Arbitration: Examining the Benefits Before Including in Your Contracts

1. Arbitration: Examining the Benefits Before Including in Your Contracts Hala Sandridge Fowler White Boggs PA February 16, 2012 Tampa FL

2. Why Choose Arbitration? • Reduce Expense • Eliminate jury passion • Speed of resolution • Eliminate protracted pretrial procedure • Eliminate attorney’s fee awards But whom do these benefits actually benefit? Are each of these purposes served under the current state of arbitration?

3. Downside To Arbitration • Expense • Adds extra layer to the litigation, including multiple trial and appellate proceedings • Motion to compel arbitration • Appeal of order on motion to compel arbitration (except federal court) • Litigation over attorney’s fees • Subject to attack in circuit court on motion to vacate • Subject to appeal from order on motion to vacate • Can go on for weeks in remote locations • Attorney’s fees available • Defending in two forums if not all parties subject to arbitration

4. Who Believes Arbitration Is Less Expensive Than Litigation?

5. Expense (continued)….. “In litigating this case without good basis through the district court and now through this Court, Harbert has deprived Hercules and the judicial system itself of the principal benefits of arbitration. Instead of costing less, the resolution of this dispute has cost more than it would have had there been no arbitration agreement.” BL HARBERT INTERNATIONAL, LLC v. HERCULES STEEL COMPANY, 441 F. 3d 905, 913 (11th Cir. 2006)

6. Downside To Arbitration (Continued)…. • Arbitrators not constrained by the law • Federal courts apply the “manifest disregard of the law” standard • Arbitrators cannot be reversed for errors or misinterpretations of law. Montes v. Shearson Lehman Bros., Inc., 128 F. 3d 1456, 1460 (11th Cir. 1997). • Under the FAC, appeal available only if: • Failed to provide due process • Arbitrator prejudice or bias • Arbitrator act outside authority • Award procured by corruption, fraud or other undue means

7. Downside To Arbitration (Continued)…. • Large awards and punitive damages defy concept that less “passion” by arbitrators then jurors • Waddell & Reed, Inc., 2003 WL 288471 (1st Dep’t Feb. 11, 2003) ($25 million punitive damages award issued against brokerage firm Waddell & Reed and in favor of one of its former brokers in an NASD arbitration.) • Sands Brothers & Co., 749 N.Y.S.2d 17 (1st Dep’t 2002) ($28 million) • In re Arbitration Between UBS Warburg LLC, 744 N.Y.S.2d 364 (1st Dep’t 2002) (affirming decision vacating $5.6 million award based on arbitrators’ disregard of securities law). • In 2005, Connecticut Supreme Court affirmed the confirmation of a $5 million punitive damages arbitration award, even though no compensatory damages were awarded, against MemberWorks Inc., a Stamford, Conn., direct marketer. • Shahinian v. Cedars-Sinai Medical Center, 2011 WL 1566971, court upheld an arbitration award against a physician of $508,124 in economic damages, $1,603,650 in emotional distress damages, and $2,580,000 in punitive damages. As to amount of punitive damages, court held that if the award were excessive, arbitrator's error no different from other errors of law, which are generally not reviewable

8. Downside To Arbitration (Continued)…. • Statute of limitations may not apply • Raymond James v. Phillips, Case No. 2D10-2144. • ___ So. 2d ___(Fla. 2d DCA, Nov. 16, 2011) (rev. pending) • Florida statutes of limitations only apply to actions • Court held that arbitration not an action • Florida S/L does not apply unless expressly incorporated into arbitration provision • Not enough to say “all state and federal statute of limitations apply.”

9. Given Your Purpose For Selecting Arbitration, Is Waiver Of Jury Trial A Better Option? • Judge, instead of jury, tries case • When is bench trial a “best bet” • If strong legal issue likely to be decided in early stage • Require extensive discovery • Keep open appeal options

10. If You Still Want An Arbitration Provision, Other Issues To Consider When Drafting Contract • Applicability to certain types of agreements (e.g. employment, nursing home) • Green Tree Financial Corp.-Ala. v. Randolph, 531 US 79 - Supreme Court 2000 (arbitration provision agreement enforceable in employment action even though cost might be prohibitive) • Effect on class actions: can exclude class action arbitrations if expressly say so in arbitration provision Stolt-Nielsen, S.A. v. Animal Feeds Int'l Corp., 130 S.Ct. 1758, 1775 (2010) (emphasis in original). • Should court rules of procedure apply • Will FAA or FAC apply (want FAA because no appeal of order compelling arbitration) • Use broad language “arising out of or relating to” • Give arbitrators power to award attorney’s fees

11. Recommendation: Weigh Options Before Including In Your Contract • Certain industries may have no choice given customer base (securities, telecommunication) • Consider where you want to be if the deal goes bad • Eliminate possible downsides from your arbitration provision and consider including: • Discovery • Rules of procedure • Appeals • Right to seek certain judicial relief • Attorney’s fees determination

12. Your Take-Away “In many cases, experts say arbitration is still expensive and time-consuming--just like trial--only without appeals. Deciding whether to arbitrate is not necessarily a simple choice. It's best to figure out what you want from arbitration before deciding to do it…” Christopher Danzig, Barring Flagrant Misconduct, Courts Should Let Arbitration Decisions Stand, InsideCounsel Magazine (September 2010 ).