find attached

BUSINESS NEGOTIATION

And

BUSINESS DISPUTE RESOLUTION

Alternative Dispute Resolution (ADR)

Excerpts from The Legal Environment of Business, 8th Edition By Cross and Miller

lFarurr are coslrv ano ame cori- | ,uting. lt has been said that I ttr¡s is the result of 'too many

lawyers, too many tawsuits, and too

many laws." ln fact, s¡nce 1960, the

number of lawyers has tripled, the

number of lawsuits has tripled, and

the number of laws has multiplied,

while the numbers of judges and courts

have not kept pace.

Although it is true that the number

of lawsuits filed has.grown rapidly,

only 5:to l0 percent of lawsuits filed

actually gó to trial. Most cases are

settled ór dismissed long before the

pa¡iås enter á courtroom. Moregver,

the number of cases that are litigated

does not appear to be growing anY

faster than the population. When

compared with the targe number of

transactions that occur in our highly

complex economy, the rate of litigation

appears low to some.

, Nevedhqlgss, in any individual case, ¡trmqy b..ç months before a hearing

can be sclreduled.:Depending on the

complexity of the case, the extent of

discovery,proceedings required, the

delaying tactics of the opposing party,

and the backlog of cases pending in the

particular court, several years may pass

before a case is actually tried. Even in

the best of situations, the civil proce-

dures discuised in Chapter 2 all require

much time and expense, particularly

when electronic discovery is involved.

As the cost and,complexity of litiga'

tion have grown, businesspersons and

other individuals have asked, "ls there

a more appropriate way to resolve

disputes?"

SECTION r

ATTERNAIIVES TO TITIGATION

lawyers and litigants who bring frivolous lawsuits in federal courts.

'Many courts require mediation ot arbitrafion before a case goes to trial. There are proposals tq fur' ther reduce delay and expenses in federal civil cases, and proposals are befng considered by the states as well..Some of the proposals can be viewed as case- manageínent þlans. One proposal, for example, would require each'federal district court to imple- ment procedures for placing cases on different Íacks, with simple cases being handled more quickly than complex ones.

Politics and Law Because reforms of arry system affect individuals and groups differently, they seldom are accomplished easily and quickly. Reform of the court system is a prime example. At the federal level, members of Congress long have been concerned with bringing court costs and delay under control. These concerns

A number of solutions have been proposed, and soùe have bèen implemented, to reduce the congestion in our court system and to reduce the litigation costs fac- ing all members of society. The enforcement of'arbitra- tion clauses, the use of court-refened ar-bitration and mediation, and the emergence of an increasing'num- ber of private forums for dispute resolution have all helped to reduce the caseload of the courts.

Another solution to the problem involves put- ting caps on damage awards, particularly for pain and suffering. Without the probability of obtaining multimillion-dollar judgments for pain and suffer- ing, some potential litigants will be deterred from undertaking lawsuits to obtain damages. Another avenue of attack is to penalize those who bring friv- olous lawsuits. Rule 11" of the Federal Rules of Civil Procedure allows for disciplinary sanctions against

57

58 uNrr oNE rflE FoUNDAÍtoNs

led to legislation that required the federal courts to develop a plan to cut costs and reduce delay within the federal judicial system.

New Methods and Anangements The search for alternative means to resolve disputes has produced several distinct methods and arrange- ments. These range from neighbors sitting down over a cup of coffee to work out their diffe¡ences to huge multinational corporations agreeing to resolve a dispute through a formal hearing before a panel of experts. All of these alternatives to traditional litiga- tion make up what is broadly termed alternative dispute resolution (ADR).

ADR describes any procedrle or device for resolv- ing disputes outside the traditional iudicial process. ADR normally is a less expensive and less time- consuming process than formal litigation. In some instances, it also has the advantage of being more private. Except in disputes involving court-annexed arbitration (as will be discussed later in this chapter), no public record of ADR proceedings is created; only the parties directly involved are privy to the infor- mation presented during the process. This is a par- ticularly important consideration in many business disputes, because such cases may involve sensitive commercial information. Today, ADR also includes online methods óf resolving disputes.

The great advantage of ADR is its flexibility. Normally, the parties themselves can control how the dispute will be settled, what procedures will be used, whether a neutral third partywill be present or make a decision, and whethei that decision will be legally binding or.nonbinding. ADR also offers more privary than court proceedings and allows disputes to be resolved relatively quickly.

.

Today, more than 90 percent of civil lawsuits are settled before trial using some form of ADR. Indeed, most states either require or encourage parties to undertake ADR prior to trial. Many fedeiat courts have instituted ADR programs as well. In the follow- ing pages, we examine the basic forms of ADR. Keep in mind, though, that new methods of ADR-and new combinations of existing methods-are con- stantly being devised and employed.

SECTION z f-¡ .. NEGOTIATION AND MEDIATION

Alternatjve dispute resolution methods differ in the degree of forrnality involved and the extent to which third parties participate in the process. Generally,

negotiation is the least formal method and involves no third parties. Mediation may be similarly infor- mal but does involve the participation of a third party.

Negotiation The simplest form of ADR is negotiation. In the process of negotiation, the parties come together informally, with or without attorneys to represent them. Within this informal setting, the parties air their'differences and try to reach a settlement or resolution without the involvement of independent ' third parties. Because no third parties are involved and because of the informal setting, negotiation is the simplest form of ADR. Even if a iawsuit has been initiated, the parties may continue to negotiate their differences at any time during the litigation process and attempt to settle their dispute.

PREPARATIOIT¡ tOR NEGOT¡AT|OH In spire of the informality of negotiation, each parlv must care. fully prepare his or.her side of the case. The elements of the dispute should be considered, documents and other evidence should be collected, alä'u;it, nesses should be prepared to testify. Negotiåting . from a well-prepared position improVes,.the:odits' óT obtaining a favorable result. Even,iF a disþute:is riot resolved through negotiation, :preparation for¡nego., tiation will reduce the effort required to prepare for ,, the next step in the dispute-resolution process.

AS$¡STED NEcOTlATlOll To facilffiunågotiarion,, various forrirs of what misht ¡djlcåfieO' ,,assisted negotiariont' have emerged ín ,..""i$8a'íi 'nsïis!ðo , negotation, as the term implies, involveS the assis- '. tance of a third part¡ Forms of ADR associated with the negotation process include mini-,trials,,,e4rlv 7ew tral case evaluation, and facilítation. An'other form of assisted negotiation-the summary ¡ufy triat-.will ' be discussed later in this chapter

A mini-trial is a privatã proceeding in which each part/s attorney driefly aigues the þarty's cáse before the other party. Typically, a neutral third party, who acts as an adviscr and an expert in the : area being disputed, is also present. If the parties fail

'

to reach an agreement, the adviser renders an opin- ion as to how a court would likely decide the issue. The proceeding assists the parties in determining whether they should negotiate a settlement of the dispute or take it to court.

In early neutral case evaluation, the parties select a neutral third party (generally an expert in the subject matter of the dispute) to evaluate their

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CHApfER ! Alternative and Online Dispute Resolution

respective positions. The parties explain their posi- dons to the case evaluator however they wish. The evaluator then assesses the strengths and weaknesses of the parties' positions, and this evaluation forms the basis for negotiating a settlement.

Disputes may also be resolved in a friendly, non- adversarial manner through facilitation, in which a third party assists disputing parties in reconcil- ing their differences. The facilitator helps to sched- ule negotiating sessions and carries offers back and forth between the parties when they refuse to face each other in direct negotiations. Technicall¡ facili- tators are not to recommend solutions. (In practice, however, they often do.) In contrast, a mediator is expected to propose solutions.

Medíation One of the oldest forms of ADR is mediation. In mediation, a neutral third party acts as a mediator and works with both sides in the dispute to facil! tate a resolution. The mediator normally talks with the parties separately as well as jointly, emphasizes points of agreement, and helps the parties to evalu- ate their options. Although the mediator may pro-

to express an opinion about the dispute, lawyers can be excluded from the proceedings, and the exchange of a few documents can replace the more expensive and time-consuming process of pretrial discovery. Disputes are often settled far more quickly in media- tion than in formal litigation.

One of the bigger advantages of mediation is that it is not as adversarial in nature as litigation. In medi- ation, the mediator takes an active role and attempts to bring the parties together so that they can come to a mutually satisfactory resolution. The mediation process tends to reduce the antagonism between the dispgtants, allowing them to resume their former relationship while minimizing hostility. For this rea- son, mediation is often the preferred form of ADR for disputes involving business partners, employers and employees, or other parties involved in long- term relationships.

Another important benefrt of mediation is that the mediator is selected by the parties. In litigation, the parties have no control over the selection of a judge. In mediation, the parties may select a media- tor on the basis of expertise in a particular field as well as for fairness and impartiality. To the degree that the mediator has these attributes, he or she will more effectively aid the parties in reaching an agree- ment over their dispute.

DISADVANTAGES 0t [ttDtATlON,.Mediation is nor without disadúdntages. A mediatòr is likely to charge a fee. (ThiS can be split between the parties, though, and thus may represent ,less expensè,than would both sides' hiringlawyers.)

Informality ancl the absence of a third party referee can also be disadväntageous. (Remember,that amedi- ator can only help the parties reach a decision, not make a decision for them.¡ 1,y¡thout a deadline hang- ing over the parties' heads, and without the threat õf sanctions if they fail to negotiate in good faith, they may be less willing to máke Concessions or otherwisê strive honestly and dilÌgently to reach a settlement. This can slow the process or even cqq$e it to fail.

A more formal method of ADR is arbitration, in which an arbitrator (a neutral third party qr a panel of experts) hears a dispute and impoies á resolution on the parties. fubitration differs from other forms of ADR in that the third parry hêaring the dispute makes a decision for the parties. Exhibit 3-1 on the following page outlines the basic differences among

59

pose a solution (called a mediator's 'she does not make a decision resol

proposal), he or ving the matter.

of mediation are being

mediator, who need not be a lawyer, usually a fee for his or her services (which can be

between the parties). States that require parties undergo ADR before trial often offer mediation as

of the ADR options or (as in Florida) the only

Mediation is essentially a form of assisted negotia- We treat it separately here because traditionally been viewed as an alternative to negotiation.

a mediator usually plays a more active than the neutral third parties in negotiation-

I Today, forms of ADR. characteristics

bined with those of arbitration (to be discussed In bínding mediatíon, for example, the parties that if they cannot resolve the dispute, the

the issue. tegally binding decision on .

-.i-.b-'SECT¡ON

iIn mediøtion-arbitration, or "med-arb,,, the ARBITRATION

mediator can make a

parties frrst attempt to settle their dispute through mediation. If no settlement is reached, the dispute will be arbitrated.

ADVANTAGES oF MEDtATtot{ Few procedural rules are involved in the mediation process-far fewer than in a courtroom setting. The proceedings can be tailored to fit the needs of ih. putìier-the mediator can be told to maintain a diplomatic role or be asked

60 uN¡T oHE TrrE FouNDAÍroNs

ExH¡BlT 5-l . Ilasic Differcnces in the Traeritional Fonns of ADII

The parties themseives reach a resolution.

The parties, but the mediator may suggest or .propose a resolution.

The arbitrator imposès a resolution on the.parties that may be either binding or nonbinding

arbitration agreements in cases governed by federai law. Virtually any dispute can be the subject of arbi- tration. A voluntary agreement to arbitrate a dispute normally will be enforced by the courts if the agree- ment does not compel an iilegal act or contravene public policy.

the three traditional forms of ADR. The key differ- ence between arbitration and the forms of Ánn ¡urt discussed is that in arbitratioe,. the third party,s deci- sion may be legally binding on the parties. Usually the parties in arbitration agree that the third party,s decision will be legally bindíng, although the parties can also agree to nonbindíng arbitration.

When a dispute arises, the parties can agree to settle their differences informally through arbitra- tion rather than formally through the court system. Alternatively, the parties may agree ahead of time that, if a dispute should arise, they will submit to arbitration rather than bring a lawsuit. If the par- ties agree that the arbitrator's decision will be legally binding, they are obligated to abide by the arbitra- tor's decision regardless of whether or not they agree with it. (See this chapter's lnsight into Ethics featurc on the facing page for a discussion of some potential ethical implications of the use of arbitration.)

The federal government and many state govern- mcnts favor arbitr:ation over litigation. I'he fecl- eral policy favoring arbitration is ernbodied in the Federal Arbitration Act (I.AA) of I9ZS.|'fhe FAA requiles that courts give deference to all voluntary

The'Federal Arbitration Act The Federal Arbitration Act does not establish a set arbitration procedure. The parties themselves must agree on the manner of resolving their dispute. The FAA provides the means for enforcing the arbitra- tion procedure that the parties have establiShed for thcmselves.

Section 4 allows a party to petition a federal dis- trict court for an order compelling arbitration under an agreement to arbitrate a dispute. If the judge is "satisfied that the making of the agreemcnt for arbi- tration or the failure to cornply therewith is not in issue, the court shall make an order directing the parties to proceed with arbitration in accorclance with the terms of the agreernent."

Under Section 9 of the FAA, the parties to tile arbitlation may agree to have the arbitrator,s deci- sion conlìrmed in a fecleral district court. Through¡. 9 ti.S.C. Sections 1 l5

Parties meet informally with or without their attorneys and attempt to is the simplest and feast method

a Ihisresolution. ADR.of

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62 uNlr oNE ntr FouNDATtoNs

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confi.rmation, one party obtains a court order direct-

ing another party io comply with the terms of the

artitrator's ãecision. Section 10 establishes the

ätãi"¿t UV which the arbitrator's decision may be

i"i"ti¿" (óanceled). The grounds for setting aside a áecision àre [mited to misconduct, ftaud' corrup-

tion, or abuse of power in the arbitration process

iir.iir "

court will iot review the merits of the dis- pute or the arbitrator's iudgment'

The FAA covers any arbitration clause in a con- tract that involves interstate commerce' Business

activities that have even remote connections or

minimal effects on commercebetween fiüo or more

;l;;t "t. considered to be included' Thus' arbitra-

tion ugr".-ents involving transactions only sligl]ll .orrrreit"d to the flow of interstate commerce may

iutt.rn¿.i the FAA, even if the parties, at the time of'

contracting, did not expect their arbitration agree-

ment to involve interstate commerce'

'lCÃSlllNTP.0.tNfrf Buckeye Check Cashing' lnc''

;;th* p";t;nal checks for consumers in Florida' BuckeyË would agree to delay submitting a con- ,.r-"r1, check for payment if the consumer paid a

"finance charge." For each transaction, the consumer

signed an agreement that included an arbitration

.iå"t". R grðup of consumers fried a lawsuit claim- i.rg tfrut Bìrckeye was charging an iltegally high

rate

ãi"i.rt.r.rt in viptation of itate law' Buckeye filed a

*otio" to compel arbitration; which the'trial court A"i"d, and ttre case was appealed; lfre gþinti,ffs argued' that the entire contract-including the arli- trition claus.e-.-w1s illegal and-therefore arbitration *ár ttot iuquired. The Úriite¿ states sr+plel49 9o.].l.rt iàr"¿ ,tt"r. the arbitration provision was severÍbl1t ãì lãpuur. of being.separaçed, 'f¡om.¡he resl of ¡he óot tå4. The Couñ held thut when;thq challgng9,is io tfre validity of a contract as a whole, and not spe:

cifically to,ai arbitration clause within the'contract'

an arbitrator must resolve the dispute' This is true

even if.the contract later proves to be u¡enforceable'

because the FAA established a national polic¡r favor-

ing arbitration and that policy extends to botn teo-

erãt and state courts.2'

Conference of Commissioners on Uniform State iaws in 1955. Those states that have not adopted the uniform act nonetheless follow many of the

nractices sPecifred in it. ' Urld., the uniform act, the basic approach is to give full effect to voluntary agreements to arbitrate

äisputes between private parties' The act supple-

rn.itrt private arbiiration agreements by providing .*pii.it'ptocedures and remedies for enforcing arbi-

irition u ,....t tt. The uniform act does not' how- ever, diciate the terms of the agreement' Moreover'

undãr both federal and state statutes, the parties are

aifor¿e¿ considerable latitude in deciding the subiect

matter of the arbitration and the methods for con-

ã;di"g the arbitration process' Il lh9 abs;1,ce of a controiling statute, the iights and duties of the par-

ties are establish"d and limited by their agreement'

The Arbitration Process The arbitration process begins with a submission' Submission is the act of referring a dispute to an

arbitrator. The next.step is the heørîng, inwhich evi-

dence and arguments are presented to the arbitrator'

itt. pto..tt iulminates in an øward, which is the decision of the arbitrâtor.- t iíi. risht to appeal the award to a court of law is [mited. ír trt. u*ãtd was made under a voluntary äiüü*io".agreement, a court normally'will not

set it:gs,idg even í! it was the result'of qn elroneous detertni4ation of fact ;or an' incorrect interpretation

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State Arbitration Statutes Nearly all states follow the federal approach to uot.rítury arbitration. Most of the states and the

District óf Cotumbia have adopted the Uniform Árbitration Act, which was drafted by the National

hoped it would be.

SUBMISSION The parties may agree to submit qulttiottt of fact, questions of laq or both to the Jrbitrator. The paities may evel agree to leave the interpretation of the arbitration agreement

to

the arbitiator. In the case of an existing agreement

to arbitrate, the clause itself is the submíssion to

arbitration. The submission typically states the identities of

the pafties, the natuiô of the dispute to be resolved'7. Buckeye Check Cashing, Inc' v' Cardegna' 546 U'S' 440' 1

rzo4, 163 L.Êd.zd i038 (2006). 26 S.Cr.

CHApTER ! Atterndlive and Onlíne Díspute Resolution

rhe aonetary amounts involved in the controversy,

,ne location at which the arbitration is to take place,

"ï¿ tn. intention of the parties to be bound by the

i.l',ittutor't award' E'xhibit 3-2 on the next page con-

iujns a samPle submission form.

Most states require that an agreement to submit

a dispute to arbitration be in writing. Moreover, t ..u*. the goal of arbitration is speed and effi- ciency in resolving controversies, most states require

that matters be submitted within a definite period of

drne, generally six months from the date on which

the dispute arises'

fHE HÉARlt{G Because the parties are free to con- struct the method by which they want their dispute

resolved, they must state the issues that will be sub- mitted and the powers that the arbitrator will exer- cise. The arbitrator may be given power at the outset of the process to establish rules that will govern the proceedings. Typically, these rules are much less iestrictive than those governing formal litigation. Regardless of who establishes the rules, the arbitrator will apply them during the course of the hearing.

I Restrictions on the kind of evidence and the manner in which it is presented may be less rigid in .arbitration, partly because the arbitrator is likely to

an expert in thè subject matter involved in the Restrictions may also be less stringent

there is less fear that the arbitrator will be by improper evidence. In contrast, evidence

jury trial must sometimes be presented twice: to the judge, outside the presence of the jury,

if the evidence may be heard by the and-depending on the judge's ruling-again,

the typical hearing format, the parties begin would at trial by presenting opening argu-

to the arbitrator and stating what remedies¡ or should not be granted. After the opening

have been made, evidence is presented. may be ealled and examined by both

After all the evidence has been presented, the give their closing arguments. On completion closing arguments, the arbitrator closes the

65

In most states, the award need not state the arbi- trator's findings regarding factual questions in the case. Nor must the award state the conclusions that the arbitrator reached on any questions of law that may have been presented. AII that is required forthe award to be valid is that it completely resolve the controversy.

Most states do, however, require that the award be in writing, regardless of whether any conclusions of law or findings of fact are included. if the arbitra- tor does state his or her legal conclusions and factual f,ndings, then a letter or an opinion will be drafted containing the basis for the award. Even when there is no statutory requirement that the arbitrator state the factual and legal basis for the award, the parties may impose the requirement in their submission or in their predispute agreement to arbitrate.

Enforcement of Agreements to Submit to .Arbitration The role of the courts in the arbitration process is limited. One important role is played at the prearbi- tration stage. A court may be called on to order one party to an arbitration agreement to submit to arbi- tration under the terms of the agreement. The court in this role is essentially interpreting a contract. The court must determine what the.parties have com- mitted themselves to before ordering that they sub- mit to arbitration.

THE ISSUE OF ARBITRABIIITY When a dispute arises as to whether or not the parties have agreed in an arbitration clause to submit a particular matter to arbitration, one party may ûle suit to compel arbi- tration. The court before which the suit is brought will not decide the basic controversy but must decide the issue of arbitrabilit|-that is, whether the issue is one that must be resolved through arbitration. If the court finds that the subject mattêÍ in contro- versy is covered by the agreement to arbitrate, then a party may be compelled to arbitrate the dispute involuntarily.

Although the parties may agree to submit the issue of arbitrability to an arbitrator, the agreement must be explicit; a court will never infer an agree- ment to arbitrate. Unless a court finds an explícit agreement to have the arbitrator decide whether a dispute is arbitrable, the court will decide the issue. This is an important initial determination, because no party will be ordered to submit to arbitration unless the court is convinced that the party has con- scnted to do so.

THE AWARD After each side has had an opportu- l-1Y

," present evidence and to argue its case, the albitrator reaches a decision. The final decision of the arbitrator is referred to as an award, even if no rnonetary payment is conferred on a party as a result o^t the proceedings. Under most statuies, the arbitra-

l?j^*u:, render án award wirhin thirty days trf theLrose of the hearing

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CHAPIER I Alternative and Onlíne Díspute Resotul¡on

The terms of an arbitration agreement can limit the types of disputes that the parties agree to arbitrate. When the parties dO not specify limits, however, disputes can arise as to whether the par- ticular matter is covered by the arbitration agree- ment, and it is up to the court to resolve the issue of arbitrability.

In the following case, the parties had previously agreed to arbitrate disputes involving their con_ tract to develop software, but the dispute involved claims of copyright infringement (see Chapter 14). The question was whether the copyright infringe- ment claims were beyond the scope of the arbitra_ tion clause.

65

.:¡

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COMPANY PROFILE ¡ ln 1884, John H. Patterson founded the National Cash Register Company (NCR), maker of the first mechanical cash registers. ln I906, NCR created a cash registe"r run by an electric motor. By I 914, the company had developed one of the first automated credit"systems. By the 1950s, NCR had branched out into transistorized business computers, and later it expanjed into liquid crystal displays and data warehousing. Today, NCR is a woddwìde provider of automated teller rnachines (AIMÐ, integrated hardware and software systems, and relateà maintenance and support services. More than 3o0,0oo NCR ATMs are installed throughout the world.

BACKGROUND AND TACTS . To upgrade.the security of its RtMs, NCR developed a soft- ware solution to install in all of its machines. nitËe same time, Korala Associates, Ltd. (KAL), claimeJ to have developed a similar security upgrade for NCR's ÆMs. Indled, KAL had entered into a contract with NCR in 1998 (the "1998 Agreement") to develop such software. To facilitaté that process, NCR hqJ loaned to KAL a proprietary ATM that contained copyrighted software called ApTRA xri. Ñên uff"g"d that KAL had "obtained access to, made unauthorized use o{ and engaged in unauthorized .opy,:ng of the AFTRn XFS softwarej' NCR further claimed that KAL had developã¿ is uà,rion áilil ;:ú;,y upgrade only by engaging in this unauthorized activity. when NCR brought a suit claiming copyritnt infringement KAL nroved to compel arbitration under the terms of the t õse Rgreement. Àt tr¡åt, riL prevailed. NCR appealed the order compelling arbitration.

IN THE TANGUAGE OF THE COURT Chief Justice S,4TCHELDER delivered the opíníon of the court.****

The arbitration clause contained within the 199g Agreement provides that:

a. click on "opinions search" and then on "Short Title,,, and type ,.NCR.,, click on .,submit euery.,, Next, click on the opinion link in the first column of the row ðorresponding to the name of this case.

cAsE cONTINUES I

Any controverry or claim arising out of or relating to this contract, or breach thereof, shall be settted by arbitration and iudgment upon. the award ¡endered by. the arbitrator may be entered in any court havi¡g jurisdiction thereof. The a¡bitrator irral ue uppói.rt.d upon the murual agreement ór ¡ottr gartie¡ failing which both parties will agree to be subject to any uibittuto. that shalibe chosen by the President of the Law Society.

The parties do not dispute that a valid agreement to arbitrate exists; rather the issue of con- tenlion i¡ wltetherNCR'¡ claims fall within the substantive scope of the agreement.

As a matter of federal law, any doubts concerning the scopi of arbinãble issues should be resolved'in favor of a¡bitration. óèspite this strong pîesumption i" fu"o, ãi ur¡tr*¿",;äüi- tration is a matter of contract uetwäen tt e fartles, and one cannot;. ;.qilü'i,5.n;;;" arbitration a dispute which it has not agreed to submit to arbitration .,, Whin faced with ø broad arbitration clause, sich øs one covering aiy dßpute arising out of an agreement, o ,o"rt tinoyti ¡oiti, the presumption of arbítration and resolve doubts ín favor of arbitratiõn. hdeid, in such a case, only an ex?ress provísíon excludíng a specific dßpute, or the most forcefut evidence of a purpose to exclude

66 ur{rr oNE T,rE FouNDATroNs

cAsE 3.r coNTINUED ) the claim fi'om arbitratíon, will remove the dispute ftom consideration by the arbítrators. [Emphasis, added.l

* * * It is sufficient that a court would have to reference the 1998 Agreement for part of NCR's direct [copyright] infringement claim. Under these circumstances, we ftnd that the copy- right infringement claim as to APTRA XFS falls within the scope of the arbitration agreement.

DECISION AND REMEDY . The U.S. Court of Appeols for the Sixth Circuit offirmed the port of the distrid court's decision compelling arbitrotion of NCR's cloims of direct copyright infringement reloting to the APTRA XFS softwore.

THE LEGAL ENVIRONMENT DIMENSION . Why did NCR not wont its cloims decided by orbitration?

THE ETIIICAL DIMENSION . Could NCR hove o cloim thot'KAL engoged in unfoir com- petition becouse KAL engoged in unethicol business procticesT (Hint: lJnfoir competition moy occur . when one porty deceives the public into believing thot is goods ore the goads of onother) Why or. -- why not?

C0MPUISORY ARB¡TRATIOI{ AGREEIIIENTS A sig- nificant question in the last several years has con- cerned compulsory arbitration agreements. For example, many claim that employees' rights are not suffrciently protected when they are forced, as a condition of being hired, to agree to arbitrate all disputes and thus waive their rights under statutes specifrcally designed to protect employees. The United States Supreme Court, however, has held thât mandatory arbitration clauses in employment contracts generally are enforceable.3

Arbitration clauses in contracts for consumer goods and services have also been a source of con- troversy. Generally, the criticism of compulsory arbitration in thgei contexts has to do with the parties' unequal bargaining power. For example, an employment contract that provides,for.manda- tory arbitration of any disputes might be presented to a iob applicant on a take-it-or-leave-it basis. In

5. For a landmark decision on this issue, see Gilmer v. Interstate/ lohnson Lane.Corp., 500 U.S. ZO, ILI S.Ct. L647 , 1.I4 L.Ed,zd 26 (1e91).

other words, if the applicant wants the job, he or she will have to sign the contract. As you will read in Chapter 9, a contract or clause drafted by one party (the dominant paÍty) and presented to the othef party on.a take-it-or-leave-it basis is refened to as . an adhesion contrøct. Although the coufts normally

"

enforce contracfual agreements, when enforcement would be manifestly unfair or oppressive, a court may deem the contract unconscionable-that is, con- trary to public policy-and refuse to enforce it.

Compulsory arbitration agrcements often spell out the rules fo¡ a mandatory proceeding. For example, an agreement may address in detail the amount and payment of ûling fees and other expenses. When an individual worker lacla the ability to pay, some courts have overh¡rned provisions in employment-related agreements that require the parties to split the costs.

ì

In the following case,',a ftavel agency included an arbitration clause in its contract with two cli- ents who participated in an agency expedition to Mt. Kilimanjaro, the highest mountain in Africa. The court had to determine whether the agreement . to arbitrate should be enforced.

(,tu az)

æ Setting Asíde an Arbitration Award This approach is consisrent with the underly, After:the arbitration has been concluded, the losing lig Ti of all voluntary arbitration-that its basis party may appeal the aibitrator'r u*utãtto ;.;;;;; Itll,:uly contract law' If the parties freely contract itrer"itr.ringpurrytnryseekacouit"ti.i.o-o.iiil; ,' y]ll one another, courts will not interfere simply the otherpäitytó compty.itrr rh.;.ràifùå;"Ñ ?:._ilt..""..side feels that it received a bad bargain. of review in either situãtion is much r"or. r;;;i"ãà Any party challenging an award must face the pre- than in an appellate corrtis revi.* oil t;i"t;il :lT,pli"" that a final award is valid. But is an award decision. The court does not look at tfr. -.iii, oJ tfr.

flnal or binding if the parties did not agree that it underlying dispute, and the courr wilt ".i;ã;;-

would be?

subtract from the remedies provided by the award. The court's role is limited tõ determiningwhettrår luB.tlc.PollcY

AND ILLEGAilTY In keeping with there exists a valid award: If so; the court'*ili;;;; contract.law principles, no award will be enforced the parties to comply with the,terms. Th" ;.;;;;i if compliance with the award would result in the view ls that because the.parties *"r. rr.àìo";;; commission of a crime or would conflict with some the issues:and ser the porvìrs of the arbitrator ,t;h; 9:.:Ît.:, social policy mandated by statute. A court ourset, they cannot comprain about the resurt. äi::J,:##if:J,:'j,#iîiå;",ättlïi|il: FACT tIt{DtNGS AND tEGAt COtr¡CLUSlOt{S The involving a matter of significant public concern. For ui¡itruio.i, ru.i-n"ãi"gr-;;;l.srr ;;;;ñ;;r;;; i::i::d to be set aside, it must call ror some action normally final. That tñe arbitraiòr may h;;;;;; ::i:f*'of thepartiesthatwouldconflictwithor in a ruling during the hearing or made ," ;ï;"ä;: in some way undermine public policy'

:i:ffîüi:å::ir,åä",ff':r?:äll';:f"i'f;Jå ?'llll' rN TH! ARBTTRATT'N pnocEss rhere aie be the judgã of the Ïacts. SiÀifarfy, "; ;;tt"t h; :"T:^l]ttt

for setting aside an award when there is obviouély ihe arbitrafor was mistaken i" . .àì- : d::ttt,i" the arbitratlon process. These bases are clusion ór n*, the award is normally

"o".irr.r.5 Ptlt^1ly those set forth in the Federal Arbitration

binding: the parties agreed to accepr tir. uruitiuià.;r *t;^1"::t"" 10 of the act provides four grounds on

inteqprétation of the law. A court will "or

l;;k;tih. which an arbitration award may be set aside. merits of the dispute, the sufficiency of the evidence I. The award was the result of corruption, fraud, or presented, or the arbitrator's reasoning in reaching a other "undue means.,, particular decision. Z. The arbitrator exhibited bias or corruption.

CHÁfTER ! Alternolive and onlíne DísPute Resolation

5. The arbitrator refused to postpone the hearing despite sufncient cause, refused to hear evidence pertinent and material to the dispute, or other- wise acted to substantially prejudice the rights of one of the Parties.

ç. The arbitrator exceeded his or her powers or failed to use them to make a mutual, frnal, and definite award'

The first three bases for setting aside the award include actions or decisions that are more than sim-

oly mistakes in judgment. Each requires some "bad fuíth" on the part of the arbitrator. Bad f¿ith actions or decisions are ones that affect the integrity of the arbitration process. The honesty and impartiality, rather than the judgment, of the arbitrator are called

into question. Sometimes, it is difficult to make the distinction

between honest mistakes in judgment and actions or decisions made in bad faiih. A bribe is clearly the kind of "undue means" included in the first basis for setting aside an award. Letting only one side argue its case is likewise a clear violation of the second basis.

Meetings between the arbitrator and one party outside the presence of the other party also taint the arbitration process. Although meetings might not involve the kind of corruption that results from taking a bribe, they do affect the integrity of the

the third basis. As noted, to provide a basis for

process; the third basis for setting aside an award is state meant to protect against this. involving

, Not every refusal by an arbitrator to admit cer- connections to evidence is giounds for setting aside an award

69

a party sometirnes forfeits the right to challenge an award by faiiing to obfect to the defect in a timely manrler. The party must object when he or she learns of the problem. After making the objection, the party can proceed with the arbitration process and still challenge the award in court after the arbi- tration proceedings have concluded. If, however, a party makes no objection and proceeds with the arbitration process, then a later court challenge to the award may be denied on the ground that the party waived the right to challenge the award on the basis of the defect.

Frequently, this occurs when a party fails to object that an arbitrator is exceeding his or her powers in resolving a dispute because the subject matter is not arbitrable.or because the party did not agree to arbi- trate fhe dispute. The question of arbitrability is one for the courts to.decide. If a party does not object on this issue at the first demand for arbitration, how- ever, a court may consider the objection waived.

in establishing the manner in which their dis- will be'resolved. Nevertheless, an agreement to te may be governed by the Federal Arbitration

Act ) or one of the many state arbitration acts, even the parties do not refer to a statute in their Recall that the FAA covers any arbitration in a,contract that involves inter-

Frequently, however, transactions commerce alsq' rhav-e substantial

states, which may in turn have their own unless the FAA

tion acts. In such situations,

the bases,for giving preeminence; when çhere is law. Th

a conflict, state law preempted by federal us, in cases'of arbitra the strong federal

policy favoring arbitration can a state's laws that might be more favorable to Iitigation

CH0ICE 0F tAW Notwithstanding preemp- tion of conflicting state laws, the FAA been inter- preted as allowing the parties to particular state law to govern their arbitration The parties may choose to have the laws of specific state govern their agreement by the agreement a choice-of-law clause. The F not mandate any particular sei of rules that ties must follow in arbitration; the parties are

state arbitration law are nearly an award, the arbitrator's decision must identical, the acts conflict. How are these con-

more than an error in fudgment, no matter how flicts to be resolved? ly incorrect that judgment might appear As a general the supremacy clause and

another observer. The decision must be so obvi- the commerce clause U.S. Constitution are gUsly wrong or unfair as to imply bias or corruption. :Qtherwise, the decision normally cannot be a basis for setting aside an award.

,r, :. The fourth basis for setting aside an award is that the arbitrator exceeded his oiher powers in arbitrat- ing the dispute. This issue involvès the question of arbitrability. An arbitrator exceeds his oi her pow- ers and authority by attempting to resolve an issue lnat is not covered by the agreement to submit to arbitration.a

WAIVËR Airhough a defect in the arbitration pro- cess is sufficient grounds for setting aside an award.,

o' *t, ,o, examplc, Majttr Leaguc Basebalt Players Associatiott v.watvey,532 u.s. 1015, 12i s.ct. 7724, 149 1..t1d,.2d740 (2OO1). to on the manner best suited to their

does

70 uNfr oNE THE FouNoAftoNs

t with this view that arbitration is at heart institute a voluntary arbitration program at the a between private parties, the te court level. In the South Carolina system, United States Supreme Id arbitration must waive a court hearing when request-

con choice-of arbitration. All decisions by the arbitrators are and binding.

Disadvantages of Arbitration Arbitration has some disadvantages. The result in any particular dispute can be unpredictable, in part because arbitrators do not need to follow any previous cases in rendering their decisions. Unlike judges, arbitrators do not have to issue written opinions or facilitate a participant's appeal to a court. Arbitratôrs must decide disputes according to whatever rules have been provided by the par- ties, regardless of how unfair those rules may be. In some cases, arbitration can be nearly as expensive as litigation. In part, this is because both sides must prepare their cases for presentation before a third party decision maker, just as they would have to do to appear in court. Discovery usually is not avail- able in arbitration, howeveç which means that dur- ing the hearing the parties must take the time to question witnesiès whom, in a lawsuit, they would not need to call.

There are disputes that courts will not allow to go to tion. Most states, for example, do not allow arbitration in disputes involv- ing title to estate or in cases in which a'court's. equiÇ involved.

A TUI¡DAM difference annexed is the frnality and reviewability of the award. With to court-annexed arbitra-

Arbitration arbitration differs significantly from

arbitration process discussed above.

DIFTERENCG The fundamental voluntary arbitration and court-

reject the award for any rea- one of the parties does reject

such an decided

it'in a way hdr " óouit;"

either sidé the; for 3ô

be'pënât: for court:

to trial: arbitrâtion

arbi-

the

tion, either party son. In the event

oragainstwhom to have the issueAND FORMAT

PROCEDURES

the award, the case proceed to trial, and the court will hear the de novo-that is, the court will recónsider all the and legal as though no arbitration oicurred.

sEcTtoN4--rr -, EVeryone who has a

OF co court-annexed arbitration not volüntary,

:

I

I i

t t { J

,}

I 4

rt

T

i 4{ { .lt J

it

I i

''j

l

i

niust be some safeguard

,courts are requiring that parties' attempt that denies an individual his This safeguard is provided by

to settle differences through some form of,ADR to reject the award regardless before to triaL For example, several fed- eral district r .encourage nonbinding. arbitra- tion for cases in Lesi than 10 percen tion evelgo to trial. have adopted formal and many other courts procedures.

Most states have adopted them to refer certain types of

amounts less than $100,000. the.cases referred for arbitra-

regarding the use of,ADR, suchirules use ADR

that allow

programs

annexed arbitration impose court fees'on

doing. The party rejecting the

ized, however:'Many statutes

not improve his or her position by Thus, for example, if a party rejects

half of all federal courts a party úho rejects an arbitraiion:a but'does "

for.negotiation, mediation, or arbitration. Typicall in California tration or some fee for the costs of the trial. and Hawaii-court systems have. manda- In court-annexed arbitration, discovery

dence occurs before the hearing. After thetory mediation or nonbinding for certain types of disputes, usually ving less 'has commenced, a party seeking to discover evl- than a specified threshold dollar.amount. parties fail to reach an agreement, or if

y if the dence must usually secure approval from the

award, and thê award turns oirt to be favorable ,

to that party than the subsequent jury paúy may be compelled to pay the costs

the

evl-

f the that mandated the arbitration. This is in parties disagrees with the decision of a third prevent the parties from using arbitration as a m mediating or arbitrating the dispute, will the of previewing each other's cases and then rej

the arbitrator's award.heard by a court. South Carolina was the first

to

CHApTER ! Alternotíve and Onl¡ne DísPute Resolat¡on

fHE ROIE 0F THE ARBITRATOR Notwithstanding it-r. diff.r.n.es belween voluntary and court-annexed

irbitraúon, the role of the arbitrator is essentially the

.ame in both types of proceedings. The arbitrator ãetermines issues of both fact and law. The arbitrator

ulso makes all decisions concerning applications of the

rules of procedure and evidence during the hearing.

WHICH RUTES APPTY Regarding the rules of evi- dence, there are differences among the states. Most

states impose the same rules of evidence on an arbitration hearing as on a trial. Other states allow

ail evidence relevant to the dispute regardless of whether the evidence would be admissible at trial. Still other jurisdictions leave it to the arbitrator to decide what evidence is admissible.

WAIVER Once a court directs that a dispute is to be submitted to court-annexed arbitration, the parties rnust proceed to arbitration. As noted above, either side may reject the award that results from the arbi- tration for any reason. If a party fails to appear at, or participate in, the arbitration proceeding as directed by the court, however, that failure constitutes a waiver of the right to reiect the award.

Related Mediation is proving to be more popular than arbi-

at a court-related method of ADR, and medi- programs continue to increase in number in

federal and state courts. Today, more court sys- offer or require mediation, rather than arbitra- as an alternative to litigation.

is often used in disputes relating'to law, environmental law, product liabil-

franchises. One of the most impotrant busi- mediation is its lower cost, which (or less) of the expense of litiga-

Another advantage is the speed with which can go through mediation (possibly one

dayé) compared with arbitration (possibly or litigation (possibly years).

of the popularity of mediation is that its goal,

7l

traditional court process is through the use of sum- mary jury trials. A summary iury trial is a mock trial that occurs in a courtroom before a judge and jury. Evidence is presented in an abbreviated form, along with each side's major contentions. The jury then presents a verdict.

The fundamental difference between a traditional trial and a summary iury trial is that in the latteç the jury's verdict is only advisory. A summary jury trial's goal is to give each side an idea of how it would fare in a full-blown jury trial with a more elaborate and detailed presentation of evidence and arguments. At the end of the summary jury trial, the presiding judge meets with the parties and may encourage them to settle their dispute without going through a standard jury trial.

---çì|¡-+¡h-SECTION 5 ll rrlf ¡ ADR FORUMS AND SERVICES

Services facilitating dispute resolution outside the courtroom are provided by both government agen- cies and private organizations, as weil as by compa- nies conducting business online.

unlike that of litisation and some other forms of ADR, is for opponänts to work out a resolution that oenefrts both sides. The rate of participants' satisfac- tion with the outcomes in mediãted disputes is high.

Summary Jury Trials Another means by which the courts have integrated altelnative dispúte-resolution methods into the

Nonprofrt Organizatlons , .i . . : r.. : .'t.,'

The major sourcê of private arþitiation'services is the American Arbitrption Associgtiôn (AAn). Most of thè tärgêst Þw h¡ms in the n¿iion ãrà mem' bers of this association. Founded in 7926, the.AAA now settles more than 200,000 disputes a year and has offices in every statej Cases,br'óught bèfore the A;.AA are heard by an expert or a panel of experts-of whom usually about half are lawyers-in thê area relating to the dispute. To cover its costs, this non- profit orgairization charges â fee, paid by the party filing the claim. In addition, each party to the dis- pute pays a price foi each hearing day, as well as a special additional fee in cases involving personal injuries or property loss.

In addition to ,the AAA, hundreds of other state and local nonprofit organizations provide arbitration services. For example, the Arbitration Association of Florida provides ADR services in that state.'The Better Business Bureau offers ADR programs to aid in the resolution of certain types of disagreements. Many industries-including the insurance, automobile, and securities industries- also now have mediation or arbitration programs to facilitate timely and inexpensive settlement of claims.

72 untr oNE ÍHE FouNDATtoNs

For-Profrt Organizations Those who seek to settle their disputes quickly can

turn to private, for-profrt organization-s to act as mediatori or arbitraiors. The leading firm in this private system of justice is JAMS/Endispute, which

is based in California. The private system of iustice includes hundreds of flrms throughout the country

offering dispute-resolution services by hired iudges' proJe¿ures in these private courts are fashioned

to meet the desires of the clients seeking their ser-

vices. For example, the parties might decide 9n tle date of the hearing, the presiding iudge, whether the

judgê's deciiiott *ilt be le$ally binding, and the site ôf tft. hearing--which could be a conference room, a iaw school óffrce, or a leased courtroom complete

with the American flag and Bible' The iudges may follow procedures similar to those of the federal courts and use similar rules. Each party to the dis- pute may pay a frling feq and a designated fee for a ^hatf-day-hËaiing

session or a special, one-hour set-

tlement conference.

Online Organizations An increasing number of companies and organi- zations are offering dispute-resolution services using the Internet. The settlement of disputes in thesõ on[ne forums is known as online dispute resolution (ObR). To date, the'disputes resolved in these forumç þave most c.ommonly involved dis- agreements ouei ttre rights fo domain-rames (Web

site addresses-see Chapter 14) and disagreements

over the quâlity of goods sold via the Intetnet, includ-

ing goodi sold ttlrough Internet auction sites' -Oón

may fe best for resolving small- to medium-

sized business liability claims, which may not be worth the expense of litigation or even traditional methods of ãlternative dispute resolution' Rules being developed in online forums, however, may ultimately become a code of conduct for every- one who does business in cyberspace' Most online forums do not automatically appty the law of any specific jurisdiction' Instead, results are often based. on geneial, more universal legal principles' As with traditional offline methods of dispute resolution, any party may appeal to a court at any time'

l{EGOI¡AT¡0i{ At{D lllEDlATl0l{ SERVICES The online negotiation of a'dispute generally is simpler

and more practical than litigation. Typically, one party files á complaint, and the other party is noti-

heO'Uy e-mail. Pássword-protected access is possible

twenty-four hours a day, seven days a week' Fees are

usually low (often 2 to 4 percent, or less, of the dis- puted amount).

CyberSettle.com, National Arbitration and Mediation (NAM), and other Web-based frrms offer

online forums for negotiating monetary settlements.

The Better Business Bureau also provides online dis-

pute settlement. The parties to a dispute may agree io submit offers. If the offers fall within a previously agreed-on range, they will end the dispute' Speciai rõft*ut. keeps secret any offers that are not within the range. lf ihere is no agreed-on range, typically an

offer inóludes a deadline when the offer will expire, and the other party must respond before then' The

parties can drop the negotiations at any time'

ARBITRATIOÌ{ PROGRAilIS A number of orga- nizations, including-the American Arbitration Association, offer online arbitration programs' For

example, the Internet Corporation for Assigned Nameì and Numbers (ICANITI), a nonprofit corpora-

tion that the federal government set up to oversee the distdbution of.domain names, has issued special

rules for the resolution of domain name disputes' ICANN has also authorized several organizations to

arbitrate domain name disputes in accordance with ICANN's rules.

sEcrioN 6

INTERNATIONAT DISPUTE RESOTUTION

Businesspersons who engage in international busi- ness transactions normalþ take special precautions to protect themselves in the event that a party with

*horn they are dealing in another country breaches an agreement. Often, pafties to international con- tracti include special claúses in their contracts providing for how any disputes arising under the contracts will be resolved.

Forum-Selection and Choice-of-Law Clauses

Parties to international contracts often include forum-selectíon clauses. These clauses

designate the

iurisdiction (court or country) in whigh any dis-

þ.ri. atisi"g ùnder the conuaét will be litigated and

itre nation;s law that will be applied' Choice-of-law clauses are also frequently included in international

contracts. If no forum and choice-of-law clauses have been included in an international contract' howeve¡ legal proceedings will be more complex

7-

and attendþd by much more uncertainty. For exam-

,.,1., litigution may take place in two or more coun-

l¡ãr, *ittt each country applying its own national iaw to the particular transactions'

Furthermote, even if a plaintiff wins a favorable iudgment in a lawsuit litigated in the plaintiff's touätty, there is no Sualantee that the court's iudg- ment will be enforced by

judicial bodies in the defen-

ãant's country. As will be discussed in Chapter B, for

,.uront of courtesy, the iudgment may be enforced

in ttre defendant's country, particularly if the defen-

ãant's country is the United States and the foreign

court's decision is consistent with U.S. national law

and poticy. Other nations, howeveç may not be as

accommodating as the United States, and the plain-

úff.maY be left emPtY-handed.

CHApfER t Altelzût¡ve and Onlíne Dlspute Resolatíon

Arbitration Clauses In an attempt to prevent such problems, parties to international contracts often include arbitration

7l

clauses in their contracts, requiring that any con- tract disputes be decided by a neutral third party. In international arbitration proceedings, the third party may be a neutral entity (such as the International Chamber of Commerce), a panel of individuals rep- resenting both parties'interests, or some other group

or organization. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awardss-which has been implemented in more than frfty countries, including the United States-assists in the enforcement of arbitration clauses, as do provisions in specific treaties among nations. The American Arbitration Association pro- vides arbitration services for international as well as domestic disputes.

5. June 10, 1958,2L U.S.T. 2517, T.I.A'S. No. 6997 (tb.e "New York Convention").