November 9, 2020

Arbitration in a COVID world

Posted in Corporate Litigation, Employment Law by Gene Killian |

I have a love-hate relationship with arbitration. On the one hand, in the right circumstances, with the right arbitrator, it can save clients substantial money and time. We do a lot of insurance coverage work at our firm, for example, and the appraisal clause in a property insurance policy, which essentially provides for an arbitration in the event the insurance company and the policyholder can’t agree on the amount of loss, can be a handy tool. On the other hand, in the wrong circumstances, with the wrong arbitrator, things can quickly become prohibitively expensive.

With access to the court system hampered by the current pandemic, however, arbitration may be a good alternative for clients looking to get a dispute resolved without waiting for years. I recently tried an arbitration via Zoom, in fact, and we got it done without a hitch.

Of course, the threshold problem is trying to reach or enforce an arbitration agreement. In the employment law world, for example, this can be difficult. Plaintiffs’ lawyers understandably prefer the prospect of a jury trial, in the belief that jurors are apt to be more plaintiff-friendly and to issue larger awards than arbitrators.

Recently, in Imperator v. Medwell, LLC, which you can read here, the New Jersey Appellate Division wrestled with the applicability of an arbitration agreement in a Law Against Discrimination case. The facts: Shortly after starting her job, a chiropractor’s assistant was asked to sign a packet of employment-related papers, one of which was a 5-page arbitration agreement that specified IN BOLD LETTERS  that she was giving up her right to a jury trial in the event of an employment-related claim. Her boss stood at her desk, pointing out the places she was required to sign. Although the arbitration agreement stated that she had been given time to consult with a lawyer, that didn’t happen. She later testified that she felt pressured to sign the documents if she wanted to keep her job.  In addition, for some reason, the employer never signed the agreement. That sort of thing sometimes happens in a busy world, and really, it shouldn’t matter, since the employer obviously agrees with the arbitration provision. But here…it did matter.

The employee later sued for sexual harassment, and the chiropractor moved to compel arbitration. In affirming that the agreement was unenforceable, the Appellate Division wrote as follows: 

“Based on the unrefuted testimony, the [trial judge] concluded defendants, either by fraud or imposition, caused plaintiff to sign the Agreement. Further…the absence of defendants' signature was a significant factor in finding the document did not represent a mutual agreement between the parties. In addition, the judge found no evidence that plaintiff was afforded an opportunity to review the Agreement prior to signing despite language in the Agreement granting her an opportunity to review the Agreement with counsel…[W]e are satisfied the circumstances surrounding plaintiff's execution of the Agreement did not present a clear expression of an explicit and voluntary agreement to forego the court system and be bound by arbitration."

Wow. If you’re an employer, that’s enough to give you back pain.

If a Court doesn’t think that one of the parties is trying to take advantage of the other, though, an arbitration clause is likely to be enforced. In Keystone Food Holdings Ltd. v. Tyson Foods, Inc., a recent case in the Southern District of New York (which you can read here), two “sophisticated parties” got involved in a squabble over the sale price for the assets of a food company. Basically, the deal contained a complicated method for determining the final number. Tyson claimed it was $2.16. Keystone claimed it was $2.5 billion.

Keystone sued. Tyson then countersued, claiming Keystone’s parent company had engaged in accounting shenanigans to drive down the number. Tyson also claimed that Keystone had stolen more than $500,000 of artwork and collectibles that were supposed to be part of the assets Tyson bought. (Is this a fight between corporations over a food company, or is it a Beverly Hills divorce?)

The sales agreement contained an arbitration clause appointing the major accounting firm KPMG to decide certain pricing disputes.  The clause stated that, within 30 days of the referral, KPMG was required to deliver "a report setting forth such calculations and reasonably detailed explanations of each required adjustment, including the basis thereof." The clause also stated that “[KPMG’s] determination shall be final and binding upon Seller and Buyer, and absent manifest error, shall be deemed a final arbitration award that is binding on Buyer and Seller."

Tyson moved to have the pricing kerfuffle sent to arbitration with KPMG. Keystone resisted, essentially arguing that Tyson’s claims were based on alleged breaches of pre-closing warranties and representations, and not simply a pricing dispute, and therefore were not encompassed by the arbitration provision.

The Court said, “you’re out of here,” writing: “[T]he question for the court is whether the parties' disputes…fall reasonably within the scope of the clause. In light of the…strong policy favoring arbitration, any doubts concerning the scope of the arbitrable issue should be resolved in favor of arbitration…Thus arbitration should be compelled unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute...Accordingly, a court can compel arbitration where...[the] arbitration provision can be interpreted to encompass the parties' disputes.’” (Citations omitted.)

The takeaways here are simple. Make your arbitration provisions as clear as possible (and sign them!), so you don’t have to spend time and money litigating over whether arbitration is permissible. In a situation involving unequal bargaining power, such as between an employer and an employee, make sure the employee has time to review the proposed agreement, and do not pressure the employee to sign. And lastly, although arbitration can be expensive, it may be preferable to waiting years for resolution, especially given the world in which we now live.