay the prevailing party’s attorneys fees (or other modifications to the default rules as to costs and fees of arbitration)
• If you have chosen an institution to administer the arbitration that is uncommon, you may want to include a statement about what happens if the provider is no longer in business or otherwise unavailable
• A limitation on the types of damages available
• Some parameters on discovery – in all disputes or in certain types of disputes (i.e., no more than X depositions, no interrogatories, no requests for admission, no expert depositions…)
• If your form contract will be used with thousands (or millions) of consumers, and those consumers may have claims that are not economical to pursue on an individual basis, but have significant public benefit, you may want to address the AmEx decision (which refused to compel individual arbitration of antitrust claims because plaintiffs could not “effectively vindicate” their statutory rights via individual arbitrations).  That could be accomplished by stating that claims under certain federal statutes (like antitrust statutes) are outside the scope of the arbitration clause
• Similarly, consider allowing low-dollar individual claims to be heard in small claims court

Do you think I missed some key ingredients?  Please tell me via email or Twitter and I will consider updating the lists.

Other Resources:

If you were hoping for the full, frosted contractual cake, instead of just a recipe, and you aren’t yet ready to hire me, here are some sources you may want to consider visiting, but note that they do not take advantage of the recent case law.

AAA’s “Clause Builder” 

JAMS

CPR

Ken Adams, a specialist in contract drafting, has a suggestion for the first few lines of your agreement

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

The underlying facts of the case highlight a tragically dysfunctional family.  An adult homosexual man named his partner as a beneficiary of his life insurance, but when the insurer in fact distributed money to the decedent’s life partner, the decedent’s mother and siblings sued the partner, the insurer, and the insurance agent in state court, alleging that they all conspired to fraudulently obtain life insurance “with the intent to end the decedent’s life and collect the policy’s death benefits.”

The insurance policy had an arbitration clause, but the angry family members refused to arbitrate.  That led the insurer, Aflac, to file a federal court action to compel arbitration.  After multiple motions and expert affidavits about whether the decedent’s signature on the policy was a forgery, the district court compelled arbitration and enjoined the angry family from continuing their state court action.  The angry family appealed on multiple grounds.

The Fifth Circuit affirmed the district court.  With respect to the federal court’s ability to effectively shut down the state court action, the court said two things.  First, there was no reason for the federal court to abstain under the Colorado River doctrine, largely because the two cases were not “parallel” and no exceptional circumstances were present that favored abstention.  Second, the court rejected the idea that the result violated the Anti-Injunction Act, which generally prohibits federal courts from staying proceedings in state court.  The Fifth Circuit found that the district court’s injunction against the state court proceeding fell within a recognized exception to the Anti-Injunction Act, for injunctions necessary to “protect or effectuate [] order[s] compelling arbitration.”

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

The developer and publisher had a 35-page contract setting out the terms of their work to create “Section 8,” a “futuristic military-style video game” (not one about affordable housing).  The contract called for arbitration.  It also gave the developer exclusive ownership of the game’s intellectual property, with the publisher only having a license to market, publish and distribute the game.  It prohibited the publisher from preparing “derivative works.”

The game bombed.  Soon, the parties found themselves in arbitration over their cross-claims for breach of contract, fraud, and copyright infringement.  The arbitrator found that the developer had committed multiple breaches of the contract and had fraudulently misrepresented critical information.  It awarded the publisher over $7 million.  However, because the arbitrator found the monetary remedy would not fully compensate the publisher, it also “amended” the contract to give both parties a perpetual license for the game’s intellectual property, without any obligation to pay future royalties and without any restrictions on creating sequels, “add-ons” or competing products.

The district court vacated the arbitrator’s award, finding the arbitrator “exceeded [his] powers” within the meaning of Section 10(a)(4) of the FAA.  The district court focused on the “perpetual license” granted to both parties, and found that was not a remedy authorized by the contract.

The Fifth Circuit reversed the district court and reinstated the arbitration award.  Notably, the Fifth Circuit cited a case it issued almost 20 years ago for the proposition that “the arbitrator’s selection of a particular remedy is given even more deference than his reading of the underlying contract.”  That remedy can be vacated only if the remedy is not “a logical means of furthering the aims of the contract.”  In this case, the Fifth Circuit found the perpetual license furthered the general aims of the parties’ contract.  In particular, because their relationship had become so contentious that future collaboration on sequels and licensing was impossible, the court found the arbitrator’s solution fit “the fundamental goal of the Agreement: mutual access to financial benefits derived from their joint creation and distribution of Section 8.”  The court did remind readers that there are other limits on creative arbitration remedies.  An arbitrator may not decide an issue that the contract reserves for another decision maker or removes from anyone’s discretion.

There are two key take home points from this case.  First, for advocates trying to challenge an arbitration award, this case shows that attacking the remedy provided may be the most difficult basis for vacating an award under Section 10.  And second, for drafters of arbitration clauses, think carefully about whether there are some remedies you want to exclude from the arbitrator’s authority and do that explicitly in the arbitration clause.

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

This case involves a class of 120 sympathetic students of a failed flight school, who claim the bank affiliated with the school, which loaned money to the students, violated the California Unfair Competition Law.  All the promissory notes signed by the students contained an arbitration clause that covered their claims and barred anything other than individual arbitrations.  The students asked the court to enjoin the bank from reporting non-payment to credit agencies, from enforcing the notes, and from disbursing any loan proceeds in the future if the consumer credit contract did not comply with FTC regulations.

The bank moved to compel arbitration and the district court denied the motion.  On appeal, a three judge panel of the Ninth Circuit reversed, finding that the FAA preempted California’s Broughton-Cruz rule.  The Broughton-Cruz rule had been developed by the California Supreme Court based on its recognition that the FAA was in conflict with California statutes authorizing public injunctive relief.  Under that rule, claims for monetary relief are subject to arbitration, but claims brought under California statutes that seek injunctive relief for the general public are not subject to arbitration.

When eleven members of the Ninth Circuit reheard the case, however, they left the Broughton-Cruz rule intact.  They were able to dodge the entire preemption analysis by concluding that the injunctions sought by these plaintiffs did not affect enough people to be considered public injunctive relief to trigger the Broughton-Cruz rule.  The majority found the injunction primarily benefited the 120 putative class members.  The majority also concluded that the arbitration agreement was not unconscionable under California law.  As a result, it reversed the district court and remanded with instructions to compel arbitration.

One judge, however, felt strongly that the district court should be affirmed.  The lone dissenter did not analyze the Broughton-Cruz rule, but instead concluded the arbitration agreement was unconscionable under general California law.

Kilgore is significant because it revives the Broughton-Cruz rule.  For everyone else, Kilgore is significant because it shows how skittish courts are about applying Concepcion’s preemption analysis.

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

Muriithi was a driver for an airport shuttle service who signed a franchise agreement containing an arbitration clause.  The franchise agreement required arbitration of “any controversy arising out of this Agreement,” required that arbitration proceed “on an individual basis only,” and required each party to bear half the “fees and costs of the arbitrator.”  Muriithi later brought employment claims as a representative of a putative class of drivers, arguing they should have been treated as employees entitled to minimum wage and overtime pay instead of labeled as franchisees.

Shuttle Express moved to compel arbitration.  The district court denied the motion, finding the arbitration clause was unconscionable, because plaintiffs could not effectively vindicate their statutory rights due to the class action waiver and fee-splitting provision (and a one year statute of limitation).

The Fourth Circuit reversed the district court, and ordered it to compel arbitration of the drivers’ claims.  The Fourth Circuit could have accomplished that in a fairly simple fashion – by finding that Muriithi did not meet his burden to prove the costs of arbitration would be prohibitive (under the same line of decisions at issue in the AmEx case currently pending before SCOTUS) because he did not present evidence about relevant arbitration fees or the value of his employment claims.  [It could not have hurt that Shuttle Express volunteered during oral argument to pay all arbitration costs if the court compelled arbitration.]

Instead, the Fourth Circuit did that, and then also went out of its way to discuss arguments about whether Concepcion had any application to the case.  The driver argued it did not, because he was not arguing for the application of any state common law that precludes class action waivers in arbitration.  The court disagreed, finding Concepcion applies to any unconscionability argument directed to waivers of class arbitration.  “[T]he Supreme Court’s holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances.”

That is a bold statement from the Fourth Circuit, not only because the question presented and ultimate holding in Concepcion were both specific to federal preemption, but also because it adopts the position of the Petitioner in the AmEx case, before SCOTUS has even issued a ruling.

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

The dispute being arbitrated was between the popular artist Thomas Kinkade and the Whites, who had agreed to be dealers of Kinkade’s artwork.  The Whites started the arbitration in 2002.  There was a panel of three arbitrators to decide the dispute.  Each party chose an arbitrator, and together those arbitrators chose Mark Kowalsky as the third member.  The panel did not issue a “Final Award” until 2009 (and Kinkade’s chosen arbitrator dissented).  The award gave more than $1.4 million to the Whites, including significant attorneys’ fees and costs.

Both the district court and Sixth Circuit found more than enough evidence to establish that “a reasonable person would have to conclude that [Mr. Kowalsky] was partial to one party to the arbitration,” and had “improper motives.”  Based on that conclusion, the courts vacated the arbitration award.  The primary issue was that five years into the arbitration proceedings, after closing arguments in the hearing but before the award, Kowalsky’s law firm took on two significant new matters from the Whites and their appointed arbitrator.  Kowalsky informed the parties of these new financial ties between his firm and the Whites, and Kinkade objected, but the AAA denied Kinkade’s request to disqualify Kowalsky.

A second basis for concluding Kowalsky was partial was the way he handled the Whites’ burden of proving their damages.  During discovery, the Whites had never produced documents about the financial performance of their galleries.  After the hearing was concluded without the Whites offering any proof of damages, instead of ruling against them, Kowalsky gave the Whites two additional opportunities to back up their damage calculations.  On the second occasion, the Whites produced 8,800 new pages of financial records.  Kinkade objected to the new documents, but Kowalsky accepted them into evidence.  Later, after the panel majority’s “Interim Award” indicated that it had denied the Whites’ request for attorneys’ fees, Kowalsky invited the parties to apply for fees and costs, and a majority of the panel added attorneys’ fees, costs, and prejudgment interest to the Whites’ interim award.

While the sheer egregiousness of the arbitrator’s actions is compelling, and the “celebrity” aspect of this case adds good color, what I find most interesting is how the Sixth Circuit analyzes the disclosure issue.  The Whites argued that Kowalsky had disclosed the financial ties between his firm and the other parties and arbitrators (and the AAA refused to disqualify Kowalsky), as if transparency alone made him neutral.  To that argument, the Sixth Circuit notes that “the harm was done” as soon as the disclosure was made, because the disclosure placed Kinkade in a lose-lose situation.  “If [he] object[s], [he] run[s] the risk of offending the neutral; if [he doesn't] object, [he] appear[s] to condone a clear conflict.”  However, other courts have acted as if disclosure alone can right all wrongs, even in the face of similar arguments regarding the lose-lose situation parties are faced with if an arbitrator discloses a significant connection after his her appointment.   (Those courts may assume that disclosure is the solution, because parties will then make an informed choice about objecting and arbitral fora like the AAA will disqualify as appropriate.)  It may be time to analyze parties’ actions in reaction to disclosures made before the arbitrator’s appointment differently than those disclosures made after the arbitrator’s appointment.

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

In Parisi, three female former employees alleged gender discrimination by Goldman, Sachs and sought to proceed as a class action in court.  The plaintiffs acknowledged having an arbitration agreement covering matters relating to their employment.  However, they opposed Goldman’s motion to compel arbitration by arguing their arbitration agreement was invalid because it waived their statutory right under Title VII to pursue a “pattern-or-practice” claim of discrimination.  (Interestingly, this whole case turns on the availability of class arbitration, but the quoted arbitration agreement does not explicitly preclude class arbitration.  The plaintiffs apparently never argued that their arbitration agreement can be interpreted as authorizing class arbitrations, so the assumption underlying this opinion is that class arbitration is unavailable to these plaintiffs.)

The plaintiffs won at the district court, with that court concluding that because plaintiffs could not proceed as a class in arbitration, they could not pursue a Title VII pattern-or-practice claim, and therefore the arbitration agreement impermissibly waived the plaintiffs’ statutory rights.  The Second Circuit disagreed and reversed.  In short, the appellate court found there is ”no substantive statutory right to pursue a pattern-or-practice claim.”  Citing earlier decisions of both the Second and Fifth Circuits, the court summarized that “‘pattern-or-practice’ simply refers to a method of proof and does not constitute a ‘freestanding cause of action.’”  Therefore, plaintiffs could be compelled to arbitrate — even on an individual basis — without waiving any of their substantive statutory rights.

In the course of its decision, the court identified only two circumstances “in which motions to compel arbitration must be denied because arbitration would prevent plaintiffs from vindicating their statutory rights.” First, as in AmEx, that can happen when the costs of arbitration effectively preclude the plaintiffs from prosecuting their statutory rights.  And second, that can happen when the arbitration agreement “interfere[s] with the recovery of statutorily authorized damages.”  In other words, if a statute authorizes treble or punitive damages, the arbitration clause cannot bar those types of damages.

This is another case that appears to have been caught in Stolt-Nielsen‘s cross-hairs.  The plaintiffs here devised their strategy, and filed their complaint, before Stolt-Nielsen was issued and significantly altered the framework for arguing class arbitration issues.  In any case, this decision clarifies that alleging a pattern-or-practice of discrimination will not allow a plaintiff to keep its claims in court instead of arbitration, and also clarifies the current state of the law on when arbitration can be avoided because it does not adequately protect statutory rights.  Of course, the state of the law may shift again in the coming months when the Supreme Court decides AmEx.

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.

Appellant’s counsel tried valiantly to express some standard of review that fit within the Court’s past jurisprudence, but also allowed for vacatur of this particular result.  In response to questions like “how wrong does an arbitrator’s decision have to be to become an issue of law?” (from Justice Sotomayor), counsel advocated that Stolt-Nielsen and Concepcion established a “presumption” that there is no consent to class arbitration without a “very clear statement of a meeting of the parties’ minds.”  However, Justice Kagan quickly noted that the Court had never suggested such a presumption in either of those cases.  Appellant’s counsel later advocated for a slightly different formulation: a reviewing court may vacate the arbitrator’s decision to allow class  arbitration if the contractual language “leaves no room for a conclusion that the parties agreed to” arbitrate on a classwide basis.  Justice Kennedy, who often casts a deciding vote in close cases,  expressed skepticism about whether the Court’s repeated and highly deferential standard of review for decisions by arbitrators allowed any kind of inquiry into the merits of the arbitrator’s contractual analysis.

Respondent’s counsel, of course, emphasized the very limited grounds for vacating an arbitration award.  He noted that Appellant argues the arbitrator “exceeded his power,” but because Appellant consented to giving the arbitrator authority to determine whether the arbitration could proceed as a class, the only way the arbitrator could have exceeded his power was by basing his award on something other than an interpretation of the contract.  This led to a series of amusing hypotheticals in which Justice Breyer asked Respondent’s counsel to assume that an arbitrator made her decision based on consulting a “magic 8-ball” (Justice Scalia pretended not to know the reference) and then asked whether that would constitute “manifest disregard” of the law or otherwise serve as grounds for vacating the award.  Justice Breyer’s questions hint that the Court may give “manifest disregard of the law” new life as a separate basis for vacating arbitration awards, and that the Court is looking for a backstop beyond just the four bases in the FAA for parties to rely on if arbitrators get the law or facts really, really wrong.

Curiously, from a Court that has vigorously enforced arbitration agreements for all types of cases, the Justices appeared skeptical of arbitrators’ capability to handle class actions, and questioned whether arbitrators were wrongly incentivized.  Justices asked how the arbitrator was compensated in this case, whether he was experienced, how many class actions were handled in arbitration (neither side could answer, since that information is not public), and whether an arbitrator would be incentivized by his own fees to create a class action after seeing a case like Sutter drag on for eleven years.  To that, Respondent’s counsel gave a good soundbite: “if we trust arbitrators to handle such important issues as civil rights issues and other very important matters [], we have to expect that they will follow the precepts of this Court and the FAA as to what constitutes grounds for class arbitration.”

This is a post from Arbitration Nation, a blog by Liz Kramer with all copyrights reserved by Leonard, Street and Deinard.