Clause for Alarm
Posted Nov 24, 2006 12:26 pm CST
When Jonathan B. Wilson, Atlanta-based corporate counsel for Web.com, was general counsel of another company, he regularly included mandatory arbitration clauses in the company’s contracts as a way to avoid the uncertainty and expense of court trials.
But after spending many months and lots of money on, ironically, trials about the enforceability of those arbitration clauses, he stopped. Attempting to enforce arbitration clauses, he says, is too expensive, “especially in a mass market business where you have many, many customers”–in other words, lots of potential plaintiffs.
Traditionally praised for its flexibility, informality,confidentiality and ability to produce unique awards not available in traditional litigation, arbitration took off alongside tort reform in the late 1980s and early 1990s. The practice became particularly popular among defendants facing a huge amount of litigation and seeking to limit risks inherent in the court system.
But in recent years arbitration has been steadily losing favor among some in-house legal departments as lawyers like Wilson gain more experience in how mandatory clauses play out. “Courts do, in fact, enforce arbitration clauses,” Wilson says. “The problem is the process you have to go through to get it enforced.”
That process, says Paul Adams, associate general counsel at the Gap in San Francisco, can be “messy, complicated and expensive.” Adams, who handles employment disputes for the global retail chain, does not include arbitration clauses in the company’s employment contracts for myriad reasons. “You still have to hire outside counsel so you’re not saving a lot of money. Plus, arbitration is missing a key tool for defendants: the possibility of summary judgment.”
Most of the lawsuits that Adams handles are dismissed before trial. “So arbitration is a process to avoid something that likely won’t happen anyway,” he explains. Besides, Adams says, arbitrators tend to “just split the baby” to appease both sides. “And it’s more of a wild card because you have one person deciding the case rather than a jury,” he adds. (Like the other lawyers interviewed for this story, Adams would not discuss details of his company’s disputes.)
Changing up the Approach
David Vigilante is another in-house counsel who steers clear of boilerplate arbitration clauses. Arbitration isn’t evil, he says–it’s just a tool, and one that’s not necessarily better than litigation. Sometimes, it’s even worse. Arbitration “lacks the checks and balances that due process is supposed to afford,” says Vigilante, head of litigation at Turner Broadcasting System and chief editorial counsel at CNN. “There’s not a marked difference from traditional litigation” in the speed or the cost of resolving disputes, he adds. “With arbitration, you’re paying a lot of mouths–you have to pay three guys to think about it. But a judge is already paid for.”
Like many in-house counsel, Vigilante has come to prefer another method of alternative dispute resolution: mediation. A facilitated negotiation, mediation encourages communication, addresses misunderstandings and levels the playing field between parties, according to lawyers who prefer it. Though mediators don’t decide a case, the result–a settlement deal–is binding, explains Vigilante. “I judge the success of mediation not by whether you settle or make a deal. If you make progress through mediation,” such as narrowing the issues for arbitration or trial, “it’s a day well-spent,” he says.
Adams is also a fan of mediation. He uses it for all cases except those with completely frivolous claims. It can be, he says, “a very, very powerful process [with] a strong emotional component. It’s informal and the plaintiff feels like he’s controlling what’s happening.” Mediation also allows for more creative resolutions, particularly in employment cases, such as providing references and outplacement services, he adds.
Lawyers unfamiliar with mediation may wonder how it can be more effective than traditional settlement discussions. But Adams says his success rate with mediation is much higher than with court-ordered settlement conferences. “You realize there’s a real skill to it. Judges don’t have the skill or the time to get [a deal] done,” he says. “Mediators have a huge range of skill, and they’re demonstrating more and more skill in the employment area.”
Even lawyers who still use arbitration also turn to mediation as an automatic precursor to arbitration.
“It’s not the right construct to think of mediation and arbitration as either/or,” says A. Stephens Clay, an Atlanta-based business litigator. “Most GCs look at mediation in every case, not as an alternative but as a complement to arbitration. Because of the expense and so much uncertainty in quantifying the company’s exposure in arbitration and litigation, it’s imperative to resolve cases quickly. Mediation offers that opportunity.” Jay Welsh, general counsel of JAMS, the Resolution Experts, a national ADR service based in Irvine, Calif., says his clients seem to agree. His company’s 200 neutrals handle, nationwide, 70 percent mediations and 30 percent arbitrations. “Mediation is an umbrella process over both arbitration and litigation. If parties want to settle the case, they’ll come prepared to do that–it’s a powerful process that works well over 90 percent of the time,” Welsh says.
Though its flaws are becoming more apparent, arbitration is not going to disappear. “It’s still faster and cheaper” than litigation, says Wilson, who wrote the book Out of Balance: Prescriptions for Reforming the American Litigation System. Unlike a trial, arbitration offers confidentiality, and he believes it is especially effective in managing volume when corporate counsel face a recurring type of case.
Vigilante also concedes that the process can have value. “Even though I am not a huge fan of arbitration, I would not reject it outright,” he says. “If that is what’s best for my client, I will do it.”