Re-Thinking the “Standard” Arbitration Clause in Cloud Agreements (Part III): Taking Full Advantage of ADR in Cloud Agreements

Part I of this three-part article included some history about how it came to be so common that modern technology agreements – including “cloud agreements” – often include a “standard” arbitration clause. Part II asked and answered the question: Is arbitration “cheaper, faster and better” than a traditional lawsuit?

This final installment will focus on some of the clear disadvantages of arbitration and make some suggestions regarding how to better take advantage of the availability of ADR.

Sometimes, It’s Not How You Play the Game, It’s Whether You Win or Lose
The one aspect of arbitration that is perhaps most starkly different from a traditional lawsuit is that an arbitration award is, for all practical purposes, final. It is extremely difficult to overturn an arbitration award on appeal. Generally, an arbitration award will be overturned only if there is some evidence of corruption, fraud or other misconduct on the part of the arbitrator. Buttressing the legal principles upholding the finality of arbitration awards are two practical realities. First, arbitration proceedings are rarely transcribed (which can save substantial costs). Second, arbitrators do not always analyze the reasons for their decision in writing, making it difficult for any reviewing court to determine whether, in fact, the arbitrator made a mistake. If there is simply no record, it’s nearly impossible to convince a court to overturn an award in arbitration.

If you are on the winning side of arbitration, this finality and lack of appeal is a distinct advantage. However, if you are on the losing side, you have very few options other than writing a check. In a traditional lawsuit, almost any judgment creditor will compromise a result in the interest of avoiding a lengthy and costly appellate process. For the victor in arbitration, however, there is little to motivate compromise. Converting an arbitration award to a judgment is fairly simple and quick. Although the loser in arbitration might attempt to draw out the collection process by seeking an order vacating the award and appealing the judgment, arbitration awards often include provisions for attorneys’ fees and interest, making this tactic more costly for the loser than for the winner.

The big problem is that you never know on the front end whether you’re going to win or lose. The uncertainty of litigation in a traditional lawsuit, including remaining uncertainty after a judgment at trial, more often than not motivates compromise. Compromise is something that the judicial process encourages. The lack of any meaningful right to appeal from an award in arbitration eliminates what is often the last opportunity to compromise. Because no one can know in advance whether they will end up in the winner’s circle, this aspect of arbitration must be considered a distinct disadvantage to potential participants.

Another clear disadvantage of arbitration relates to choice of law provisions. These provisions are much less likely to be followed by an arbitrator. Choice of law analysis is difficult. Arbitrators, unlike most judges, do not have law clerks to do research necessary for a thorough choice of law analysis. If the arbitrators do it themselves, or use someone from their firm to do it, it will be billed at an hourly rate, driving up the cost. Often, it is not even clear whether an arbitrator is empowered to employ someone from his or her firm to assist with research.

Moreover, there is no equivalent of a jury charge in arbitration. Frequently, there will be no practical way to effectively raise the issue of choice of law in arbitration. Many arbitrators will simply apply the law that they know. Because there is often no written opinion, and there is no meaningful opportunity for appeal, the parties may be left with no way to evaluate whether the arbitrator applied the correct jurisdiction’s law. This is a distinct disadvantage for litigants in a variety of contexts. For example, there are significant differences in the way courts in Georgia would treat various privacy or data security issues and the way Massachusetts or California courts treat them. If choice of law is important, arbitration should probably be avoided.

A third distinct disadvantage of arbitration is that arbitration is usually a less appropriate forum to deal with issues of equitable relief. Commercial cases often involve such issues as intellectual property, confidentiality agreements, covenants not to solicit employees or customers, and covenants not to compete. Some circuit courts have held that arbitrators have the power to grant broad equitable relief if the arbitration rules contemplate such relief. But equitable relief can often be draconian for the party adversely impacted by it, and decisions about the propriety of equitable relief usually require quick judgments based on less than all of the facts. Most judges have significant experience in making these types of decisions and the benefit of having seen the consequences of many of their decisions play out. By comparison, arbitrators, unless they are former judges, rarely have this depth of experience. The possibility that equitable relief may practically not be available in arbitration, and the lack of experience of most arbitrators in making decisions about equitable relief, are distinct disadvantages of arbitration as compared to a traditional lawsuit.

Certainly, if you want to make sure you have a right to go to court to seek an injunction to preserve your rights pending an arbitration, your arbitration clause should specifically allow for this possibility. The “standard” arbitration clause often does not.

These are a few of the definite drawbacks of arbitration. However, arbitration does have many advantages over a traditional lawsuit. The premise of this entire series, however, is that many of these advantages are lost if the parties never give any thought to the terms of the arbitration clause and simply insert the “standard” clause. Moreover, some parties, if they stop and think about it, may realize that arbitration is not always the best option.

What follows are some practice tips to consider before agreeing to arbitration and some additional tips to assure that, if your client agrees to arbitration, they are considering the factors that matter in taking full advantage of the flexibility of ADR.

A party to an agreement may want to agree to arbitration under these circumstances:

• disputes likely to arise under the agreement will require the decision-maker to understand complex industry or technical issues;
• it is an international company reluctant to subject itself to litigation in the courts of a foreign country;
• your opponent in disputes likely to arise might be sympathetic to a lay jury;
• it would be better that any dispute arising under the agreement be resolved confidentially and without a public record; or,
• minimizing the chance of an extreme result in the event of a dispute is more important than the possibility of an incorrect result.

Alternatively, a party may want to avoid agreeing to arbitration if these factors are likely:

• it is likely to have a strong legal or contractual defense to any dispute that may arise;
• legal proceedings are likely to occur in a court with which the party is familiar and comfortable;
• legal proceedings are likely to occur in a court that quickly and expeditiously resolves lawsuits;
• if a dispute arises, the party may need to seek an injunction or specific performance of the contract, such as to enforce a non-solicitation or confidentiality provision; or
• the party will likely need to preserve all options regarding any dispute that may arise, including the ability to appeal an initially unfavorable decision.

This list is not exhaustive. In any commercial transaction, there may be other factors that are more or less important than these. This series of articles hopes to encourage considered thought to the relevant factors, rather than simply agreeing to arbitration without any further consideration.

If you decide to agree to arbitration, consider the following possibilities:

• including a “structured” ADR provision that contemplates various precursors to arbitration, like a meeting of the parties or mediation, before one party or the other may file a demand for arbitration;
• including specific provisions regarding the amount and type of discovery that can be taken in the arbitration, perhaps excluding certain forms of discovery, like interrogatories or depositions, or limiting the number and length of depositions that can be taken;
• naming an arbitration association with lower administrative fees or, perhaps, naming your arbitrator(s) ahead of time and avoiding an administrative organization altogether;
• including provisions about whether the parties can apply to a court for injunctive relief or whether the arbitrator can issue injunctive relief;
• stating whether the arbitrator should give the reasoning for his or her decision in writing;
• specifically including rules to be followed in the arbitration, like whether the arbitrator should limit certain kinds of evidence or whether there will be post-hearing briefs; and,
• specifically stating whether the arbitrator should consider early dispositive motions, before a full hearing on the evidence, and when such motions should be heard.

None of these provisions are necessary in all cases, and there may be others not listed that a particular party might want to include. The point is to give these issues some thought. If you do, then you might realize the full potential of ADR. Otherwise, you might be better off just to live with the system that our founding fathers dreamed up – a good, old-fashioned court case.