Business Law Prof Blog

Law Firm Mandatory Arbitration On the Decline?

When I was a number of years into my law practice, Skadden, Arps, Slate, Meager & Flom LLP, the firm at which I worked, asked me to sign a mandatory arbitration agreement.  Signing was voluntary, but the course of conduct indicated that it was strongly suggested.  I thought about it and declined to sign.  

It was hard for me to imagine bringing a legal claim against my law firm employer.  I knew that if I were to sue Skadden, the matter would have to be very big and very serious--a claim for a harm that I would not want compensated through a "compromise recovery," which I understood could be a likely result in arbitration.  I also was concerned about the lack of precedential value of an arbitration award for that kind of significant claim--permitting systemic bad employer behavior to be swept under the rug.  And finally, I understood and respected the litigation expertise and experience of my colleagues in the firm and their connections to those outside the firm--expertise, experience, and connections that I believed would be more likely to impact negatively the opportunity for success on the merits of my claim in an arbitral setting.

I watched with interest as arbitration clauses caught on in this context, becoming (in many firms) a condition of employment.  Other BLPB editors have written about mandatory arbitration in the employment law context in this space in the past, including Ann Lipton here and Marcia Narine Weldon here.  The issue also has been raised by other bloggers and in the news media.  I remember stories about summer associate mandatory arbitration classes, for example.  (See, e.g., here and here from 2018.)

I recently read this article from The American Lawyer, which describes a trend away from these mandatory arbitration clauses in law firm employment.  What goes around comes around . . . .  I was especially interested to read that some firms are dispensing with the practice because employees/prospective employees disfavor these agreements.  I also noted the article's description of key substantive arguments against mandatory arbitration:  "[T]he clauses are unfair to workers and can allow large law firms to conceal accusations of racism, sexual harassment and assault."  This is consistent with my own reasoning.  Moreover, I admit that, as I was contemplating whether to sign Skadden's arbitration clause, sexual misconduct was among the big and very serious claims I determined that I would want to pursue in court--for remedy-related and public disclosure reasons.

Although the firm's leadership may have disapproved of my refusal to sign that agreement way back when, I still think I made the right decision--at least for me.  If arbitration is mutually beneficial, one would hope that both parties would recognize that at the outset of their relationship or at the time a dispute arises.  Otherwise, power imbalances tend to dominate in this space.  Dispute resolution situations also may involve emotional and psychological factors that can impact judgment and strategy.  Regardless, I am a "preserve as many options as possible" kind of gal.  As a result, taking a position that maintains my rights to sue or participate in a class action claim seems natural and appropriate.  I will hold onto those rights, if I can.

Revising How to Handle Derivative Claims (or Not)

Yesterday, Professor Bainbridge posted "Is there a case for abolishing derivative litigation? He makes the case as follows: 

A radical solution would be elimination of derivative litigation. For lawyers, the idea of a wrong without a legal remedy is so counter-intuitive that it scarcely can be contemplated. Yet, derivative litigation appears to have little if any beneficial accountability effects. On the other side of the equation, derivative litigation is a high cost constraint and infringement upon the board’s authority. If making corporate law consists mainly of balancing the competing claims of accountability and authority, the balance arguably tips against derivative litigation. Note, moreover, that eliminating derivative litigation does not eliminate director accountability. Directors would remain subject to various forms of market discipline, including the important markets for corporate control and employment, proxy contests, and shareholder litigation where the challenged misconduct gives rise to a direct cause of action.

If eliminating derivative litigation seems too extreme, why not allow firms to opt out of the derivative suit process by charter amendment? Virtually all states now allow corporations to adopt charter provisions limiting director and officer liability. If corporate law consists of a set of default rules the parties generally should be free to amend, as we claim, there seems little reason not to expand the liability limitation statutes to allow corporations to opt out of derivative litigation.

I think he makes a good point.  And included in the market discipline and other measures that Bainbridge notes would remain in place to maintain director accountability, there would be the shareholder response to the market.  That is, if shareholders value derivative litigation as an option ex ante, the entity can choose to include derivative litigation at the outset or to add it later if the directors determine the lack of a derivative suit option is impacting the entity's value.  

Professor Bainbridge's post also reminded me of another option: arbitrating derivative suits.  A friend of mine made just such a proposal several years ago while we were in law school: 

There are a number of factors that make the arbitration of derivative suits desirable. First, the costs of an arbitration proceeding are usually lower than that of a judicial proceeding, due to the reduced discovery costs. By alleviating some of the concern that any D & O insurance coverage will be eaten-up by litigation costs, a corporation should have incentive to defend “frivolous” or “marginal” derivative claims more aggressively. Second, and directly related to litigation costs, attorneys' fees should be cut significantly via the use of arbitration, thus preserving a larger part of any pecuniary award that the corporation is awarded. Third, the reduced incentive of corporations to settle should discourage the initiation of “frivolous” or “marginal” derivative suits.

Andrew J. Sockol, A Natural Evolution: Compulsory Arbitration of Shareholder Derivative Suits in Publicly Traded Corporations, 77 Tul. L. Rev. 1095, 1114 (2003) (footnote omitted). 

Given the usually modest benefit of derivative suits, early settlement of meritorious suits, and the ever-present risk of strike suits, these alternatives are well worth considering.  

Steve Bradford on Online Dispute Resolution for Crowdfunding Fraud

Former BLPB editor Steve Bradford has posted a new paper adding to his wonderful series of articles on crowdfunding (on which I and so many others rely in our crowdfunding work).  This article, entitled "Online Arbitration as a Remedy for Crowdfunding Fraud" (and forthcoming in the Florida State University Law Review), focuses on a hot topic in many areas of lawyering--online dispute resolution, or ODR.  Steve brings the discussion to bear on his crowdfunding work.  Specifically, he suggests online arbitration as an efficacious way of resolving allegations of fraud in crowdfunding.  Here's the abstract:

It is now legal to see securities to the general public in unregistered, crowdfunded offerings. But offerings pursuant to the new federal crowdfunding exemption pose a serious risk of fraud. The buyers will be mostly small, unsophisticated investors, the issuers will be mostly small startups about whom little is known, and crowdfunded offerings lack some of the protections available in registered offerings. Some of the requirements of the exemption may reduce the incidence of fraud, but there will undoubtedly be fraudulent offerings.

An effective antifraud remedy is needed to compensate investors and help deter wrongdoers. But, because of the small dollar amounts involved, neither individual litigation nor class actions will usually be feasible; the cost of suing will usually exceed the expected recovery. Federal and state securities regulators are also unlikely to focus their limited enforcement resources on small crowdfunding offerings. A more effective remedy is needed.

Arbitration is cheaper, but even ordinary arbitration will often be too expensive for the small amounts invested in crowdfunding. In this article, I attempt to design a simplified, cost-effective arbitration remedy to deal with crowdfunding fraud. The arbitration remedy should be unilateral; crowdfunding issuers should be obligated to arbitrate, but not investors. Crowdfunding arbitration should be online, with the parties limited to written submissions. But it should be public, and arbitrators should be required to publish their findings. The arbitrators should be experts on both crowdfunding and securities law, and they should take an active, inquisitorial role in developing the evidence. Finally, all of the investors in an offering should be able to consolidate their claims into an arbitration class action.

Although I haven't yet read the paper (which was just posted this morning, it seems), Steve's idea totally makes sense to me on so many levels.  Among other things, ODR has a history in e-commerce and social media, two front-runners and foundations of crowdfunding.  Also, the dispute resolution expense issue that Steve alludes to in the abstract is real.  It has been raised by a number of us, including by me in this draft paper, in which I assert, among other things:

Prosecutors and regulators may not be willing or able to devote financial and human resources to enforcement efforts absent statutory or regulatory incentives or extraordinary policy reasons for doing so . . . . Individual funders also are unlikely to bring private actions or even engage alternative dispute resolution since the cost of vindicating their rights easily could exceed their invested money and time, although the availability of treble damages (often a statutory right for willful violations of consumer protection statutes) or other extraordinary remedies may change the calculus somewhat.

 . . . [C]lass actions tend to be procedurally complex—difficult to get in front of a court—and may not be available in some jurisdictions. Moreover, the prospects for recovery are unknown and, based on recent information from U.S. securities class action litigation, financial compensation to individual members of the plaintiff class is likely to be relatively insignificant in dollar value and in relationship to losses suffered, even if the aggregate amount of damages paid by the defendant is relatively high . . . . Accordingly, class action litigation also may be of limited utility in bringing successful legal claims in the crowdfunding context.

This will be an area for much further thought as the crowdfunding adventure continues . . . .

Just Because You Can, Doesn't Mean You Should, Detroit Lions Edition

Last weekend, retired NFL receiver Calvin Johnson made news when he revealed that he was not pleased with the Detroit Lions and how they handled his retirement. Johnson is apparently frustrated that the Lions required him to pay back about 10% of the  unearned $3.2 million remaining on his $16 million signing bonus from his 2012 contract. This is apparently a thing for the Lions, who sought all of the unearned signing bonus money remaining on Barry Sanders' contract when he abruptly retired in 1999.

This is in contrast to Tony Romo's retirement, in which the Dallas Cowboys released him, making the $5 million remaining on the signing bonus Romo's.  Cowboys owner Jerry Jones said he was following the “Do Right Rule” when he allowed the team to release him.  The Seattle Seahawks made a similar decision with Marshawn Lynch.  

Some have argued that Johnson is being "pettier" than the Lions in this spat.  Mike Florio, a sports writer and graduate of WVU College of Law, where I teach, argued that "while Johnson has every right to be miffed at the Lions, Johnson also should be miffed at himself. Or at whoever advised him to retire instead of biding his time until the Lions would have released him." Florio correctly notes that Johnson had a big cap number likely to come due had he not retired or accepted a restructured deal, so he was coming from a position of power in negotiating, which would have likely forced the Lions to cut him. Still, that doesn't mean Johnson is wrong to be frustrated.  

Perhaps Johnson didn't ever want to be cut in his career, even at that point in his carerr. Maybe he just wanted to retire.  The Lions were worried, perhaps about "precedent" that other players could use to walk away without paying back the bonus, though there is already such precedent out there, as discussed above, and the Lions have non-binding precedent already in the Barry Sanders case, where an arbitrator said Sanders had to pay back some of his signing bonus.  Beyond that, the response to most players would simply be, "I know we didn't ask Calvin Johnson for any money back. You're not Calvin Johnson." 

It is  true that the Lions could seek money from Johnson, and that Johnson almost certainly, from a legal sense, owed the money.  But having a legal right to something doesn't always mean it is a good idea.  And that is important for lawyers to remember.  The question I would have asked the Lions front office is this: "Is it really worth $320,000 when it is possible that one of your greatest players will feel disrespected by the process? Especially when you already created a rift with one of you other greatest players fifteen years ago?"  

Maybe it was asked, and the answer was yes, but I just don't see the upside.  My guess is that the Lions asked for a lot more and the two sides negotiated to this figure.  But that process, not the payment, is likely what irked Johnson.  Why does it matter? Because it tells future people the team wants, especially coaches and free agents, how the Lions do business.  And when choosing between two similar offers, that could very well lead one to choose the other team.  

I often use these kinds of issues facing a business when teaching the importance of the business judgment rule and allowing a board of directors not to pursue claims it can win (as long as there is no fraud or self dealing).  Sometimes, it is better for the entity to let a claim go than to extend a bad story or scare off potential talent.  Back in 2007, for example, Billy Donovan was hired to leave his head coaching job at the University of  Florida to lead the NBA's Orlando Magic.  Just days later, Donovan decided he did not want to leave Florida, and asked the Magic to let him return to the college game. The Magic decided to let him do so without any financial penalty, though they did ask him to agree not to coach in the NBA for five years.

Why let Donovan back out and return to Florida without a payment?  For one, the Magic needed to hire a new coach, and you want to send a message that you are a good employer.  Second, Donovan was beloved in Florida. He had won two NCAA championships in a key market for the team.  Don't irritate your prime audience is always a good bit of advice.  There was little upside to being difficult. The team was almost certainly irritated, but there is little value in letting that lead to bad publicity and unnecessary public spats. This principle extends well beyond the sports realm, but it is especially important in any area where employers fight for talent, which is common in the sports and entertainment areas. 

In assessing the legal (and business) options for the Calvin Johnson situation, good lawyering requires a recognition that key issues were likely related to perception and respect, not money.  As such, the fact that there was an argument about repayment at all was the issue that made Johnson frustrated (and now could have repercussions in the future free agent market).  It is certainly possible the Lions assessed this risk and decided it was worth it.  I disagree that it was worth it, but that would be a reasonable decision.  (As a life-long Lions fan, I will need more evidence the problem was properly assessed, though I do hold out hope for the new front office.) 

Such decisions, if made simply on the legal merits (e.g., Would I win in court?), run the risk of what Jeff Lipshaw calls "pure lawyering," which is essentially legal reasoning without context or assessment of non-legal impacts or opportunities. As Lipshaw explains in the preface to his book, Beyond Legal Reasoning, A Critique of Pure Lawyering: 

Legal reasoning is merely one way of creating meaning out of circumstances in the real world. In its pure form, it does nothing more than convert a real-world narrative to a set of legal conclusions that have no necessary connection either to truth or morality.

Or the ability to recruit free agents.  

Harvard Negotiation & Mediation Clinical Program Positions

Harvard Negotiation & Mediation Clinical Program is looking to fill two clinical instructor positions (one with a focus on facilitation and political dialogue) for July 2017.

Details about the positions are available here. 

Following up on Arbitration and Human Rights

I would like to build off of Marcia Narine’s post about binding arbitration clauses. In her post, she discusses two related subjects. The first concerns the importance of civil procedure, noting that jurisdictional problems prevented the human rights victims in Kiobel from finding justice. The second addressed the grim picture painted by the New York Times about how companies use arbitration clauses to undermine meritorious legal claims. I mention this because there seems to be a radical development brewing about how arbitration clauses might actually help human rights victims.

The problem with adjudicating human rights claims is that few courts have been able, or willing, to remedy violations. Most abuses occur in countries where legal systems are too weak to prosecute offenders. And, in light of Kiobel, the United States generally lacks jurisdiction over entirely foreign defendants and events. This has led commentators to conclude that courts of law are poorly equipped to hear human rights cases.

But could arbitration be the answer? Consider the Bangladesh Accord, which was recently signed by over 200 apparel companies—including H&M, Abercrombie & Fitch, and Adidas—after a series of sweatshop fires in Bangladesh. Signatories agree to take numerous proactive and remedial measures intended to prevent future factory tragedies. The novelty of the Accord is found in its dispute resolution provision, requiring signatories to settle disputes by binding international arbitration. Since the New York Convention makes international arbitral awards globally enforceable, the Bangladesh Accord seems to have found a solution to the aforementioned jurisdictional issues. Although the Bangladesh Accord pertains only to a small subset of potential human rights abuses, the agreement suggests that private dispute resolution could offer a superior forum to hear types of human rights abuses.

The question is whether other agreements might similarly seek to use arbitration clauses to resolve human rights disputes—or whether the Bangladesh Accord will remain an anomaly. Convincing other companies in other industries to arbitrate corporate responsibility standards will certainly prove difficult since, as it currently stands, transnational firms face little liability for their torts in developing countries. However, it does appear that the International Olympic Committee is using a similar mechanism now that host countries must abide by human rights standards, enforced by the Court of Arbitration for Sport. Indeed, the potential use of binding arbitration to enforce corporate responsibility is certainly an interesting development considering arbitration’s reputation as an obstacle that frustrates less sophisticated and resourceful parties. 

There are a couple of articles discussing the potential use of international arbitration to promote human rights. Consider this article by Professor Roger Alford (who also has a great article about the future of human rights litigation after Kiobel) or me. 

Are Arbitration Clauses All Bad, and If So, For Whom? A Look at the NY Times Expose

I teach both Civil Procedure and Business Associations. As a former defense-side commercial and employment litigator, I teach civ pro as a strategy class. I tell my students that unfortunately (and cynically), the facts don’t really matter. As my civil procedure professor Arthur Miller drilled into my head 25 ago, if you have procedure on your side, you will win every time regardless of the facts. Last week I taught the seminal but somewhat inscrutable Iqbal and Twombly cases, which make it harder for plaintiffs to survive a motion to dismiss and to get their day in court. In some ways, it can deny access to justice if the plaintiff does not have the funds or the will to re-file properly. Next semester I will teach Transnational Business and Human Rights, which touches on access to justice for aggrieved stakeholders who seek redress from multinationals. The facts in those cases are literally a matter of life and death but after the Kiobel case, which started off as a business and human rights case but turned into a jurisdictional case at the Supreme Court, civil procedure once again "triumphed" and the doors to U.S. courthouses closed a bit tighter for litigants. 

This weekend, the New York Times published an in depth article about how the corporate use of arbitration clauses affects everyone from small businesses to employees to those who try to sue their cell phone carriers and credit card companies. Of course, most people subject to arbitration clauses don’t know about them until it’s too late. On the one hand, one could argue that corporations would be irresponsible not to take advantage of every legal avenue to avoid the expense of protracted and in some cases frivolous litigation, particularly class actions. On the other hand, the article, which as one commenter noted could have been written by the plaintiffs bar, painted a heartbreaking David v. Goliath scenario.

I see both sides and plan to discuss the article and the subsequent pieces in the NYT series in both of my classes. I want my students to think about what they would do if they were in-house counsel, board members, or business owners posed with the choice of whether to include these clauses in contracts or employee handbooks. For some of them it will just be a business decision. For others it will be a question of whether it’s a just business decision.