Attorney Sanctioned For Filing Suit While Ignoring Arbitration Provision

It is not unusual for attorneys to ignore a contractual arbitration provision and institute litigation to pursue a client’s claim. A defendant that wants to take advantage of the arbitration provision will then typically move to compel arbitration. Sometimes, they will bolster the motion either in court or the ensuing arbitration by adding a counterclaim for breach of contract to recover the damages incurred in seeking to stop the litigation in favor of arbitration.

A recent decision by a California federal judge in Eddie Golikov v. Walmart Inc. adds a new dimension that should cause counsel to take notice. Golikov is a class action brought on behalf of a named plaintiff arising from his purchase of olive oil from Walmart. The complaint erroneously alleged that the olive oil was purchased from a Walmart store when in fact it was purchased online. As an online purchase, it was subject to Walmart’s Terms of Use for website orders, including a requirement that the claims be arbitrated.

Finding that counsel’s failure to heed the arbitration provision was reckless, the court ordered that sanctions in the form of attorneys’ fees be imposed against plaintiff’s counsel.

The takeaway: out of self-interest, attorneys should be attentive to a contract’s dispute resolution provision and not cavalierly ignore provisions requiring arbitration of disputes.

Second Circuit Holds That Company’s Refusal To Pay Arbitration Fees Does Not Constitute A “Failure, Neglect, Or Refusal To Arbitrate”

What happens when an arbitration tribunal refuses to administer a case due to a party’s refusal to pay required fees? Can a court compel payment? Not according to the Second Circuit’s recent decision in Frazier v. X Corp., holding that an employer’s refusal to pay JAMS administrative fees did not constitute a “failure, neglect, or refusal to arbitrate” within the meaning of the Federal Arbitration Act. Reversing District Judge Jed Rakoff, the Second Circuit held that discharged employees seeking to arbitrate were required to pursue relief through JAMS, presumably by agreeing to advance fees themselves, or leaving open the possibility that the former employees might choose to bring their claims judicially.

“Surprise! Misleading Statements and Time Pressure May Render an Employer’s Arbitration Agreement Unenforceable”

As discussed by Jared Slater, of Ervin Cohen & Jessup, in this article available at JD Supra, the California Court of Appeal rendered unenforceable an arbitration agreement that a new employee was required to sign as one of 31 documents presented to her by a human resources manager at the outset of her first day of work. The court in Velarde v. Monroe Operations, LLC found this process to be procedurally unconscionable.

As Attorney Slater explains, “[t]he Court of Appeal made clear that the arbitration agreement was unenforceable due to the coercive nature of the circumstances: ‘Had [the employer] either correctly explained the terms of the agreement, or had not explained them at all, and had given [the employee] a reasonable opportunity to review the agreement and to consult counsel, “this would be a different case.”‘”

The takeaway for counsel advising HR departments: make sure your clients understand the importance of providing new employees the opportunity to review arbitration (and other) agreements and to seek attorney input.

“Eleventh Circuit Decision Underscores Importance of Complying with AAA Rules”

In this article published by Lexology, Lelia Ledain, of Covington & Burling, discusses the Eleventh Circuit’s recent decision in Merritt Island Woodwerx LLC et al. v. Space Coast Credit Union. The court affirmed the denial of a company’s motion to compel arbitration in a consumer dispute where the company had failed to timely submit its arbitration provisions for timely administrative review by the American Arbitration Association. The article appropriately urges review of the decision by “companies who rely on arbitration agreements that select the [AAA] consumer arbitration rules for dispute resolution.”

What Do Business-To-Business Arbitration And A Well-Tailored Suit Have In Common?

Scenario #1: You are a transactional attorney representing a business client in a substantial transactional matter. It’s time to address the dispute resolution tribunal—court or arbitration. The draft agreement provided by the counterparty provides for arbitration. As you review the agreement with your client, she suggests that you should push back on the counterparty’s arbitration preference. However, the contract negotiation already has been stressful, and you are dubious that your client’s suggestion is a good one.

Scenario #2: You are a business litigator and your client advises you that a dispute between his company and his contract counterparty soon will involve claims flying back and forth. He emails you with the operative agreement and it provides for arbitration. You cringe, because you anticipate that he will be upset to hear that he cannot proceed in court. 

In recent years, arbitration has received a lot of media attention, mostly in the context of consumer and employment disputes. Lost in the discussion, however, are the advantages that arbitration continues to provide over litigation in a B2B context. 

When newspaper-reading B2B clients balk at arbitration, knowledgeable attorneys educate them about often unknown or unappreciated virtues of B2B arbitration. Let’s review some of them.

The “But What About the Judge?” Syndrome

A common misconception is that litigation provides a more reliable decision-maker. In litigation, the case will be decided by an exalted, robed judge in an elegant courtroom, whereas arbitrators are “wanna be” judges lacking in credentials and gravitas.  

Robes notwithstanding, arbitration provides parties with a far greater opportunity to ensure that their matter will be decided by someone best suited to the task.

Especially in recent years, organizations like the American Arbitration

Association (AAA) have vetted and curated their rosters to ensure that arbitrators are exceedingly well-credentialed. 

More importantly, no matter their pedigree, judges may have limited familiarity with the subject matter of the dispute. Whereas parties in litigation typically have no control over the judge assigned to their case, arbitration allows businesses to select decision-makers with specific expertise relevant to their industry and dispute. 

For example, AAA maintains rosters of arbitrators who are specifically qualified by areas of need. Need someone who understands the intricacies of M&A disputes? There’s a panel for that. Worried about complex intellectual property issues? There’s a panel for that too. Have a dispute where the claimed damages are in the tens of millions of dollars? Consider the AAA’s large, complex case panel. 

With this array of options, parties can ensure that their dispute is resolved by a professional who understands the nuances of the issues at hand, providing a level of expertise that litigation cannot guarantee. 

And here’s the kicker – if you really can’t let go of that judicial security blanket, the

AAA enables parties to select from a panel of former judges.                  

The “Appeals Safety Net” Anxiety

“But what if the arbitrator gets it wrong?” Attorneys know that, except in very limited circumstances, an arbitrator’s decision will not be reversed by a court.  But let’s put this in perspective. What percentage of litigated cases are appealed? And of those, how many appeals succeed? 

Still, for high-stakes cases, there’s an arbitration solution: the three-arbitrator panel. The AAA permits the parties by agreement to utilize a three-arbitrator panel. Even in the absence of agreement, the AAA nonetheless can exercise discretion to appoint a three-arbitrator panel if deemed appropriate. 

Think of this as a front end appeal process. With three sets of arbitrator eyes listening to the evidence, considering the applicable contract and interpreting the law, the likelihood of error is remote, obviating concerns about the absence of appeal rights. 

When considered as an alternative for high-stakes arbitrations, the additional cost of a three-person panel is justifiable and can be measured against the costs (and likelihood of success) on a judicial challenge to a single arbitrator’s award.

And, spoiler alert, for those wanting suspenders in addition to their belt, AAA offers appellate arbitration, which parties can provide for in their arbitration agreement.

The Discovery Security Blanket

One of the biggest concerns attorneys hear about arbitration is the perceived limitation on discovery. This concern often stems from a fundamental misunderstanding about arbitration flexibility. 

Contrary to rumor, arbitration allows parties to shape the discovery process to fit their specific needs. Arbitration permits parties to agree on the scope and method of discovery, ensuring that they have access to necessary information without the burdens often associated with litigation. Rarely do arbitrators impose material limitations on discovery when the parties collectively present a discovery plan for approval. 

In the absence of an agreement, arbitrators will issue a discovery order establishing the extent and type of discovery that the parties may pursue. The arbitrators’ issuance of a “front end” order should be compared with litigation discovery. Federal and state procedural rules on their face may be more open-ended than the discovery order issued by an arbitrator at the commencement of the matter. However, in litigation, parties routinely object to the scope of discovery requested under those open-ended rules, with judges often limiting the requested discovery in expensive and time-consuming motion practice.

At the end of the day, the scope of discovery available to the parties in arbitration and litigation is not materially different.

Furthermore, arbitrators are more accessible than judges when disputes arise during discovery. Instead of waiting weeks or months for a court hearing on a discovery motion, parties can often resolve disputes in a matter of days through a conference call with the arbitrator. This responsiveness ensures that arbitration remains efficient and focused on the resolution of substantive issues rather than procedural battles.

Confidentiality and Protection of Business Interests

For companies handling sensitive financial, technological, or strategic information, arbitration provides a significant advantage: confidentiality. Unlike court proceedings, which are generally public, arbitration allows disputes to be resolved in a private setting. This protects proprietary information, trade secrets, and reputational interests, preventing competitors or the media from gaining access to potentially damaging disclosures.

The Bottom Line: A Business-Driven Approach to Dispute Resolution The goal of arbitration is not to mimic litigation—that’s why courthouses were invented. Rather, arbitration seeks to create a dispute resolution process that serves clients’ actual needs, not their perceived ones. Think of arbitration as a blank canvas rather than a pre-painted picture. You can design it to address the concerns that actually matter to your client while letting go of the ones that don’t.

When clients raise the perceived shortcomings of arbitration, attorneys should remind them that business-to-business disputes are different than the arbitration matters discussed in the newspapers, and educate them about the ability to customize arbitration to serve their business’s specific needs. By shifting the narrative from skepticism to opportunity, attorneys can help their clients see that arbitration often delivers faster, more cost-effective, and more specialized dispute resolution than traditional litigation.

Next time a client expresses hesitation about arbitration, start by asking what they truly need in a dispute resolution process. With a well-crafted arbitration agreement, businesses can achieve better outcomes while avoiding the inefficiencies and unpredictability of litigation. By taking a proactive approach, attorneys can position arbitration not as a compromise, but as a strategic advantage in high-stakes commercial disputes.

“Mistake No. 8 of the Top 10 Horrible, No-Good Mistakes Construction Lawyers Make: Know the Benefits and Perils of a Privately Administered Arbitration”

Parties sometimes do not fully appreciated the added value provided by tribunals such as the American Arbitration Association. This article by David Taylor at Bradley Arant, published at Lexology, discusses potential pitfalls parties face when they decide to forego the services of an arbitration tribunal.

“A Return to First Principles: Individual Mediation as an Alternative to Mass Arbitration”

Thanks to the American Arbitration Association for inviting me to offer my thoughts as to how individual mediation may be a viable alternative to mass arbitration of consumer and employment disputes. This article recently appeared in Dispute Resolution Journal® (a publication of the American Arbitration Association—International Centre for Dispute Resolution). 

Kool-Aid®, Goalposts and Uncle Harry

Mediation provides a golden opportunity to bring closure to a matter, avoid lengthy trials, and protect the parties’ interests. However, the effectiveness of mediation is heavily influenced by the parties’ expectations. When preparing their clients for mediation, attorneys should be vigilant in order to avoid certain pitfalls that harm the chances of reaching a favorable settlement. Indeed, if not careful, failure to anticipate these problem areas can destroy potentially positive outcomes before the parties roll up their sleeves and get to work.

1. Failing To Ensure Clients Understand That Arguments Their Attorneys Advance Are Not “Sure Winners”: Don’t Drink the Kool-Aid®

One of the challenges faced by attorneys in preparing clients for mediation is setting realistic expectations about the strengths and weaknesses of their case. Overconfidence can be the Achilles’ heel of any settlement negotiation.

Attorneys are skilled at designing and advancing legal arguments to support claims and defenses. While confidence is important, it is equally important for attorneys to temper optimism with reality. If clients believe that their legal arguments are so compelling that the other side will simply cave, they may be unwilling to consider reasonable settlement terms.

This mindset, “drinking the Kool-Aid®,” can cloud judgment and prevent a client from recognizing the need to be flexible or pragmatic in the mediation room. A client who is fixated on winning in court may resist the idea of compromise, undermining the purpose and goal of mediation.

To avoid falling into this trap, attorneys need to have honest conversations with their clients, making sure they understand the relative strengths and weaknesses of the arguments advanced in court filings. Believing that a favorable litigation outcome is a foregone conclusion will only serve to frustrate the mediation process.

Clients with realistic expectations are likelier to approach the mediation with a level-headed, open-minded perspective, increasing the chances of reaching a settlement.

2. Don’t Move The Goalposts: Establishing A Bargaining Position Consistent With Prior Communications

Often, prior to a formal mediation, the parties have already communicated settlement positions and expectations. Consider, for example, a dispute over an ownership interest in a company or a piece of property, where the parties—perhaps through expert reports or depositions–have exchanged respective views about the asset’s value.

Mediation day arrives with the expectation that settlement will be achieved somewhere between the parties’ respective valuations. The mediator’s goal is to refine the parties’ bargaining positions and to assess whether and how best to bridge the gap between the two sides.

Sometimes, however, a party decides that it no longer wants to live with the settlement position previously articulated—a plaintiff decides he wants more, or a defendant decides she will offer less. When a party starts the mediation with a surprising position that falls outside the parameters previously discussed, it meaningfully complicates the challenge of finding common ground. A party that changes a bargaining position with new or revised demands can come across as engaging in bad faith, undermining goodwill necessary to achieve a settlement.

To minimize this risk, attorneys should have clear discussions with their clients about their positions and objectives before mediation, and ensure that the client’s expectations are properly aligned with what has already been communicated to the other side.

If a client wants to propose terms that materially depart from what was previously communicated, it is essential to reassess the likely impact of a change of position on the negotiations. At minimum, before mediation day, any change to a previously articulated position should be communicated to adversary counsel and to the mediator to avoid a mediation surprise that may end productive discussions before they begin.

3. Where’s Uncle Harry? Ensuring That All Necessary Parties Attend The Mediation.

After the parties have spent much of mediation day inching closer to a resolution, one of the parties announces that he cannot commit until the terms are blessed by a previously unidentified and currently absent decision maker. The MIA decision maker may be a spouse, family member, or business partner whose input on the settlement terms is deemed necessary but regrettably is unavailable.

The parties leave, with fingers crossed, but momentum is lost and the anticipated settlement is subject to Uncle Harry’s second guessing. When one of the attorneys subsequently communicates that Uncle Harry voiced objections or requirements that were not raised during the mediation, the progress previously made is undermined if not destroyed altogether.

This unforced error is avoidable. Attorneys always should discuss with their clients who needs to attend the mediation and make sure they are available to participate. The necessary individuals may be those with concrete knowledge (e.g., a business partner) or one whose blessing will be required as a practical matter (e.g., a spouse).

The attorneys also should advise the mediator who plans to attend and the nature of their involvement. The mediator can ensure the other party is made aware of the guest list to ensure there are no objections to the attendance by non-parties.

Some of the practical steps an attorney can take to ensure all necessary parties are appropriately involved include:

  • Pre-Mediation Preparation: Confirm with the client who needs to be involved and whether they are available. If any key individuals are unavailable, make arrangements for them to participate by phone, video conference, or at least be readily reachable.
  • Clear Communication of Authority: Make sure that clients and other involved parties understand their level of authority. Are they authorized to make final decisions, or do they need approval (whether formal or informal) from someone else? This ensures that no surprises occur when agreements are reached.
  • Anticipate Who Should Attend From The Other Side: Sometimes a party or their attorney will recognize that the adversary party will benefit from having a supportive network (e.g. adult children of an elderly principal) attend the mediation. Alerting the mediator to this perception will enable the mediator to facilitate the inclusion of helpful participants.

Final Thoughts

Mediation can be challenging enough without complications that come from drinking Kool-Aid®, moving goal posts, and failing to invite Uncle Harry. By ensuring that clients’ expectations are realistic, making sure they stick to their communicated positions, and coordinating the attendance of all required decision makers, attorneys are better positioned to facilitate effective and productive negotiations that lead to successful outcomes.

“Single Sexual Harassment Claim Eliminates Arbitration of All Employment-Related Claims in the Same Case”

“[U]unwary employers may see a spike in sexual harassment claims, regardless of merit, if only to allow the employee to escape an otherwise valid arbitration agreement.” Such is the prediction of Jared Slater, an attorney with Ervin Cohen & Jessup LLP, in this article, available in JD Supra. Attorney Slater reviews two recent California decisions holding that the inclusion in a multi-count complaint of a claim alleging conduct constituting a sexual harassment dispute or sexual assault dispute renders all claims non-arbitrable under the federal “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act.”

“No Assent Without Affirmative Action – Challenges in Binding Former Subscribers to TOS Amendments”

Arbitration provisions sometimes strive to capture activity that occurs after the initial interaction which precipitated the agreement in the first place. This article, by Patrick Curran at Davis Wright Tremaine, and available at Lexology, addresses two judicial decisions that rejected attempts to invoke arbitrability for downstream events.