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Can Arbitration “Prevent” Litigation?

September 15, 2021 – R. David Gallo

Today, many lawyers and parties think of commercial arbitration as a way to “litigate” a matter cheaper, faster, and more privately than in court.  Indeed, while there are real differences between arbitrations and courts, modern commercial arbitration shares many important features with court litigation.  For example, the parties typically rely heavily on the law in presenting their respective cases to the arbitrators.  Also, particularly in the United States, arbitration will have discovery.  The discovery may be less expansive and expensive than in court, but it will often still require a significant investment of time and money.  And while there will hopefully be some added measure of civility among counsel and parties in arbitration, this does not always happen.  Arbitration can be just as adversarial and acrimonious as court litigation.

In these observations, some will see the natural evolution of dispute resolution that tracks the growing complexity of business relations.  Others may see an unfortunate departure from the promise that commercial arbitration once held.  Julius Cohen might have fallen into the second category.  Cohen was a lawyer and a major proponent of arbitration.  He was one of the primary drafters and lobbyists responsible for the 1920 New York Arbitration Law and the 1925 Federal Arbitration Act.  These laws represented a seismic shift in the law of arbitration in the United States, most notably by making agreements to arbitrate enforceable.

In 1921, Cohen wrote an article reflecting on the new New York Arbitration Law and advocating for the federal legislation that would soon come.*  Cohen noted that the original committee that lobbied to update U.S. arbitration laws was called the “Committee on the Prevention of Unnecessary Litigation.”  The committee believed that “in the interest of preventing unnecessary litigation” we must encourage “the settlement of disputes out of court by arbitration.”  Cohen explained that arbitration among commercial parties allows for “trade questions” to be decided by trade “experts” on the basis of “trade customs and trade facts.”  In arbitration, issues of damages could be “disposed of on the basis of trade experience,” rather than on the basis of rigid legal doctrines.  Whereas litigation often resulted in “the breaking up of friendly relations,” arbitration was better suited to the “continuity of friendly relations” because it permits parties to “settle their differences without friction.”

To be sure, what Cohen described in 1921 may exist today in some arbitrations administered by certain industry or religious organizations.  But Cohen was not talking exclusively about such specialized kinds of dispute resolution.  Cohen was talking about commercial arbitration and he was building the case for the Federal Arbitration Act that today governs a significant portion of arbitrations taking place in the United States.

Is there anything today’s lawyers and parties can take from Cohen’s 100-year-old remarks?  Would it be helpful if more stakeholders saw arbitration as a way to “prevent” litigation, instead of seeing arbitration as litigation in a conference room with a little less discovery?  Or are Cohen’s words out of place in the modern business world?  Certainly, much has changed in law and business since 1921.  Cohen likely did not foresee that his efforts to improve dispute resolution among merchants would lead to the spread of arbitration into many additional types of commercial disputes.  If he had, he may not have held such a rose-tinted view of arbitration’s promise.  In the end, perhaps it is simply a positive development that we now also bring our more complex and impersonal business disputes to arbitration, even if that means that those arbitrations may look more like litigation.  If even a small measure of Cohen’s ideals can be realized, this is a win.

* https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=2857&context=ylj

About the author: 

David Gallo specializes in business litigation and arbitration.  Prior to moving to Atlanta, David studied under leading arbitration practitioners and scholars at Columbia Law School, practiced litigation and arbitration at two AmLaw 100 firms in New York, and taught arbitration at Fordham Law School.

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Georgia Court of Appeals Strictly Construes Requirement that Parties Must Initial Arbitration Clauses in Employment Contracts

August 13, 2021 – R. David Gallo

On August 5, 2021, the Georgia Court of Appeals overturned a trial court’s decision to compel arbitration between a physician, Vasudeva, and his former employer, Georgia Brain & Spine Center.  Vasudeva v. Dagnew, 2021 WL 3417474 (Ga. App. Aug. 5, 2021).  The Court held that the arbitration agreement in Vasudeva’s employment contract was not enforceable because the parties had not initialed the arbitration clause in accordance with Georgia law.  The Georgia Arbitration Code (“GAC”) does not recognize arbitration clauses in “[a]ny contract relating to the terms and conditions of employment unless the clause agreeing to arbitrate is initialed by all signatories at the time of the execution of the agreement.”  O.C.G.A.§ 9-9-2(c)(9).

In addition to signing the last page of Vasudeva’s employment contract, the parties had also initialed the bottom of each of the 26 pages of the contract.  The arbitration clause started on the bottom of page 21 and carried over onto page 22.  The only text on page 22 other than the arbitration clause was the words “Signatures on Following Page.”  Because the parties had initialed page 21 “immediately adjacent to the Arbitration Provision,” and page 22, where the arbitration agreement was the only substantive text, the trial court determined that the parties had initialed their arbitration agreement per § 9-9-2(c)(9).

The Court of Appeals reversed, explaining that “[w]hether a valid and enforceable arbitration agreement exists is a question of law,” and concluding that, because “the initials are at the bottom left of every page of the agreement,” the parties had “acknowledg[ed] [] each page generally, not the arbitration clause specifically.”  [Query whether the Court would have found Vasudeva’s arbitration clause enforceable if the parties had initialed every term, rather than every page.]

There is logic to the Court’s reasoning.  The Court of Appeals has previously explained that the purpose of O.C.G.A. § 9-9-2(c)(9) is “to ensure that [signatories] are not compelled to give up their common law right of access to the courts unless they specifically acknowledge the intent to do so by initialing the arbitration clause.”  Pinnacle Constr. Co. v. Osborne, 218 Ga. App. 366, 368 (1995) (emphasis added).  Initialing every page of a contract may not fully serve this purpose.

On the other hand, the Pinnacle and Vasudeva decisions are adding a requirement to O.C.G.A.§ 9-9-2(c)(9) that may or may not be supported by the text of the law itself.  Why must the parties’ initials demonstrate “specific” acknowledgment of the arbitration clause?  And does “specific” acknowledgment of the arbitration clause need to be measured by the amount of attention given to other terms in the contract?  In other words, why can’t an employer draw “specific” attention to every term in the contract (as Vasudeva’s employer arguably did)?

Whatever you think of the decision, the Court articulated a mostly clear rule of law that you can follow when drafting and executing employment contracts.  Going forward, if you want an enforceable arbitration clause in an employment contract, make sure that the parties initial the clause in a manner that clearly indicates “specific” acknowledgment.  For example, you can draft your contract so that the parties’ initials only appear once, next to the arbitration clause.  Or, if you want the parties to initial multiple terms or pages, then you can include language to the effect that the parties hereby initial and specifically acknowledge the agreement to arbitrate.

About the author: 

R. David Gallo specializes in business litigation and arbitration.  Prior to moving to Atlanta, David studied under leading arbitration practitioners and scholars at Columbia Law School, practiced litigation and arbitration at two AmLaw 100 firms in New York, and taught arbitration at Fordham Law School.

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Georgia Court of Appeals Rules that “Speculation” About High Arbitration Fees is Not Enough to Resist Arbitration

August 4, 2021 – R. David Gallo

Synopsis

The Georgia Court of Appeals recently issued its decision in Omnitech Institute, Inc., et al. v. Norwood, 2021 WL 2643909 (June 28, 2021).  The case was on appeal from the Superior Court of Fulton County, which had denied Omnitech’s motion to compel arbitration against Norwood.  Norwood, a former Omnitech employee, had filed suit in state court alleging sexual harassment, retaliation, and other claims in connection with her tenure at Omnitech.  Her employment contract contained an American Arbitration Association (“AAA”) arbitration clause and Omnitech asked the Fulton County court to compel arbitration.  Norwood opposed, arguing that she could not afford the fees she would likely incur in arbitration.  The trial court agreed with Norwood.  In a split decision, the Court of Appeals reversed and compelled the parties to arbitrate on the basis that Norwood had failed to demonstrate with enough certainty that she would be required to pay the arbitration fees.

The majority’s opinion explained that the inability to afford arbitration fees is a Supreme Court-created defense to the enforcement of an otherwise-valid agreement to arbitrate.  See Green Tree Financial Corp.-Ala. v. Randolph, 531 U. S. 79 (2000).  Under certain circumstances, courts will protect a party if the costs of arbitration prohibit the party from effectively vindicating its rights.  The Omnitech majority held, however, that this “effective vindication” defense requires more than speculation regarding both the costs of arbitration and the inability to pay those costs.  The majority’s decision to compel arbitration in Omnitech was driven in large part by the fact that the AAA Arbitration Rules provide that “[t]he AAA may, in the event of extreme hardship on the part of any party, defer or reduce the administrative fees.”  The potential burden that arbitration would place upon Norwood, the majority reasoned, was therefore neither concrete nor ripe.

There was also a lengthy dissent that argued, among other things, that the majority: (1) gave insufficient deference to the trial court’s findings of fact, (2) gave too much weight to non-binding and inapposite federal court decisions, and (3) failed to appreciate the practical consequences of its decision.

Discussion

As discussed, the Omnitech majority focused on the AAA Rule that provides that the AAA may, in the event of extreme hardship, defer or reduce a party’s fees.  The majority also noted that the AAA Rules (like many sets of rules promulgated by arbitral institutions), allow for the arbitrator, in the award, to apportion more than 50% of the arbitration’s fees and costs to one of the parties.  Because these provisions could result in Norwood paying reduced fees, the court found Norwood’s concerns about the fees to be too speculative.  The Omnitech decision essentially holds that, when parties select the AAA or similar rules, the “effective vindication” defense will be too speculative before a party submits to arbitration and, perhaps, too speculative before the arbitrator issues the final arbitration award.

For the reasons identified by the majority, Norwood’s concerns were somewhat speculative.  But the majority did not fully examine the consequences of requiring more certainty.  While AAA Rule 53 provides that the AAA may reduce or defer a party’s fees, AAA Rule 57 states that non-payment of fees can result in heavy sanctions, including “limiting a party’s ability to assert or pursue their claim.”  So, after Omnitech, a party may need to initiate an arbitration it cannot afford, run the risk of sanctions, and hope for leniency on fees.  In many cases (putting aside the indigent and affluent), parties will not have enough information to make an accurate prediction about whether sanctions or leniency is more likely.

Additionally, as the dissent explains, the majority incorrectly “suggest[s] there may be some future point in the proceedings when Norwood would be better positioned to invoke the effective vindication doctrine.”  For a variety of reasons, the most logical time to raise this doctrine is when Norwood raised it—in opposition to a motion to compel arbitration.  There are additional legal and practical barriers to waiting until the middle of arbitration, or until after the final award, to seek a court’s protection from high arbitration fees.  For example, it may be difficult for a party to oppose the enforcement of an arbitration award on the basis that the arbitration fees were too high.  The statutory grounds for opposing enforcement of arbitration awards are few, and none are a great fit for this issue.

Conclusion

There are valid critiques of the “effective vindication” defense.  For one, it is hard to situate this defense within the Supreme Court’s broader pro-arbitration case law.  And, in practice, it may not make economic sense for a party to argue that arbitration is too expensive.  Sure, arbitration initiation fees are usually larger than court filing fees, but the costs of litigating in the courts may quickly catch up if there is voluminous discovery or if there are other costs and delays that are less likely in arbitration.  Which forum is more cost effective will likely depend on the nature and size of the of the dispute.

But as long as we have the “effective vindication” defense, it should be a coherent tool for the party that seeks to invoke it in good faith.  Unfortunately, Omnitech fails to consider the realities of arbitration.  As a result, the extent of the protections offered by this defense in Georgia is not clear.

About the author: 

R. David Gallo specializes in business litigation and arbitration.  Prior to moving to Atlanta, David studied under leading arbitration practitioners and scholars at Columbia Law School, practiced litigation and arbitration at two AmLaw 100 firms in New York, and taught arbitration at Fordham Law School.

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For a Good Clause – Part I: The Who, What, When, Where, and How of Your Arbitration Agreement

July 28, 2021 – R. David Gallo

In our K&H Arbitration Blog series “For a Good Clause,” we examine arbitration agreements through a variety of lenses to help you draft and select arbitration clauses that meet your business needs.  In this installment, we provide a list of questions that you can use to better craft and understand your arbitration agreement.

You have some real power to determine the contours of your arbitration.  Legally and practically, this power is most potent when you are drafting your arbitration agreement.  Take the time to discuss with your counterparties during contract negotiations what it will look like if the parties end up in arbitration.  Whether the parties are drafting an arbitration clause from scratch, making minor modifications to a clause used in an earlier contract, or dropping an off-the-shelf model clause into their contract, they should understand the who, what, when, where, and how of their arbitration agreement.

Who (is submitting to arbitration)?  Typically, your contract will provide that it is the parties to the contract who agree to submit to arbitration, and this aligns with the foundational principle that arbitration is a voluntary process.  Still, many arbitrations get sidetracked by the question of whether a party that did not sign the contract should nevertheless be a party to the arbitration.  This may be because one of the parties is judgment proof and its parent company has deep pockets, or because a third party participated in the performance or alleged breach of the underlying contract.  Consider whether your particular corporate or contractual circumstances call for clarifying the issue of who should–or should not–be arbitrating in connection with your contract.  And if you are selecting a set of institutional rules that will apply to your arbitration, carefully read any provisions regarding joinder of additional parties.  See, e.g., International Chamber of Commerce (“ICC”) Arbitration Rules, Art. 7.  The parties may decide that it is best to strike or modify such rules (as parties are generally permitted to do).

What (do you agree to arbitrate)?  This is often called the “scope” of the arbitration agreement.  Most model clauses contain broad scope language such as: “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration.”  A broad scope often makes sense, given that the parties rarely know exactly what kind of dispute will later arise.  But you may also decide that you want a clause with a narrow scope, submitting only specific kinds of disputes to arbitration and leaving the rest to the courts.  Whatever you choose, be deliberate.  If you want a narrow scope, spend some time with your attorney determining whether it is actually clear which potential disputes fall inside and outside your clause.  If it is not clear, then clean up your scope language.

When (can a party initiate arbitration)?  As soon as a dispute arises?  Or does a party need to follow any pre-arbitration steps?  These steps may include mediation, or a meeting between officers of each side.  Clauses with these prerequisites are sometimes called “multi-step” clauses.  Pre-arbitration steps can be a great idea if the parties are prepared to take seriously the good faith that is required to make non-binding dispute resolution fruitful.  Or, pre-arbitration steps can be a source of delay and posturing that get in the way of moving your dispute towards a resolution.  If you decide to use a multi-step clause, give some thought to what it means for a party to “comply” with pre-arbitration steps.  An agreement to negotiate may sound nice, but does it have any teeth?

Where (will the arbitration take place)?  You may want your arbitration to take place in a location convenient to your business affairs, or in a location that relates to the performance of the contract.  These are important considerations.  But you should also know that there are meaningful differences among the arbitration laws of different states and countries.  It is worth a conversation with your attorney to determine whether the jurisdiction you believe is the most convenient also presents obstacles to achieving your goals.

How (will the arbitration be administered)?  Will an institution such as the JAMS run your arbitration?  Or will it be “ad hoc,” meaning that the parties largely run the show?  Will you have a single arbitrator or a panel of three?  Each of your choices here involve trade-offs.  Institutional arbitrations come with administrative services that many counsel and parties prefer to outsource, but those services are not free.  Similarly, some prefer the deliberative process of a three-panel tribunal but, of course, all three arbitrators will need to be paid.

These questions do not address every aspect of an agreement to arbitrate, but they should be part of your efforts to ensure that the agreement is a good fit for the parties’ circumstances, needs, and expectations.  The earlier you address these issues, the better.  Once a dispute has arisen, parties may be incentivized to dig in, exploit uncertainty in the arbitration clause, and oppose even common-sense proposals by the other party.

About the author: 

R. David Gallo specializes in business litigation and arbitration.  Prior to moving to Atlanta, David studied under leading arbitration practitioners and scholars at Columbia Law School, practiced litigation and arbitration at two AmLaw 100 firms in New York, and taught arbitration at Fordham Law School.

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The Law Applicable to Your Arbitration in Georgia

July 13, 2021 – R. David Gallo

The answer to your arbitration-related question may depend on the law that applies to the arbitration.  The State of Georgia has an arbitration code—the Georgia Arbitration Code, or “GAC” (O.C.G.A. § 9-9-1 et seq.)—that applies to certain arbitrations and certain arbitration-related issues.  The United States also has an arbitration code—the Federal Arbitration Act, or “FAA” (9 U.S.C. § 1 et seq.)—that may apply alongside, or instead of, the GAC.  While these two sets of laws will often provide the same answer to a particular question, there are areas where these laws diverge.  And even where the codes look similar, it may be that courts have interpreted the respective provisions in such a way that results in incompatible answers to your question.

The basic rule is that the GAC will usually apply when the underlying contract involves Georgia parties and a local commercial relationship in Georgia.  The FAA will usually apply when the underlying contract involves parties from different states and/or subject matter that crosses state lines (i.e., “interstate commerce”).  The U.S. Supreme Court has an expansive view of the FAA’s reach, concluding that it applies to contracts that have even a slight relationship to “interstate commerce.”

Now for an example that illustrates why it matters.  There is an ongoing arbitration, and you are a non-party.  One of the parties in that arbitration sends you a subpoena requesting that you turn over certain relevant documents in your possession.  Do you have to produce the documents?  If the GAC applies to the arbitration, then you probably do.  The GAC provides that “[t]he arbitrators may issue subpoenas for … the production of books, records, documents, and other evidence” and that courts may enforce these subpoenas.  O.C.G.A. § 9-9-9(a).  To date, courts have not provided much guidance on this provision of the GAC, and the safest assumption is that it will be enforced as written.  If, however, the FAA applies to the arbitration, then you likely do not have to produce the documents.  See Managed Care Advisory Grp., LLC v. CIGNA Healthcare, Inc., 939 F.3d 1145 (11th Cir. 2019).  But be careful.  The arbitrator generally has the power under the FAA to compel your appearance as a witness at the arbitration, and can require that you bring the requested documents with you to the hearing.  Therefore, if you believe that refusing to produce the documents may lead to a request that you appear at the arbitration, you may decide to voluntarily turn over the documents.

The issue of applicable law in arbitration is complex.  For any “rules” discussed above, the exceptions and nuances are abundant.  But we hope you now feel better equipped to raise the issue with in-house or outside counsel when drafting an agreement, when a dispute arises, or when a subpoena shows up in your inbox.

About the author: 

R. David Gallo specializes in business litigation and arbitration.  Prior to moving to Atlanta, David studied under leading arbitration practitioners and scholars at Columbia Law School, practiced litigation and arbitration at two AmLaw 100 firms in New York, and taught arbitration at Fordham Law School.

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Welcome to the K&H Arbitration Blog

July 6, 2021 

There is an ever-increasing demand for alternative dispute resolution processes such as arbitration.  The Covid-19 pandemic only accelerated this demand and we do not anticipate that this trend will subside once the world emerges from the pandemic.

This blog is a user-friendly resource for businesses and individuals who find themselves faced with issues involving arbitration.  Perhaps you want to include an arbitration clause in your contract, or you are being asked to sign a contract with an arbitration clause.  Maybe a dispute has arisen and you want to begin arbitration proceedings but you are not sure whether your arbitration clause covers the dispute (hint: it usually does).  Perhaps you received a subpoena for documents in connection with an arbitration in which you are not otherwise involved.  This blog will provide you with answers to simple questions and will help you ask the right questions when confronted with more complex issues.

Among other topics, we will cover how to draft an arbitration clause and what to expect in arbitration proceedings.  We will discuss the differences and similarities among arbitrations governed by Georgia law, federal law, and international law.  We will explore—in layman’s terms, whenever possible—the Georgia Arbitration Code, the Federal Arbitration Act, transnational law, and decisions from Georgia’s state courts, Georgia’s federal district courts, the U.S. Court of Appeals for the Eleventh Circuit, the U.S. Supreme Court, and foreign tribunals.  We will provide toolkits and checklists you can use to navigate everyday arbitration issues.  We will discuss the various contexts and industries in which we have handled arbitration issues for our clients, including:

  • Breach of Contract
  • Closely Held Company Shareholder Disputes
  • Communications
  • Construction
  • Earn Out Disputes
  • Employment
  • Executive Separation/Severance
  • Franchise Disputes
  • Gaming
  • International
  • Mergers and Acquisitions
  • Pharmaceuticals
  • Real Estate
  • Securities
  • Trusts and Estates
  • Vendor/Supplier Disputes
  • Technology
  • Trusts and Estates

We are available and eager to discuss your arbitration issues with you.

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Attorneys at Krevolin & Horst with extensive arbitration experience:

Kana Caplan

404-835-8054

Email Kana

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