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DRAFTING DISPUTE RESOLUTION CLAUSES FROM A LITIGATOR'S PERSPECTIVE Ron Coleman Partner, Parker, Hudson, Rainer & Dobbs LLP Claudia Levitas General Counsel, Hooters of America, LLC Parker, Hudson, Rainer & Dobbs LLP 285 Peachtree Center Avenue, N.E. 1500 Marquis Two Tower Atlanta, Georgia 30303 (404) 523-5300 / rcoleman@phrd.com 2015 Ronald T. Coleman, Jr.
WHY IS A DISPUTE RESOLUTION CLAUSE IMPORTANT? Decides HOW a case is litigated arbitration vs. court litigation Decides WHERE a case is litigated one party's preferred venue Decides WHEN a case can be brought Decides WHAT damages can be recovered
WHO LIKES ARBITRATION? How many participants include arbitration agreements in their contracts? Commercial contracts? Consumer contracts? Employment agreements?
FEDERAL COURTS LOVE ARBITRATION Federal Arbitration Act strong policy to enforce arbitration agreements as written Recent key Supreme Court cases: Stolt-Nielsen: parties must agree to class arbitration Concepcion: enforcing contractual class action waiver Italian Colors: enforcing arbitration and class waiver despite evidence that cost exceeded value of claims
DRAFTING ISSUES: DEFINING SCOPE OF DISPUTES AAA: "Any controversy or claim arising out of or relating to this contract, or any breach thereof " Is this clause broad enough? Does it cover tort or statutory claims? Draft to make clear intent to cover all disputes "Any and all disputes, controversies or claims of whatsoever kind or nature between the parties shall be resolved by arbitration "
DRAFTING ISSUES: CONSIDER CARVE-OUTS FOR CERTAIN CLAIMS Rationale: Things you don't want to leave to an arbitrator with no meaningful review Subjects of potential carve-outs Temporary or permanent injunctive relief Trademark, restrictive covenant, or other IP claims Issues implicating public health or safety Obtaining possession of real estate
DRAFTING ISSUES: DISCOVERY AND PROCEDURAL MATTERS Number of arbitrators consider amount or nature of disputes Take advantage of ability to limit scope of discovery, particularly ESI Limit number of custodians, types of data Require cost-shifting Reasoned award vs. mere statement of result
DRAFTING ISSUES: CLASS AND COLLECTIVE ACTION WAIVER Valuable risk mitigation tool Law is now crystal clear: Class waiver does not make clause unenforceable Waiver will be enforced is properly drafted Key question is whether parties intended to allow arbitration of multi-party claims Mere silence is not enough
CLASS/COLLECTIVE ACTION WAIVER But what evidence is sufficient to show "intent"? Change in form agreement to add class waiver? References to "all disputes" or "all remedies"? Incorporation of administrator rules that recognize class arbitration? Industry practice?
CLASS/COLLECTIVE ACTION WAIVER Avoid problems by clear drafting: "All claims shall be arbitrated on an individual basis" "Neither party shall bring any class, collective, or multiparty claims" "Neither party shall be a claimant or otherwise participate in any class or multi-party action"
CLASS/COLLECTIVE ACTION WAIVER Next frontier: Is class waiver enforceable in litigation vs. arbitration? Good reasons for different treatment? What is the proper analysis? Enforce the parties agreement? Can contracting parties agree to modify court rules? Answer??
CLASS/COLLECTIVE WAIVER IN LITIGATION See Quiznos cases conflicting results Bonanno, 2009 WL 1068744 (D. Colo. Apr., 20, 2009) Rule 23 is procedural rule, not substantive right Analysis: Is waiver unconscionable? NO Individual lawsuits not prohibitively expensive Greater bargaining power not enough Martrano, 2009 WL 1704469 (E.D. Pa. June 15, 2009) Parties can t force court to forego judicial efficiencies under Rules 23 and 42 100s of individual trials not an acceptable result BUT what about Atlantic Marine (S.Ct. 2013)?
CLAIMS BY OR AGAINST RELATED PARTIES Theories to bind non-signatories: Equitable estoppel (offensive or defensive) Agency Third-party beneficiary Veil-piercing Incorporation by reference BUT avoid challenge by drafting precisely
DEFENSES TO ENFORCEMENT OF ARBITRATION PROVISION Short answer: not many Fraud in inducement of arbitration clause Unconscionability High standard under most states law Can't apply different standard for evaluating arbitration clause vs. traditional contract
DEFENSES TO ENFORCEMENT Potential arguments for unconscionability - VOTE Non-mutual: one party can bring court lawsuit but other party must arbitrate all claims? Bar for non-economic, punitive, or statutorily authorized damages? Beware of states with strict unconscionability standards (e.g., Arkansas)
SPECIAL CONSIDERATIONS FOR CONSUMER CONTRACTS Make sure no regulatory bar Draft to be reasonably fair to individual litigants Make sure chosen arbitral forum will hear claims Consider AAA Clause Repository for "approved" consumer arbitration clauses AAA vets clause; not let to discretion of arbitrator Registration process
DEFENSES TO ENFORCEMENT Drafting tips to overcome a challenge: Include a delegation clause Include a severability provision Make arbitration and any carve-outs mutual Place terms potentially subject to challenge outside the arbitration provision
MANDATORY MEDIATION PROS: Chance to resolve dispute at early stage Chance to avoid disclosure obligation Way to get early notice of dispute "Cover" to negotiate early but not look weak CONS: Incomplete knowledge of facts to evaluate case Unsuccessful early mediation can harden parties' positions Too early to make significant compromise
MANDATORY MEDIATION Failure to comply might support motion to dismiss Failure of condition precedent Independent breach of contract No subject matter jurisdiction How effective is the remedy: stay vs. dismissal? Refusal to enforce for futility?
VENUE/FORUM SELECTION CLAUSES Key distinction: Permissive vs. Mandatory "Parties consent to jurisdiction and venue in [court] " vs. "All disputes shall be litigated in [court] "
VENUE/FORUM SELECTION CLAUSES Draft to be crystal clear: "The parties agree that [insert court] shall be the exclusive venue and exclusive proper forum in which to adjudicate any case or controversy arising out of or related to this Agreement, ancillary agreements, or the business relationship between the parties." Add that parties "will not contest or challenge the jurisdiction or venue of [designated court]."
CHALLENGING THE CHOSEN FORUM First to File Rule Court can decline jurisdiction when case involving same parties and issues is pending in another court Allows "race to the courthouse" for permissive clause But for mandatory clauses, see Atlantic Marine (Supreme Ct. 2013) Courts must enforce FSCs in all but the most extraordinary circumstances Plaintiff's forum choice and parties' private interests not considered
CHOICE OF LAW: WILL THE CHOSEN LAW APPLY? Restatement: COL clause presumptively valid and upheld if: Reasonably related to the transaction Chosen law not contrary to fundamental policy of forum More limited substantial relationship approach Court can disregard chosen law, even if reasonable basis for it, if most significant contacts are with another state
CHALLENGING THE CHOSEN LAW State protective statutes (e.g., franchisees and dealers) Impact of State Public Policy Interests (e.g., CA, GA policy on restrictive covenants) Important note: Be careful what you wish for! Check relevant law in the chosen forum Don't blindly pick Delaware or NY
LIMITING DAMAGES WHAT ARE THE LIMITS? Rationale: Party's interest in avoiding a runaway verdict Damages limitation provisions can manage risk Waiver of punitive or exemplary damages No consequential or indirect damages Limitation to amount paid under contract Courts will generally enforce
LIMITING DAMAGES WHAT ARE THE LIMITS? Factors supporting enforcement "knowing and voluntary waiver" Provision conspicuous and unambiguous Parties initialed page containing waiver Burden on challenger to show provision is invalid But enforcement is not always a "slam dunk" Some protective statutes cannot be waived Public policy grounds for challenge State-specific unconscionability challenge
APPLICATION OF DAMAGES LIMITATIONS If you can't defeat clause, can you get around it? What are "indirect" or "consequential" damages? Lost profits? Benefit of the bargain damages? Restitution? "General" damages? Other types of damages?
ATTORNEYS' FEES AND LITIGATION COSTS Did I prevail? "Prevailing party" generally means: The party in whose favor a judgment, decree, or final order is rendered The party obtaining substantially the relief sought, whether by compromise, settlement or judgment If agreement does not define "prevailing party," how should court decide?
ATTORNEYS' FEES AND LITIGATION COSTS Different scenarios what if One party gets some relief but not all? Both sides get some relief? Is award of nominal damages enough? Can there be no prevailing party?
What can I recover? Attorney s Fees? Litigation costs? Expert Witness Fees? Court Costs? Anything Else? ATTORNEYS' FEES AND LITIGATION COSTS Be clear about what you want to include!
OTHER RISK MITIGATION PROVISIONS Contractual limitations period to bring a claim Generally enforceable if parties have reasonable chance to discover and assert claims Shorter than 1 year can be a problem Waiver of jury trial Generally enforceable in federal court Some state courts refuse to enforce
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