The United States Court of Appeals for the Fifth Circuit held that a party waived its right to arbitrate by waiting one year after the suit was filed before seeking to compel arbitration. In Petroleum Pipe Americas Co., v. Jindal Saw Ltd., (No. 08-20461) (5th. Cir. July 9, 2009) Defendant Jindal Saw Ltd. (“Jindal”) is an Indian manufacturer of pipelines and plaintiff Petroleum Pipe Americas Corp. (“PPA”) is a Texas corporation whose affiliate regularly purchases pipelines from Jindal since 2004. Those purchase orders do not contain an arbitration clause. In 2006, the parties resolved a dispute over allegedly defective pipelines (P110 pipe) with a Settlement Agreement, which includes the following clause: The parties agree to have the dispute if any to have the same arbitrated [sic] than litigated. All disputes arising in connection with the present contract shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by a Sole Arbitrator . . . . The law governing the contract and the arbitration procedure shall be English law. The place of arbitration shall be London. On May 30, 2007, PPA sued Jindal in state court for breach of contract and breach of warranty based on allegedly defective pipelines L80 and N80, but not any of the P110 pipe. Jindal removed promptly to federal court, filed an answer and counterclaimed for: (1) breach of the Settlement Agreement and purchase orders, (2) unjust enrichment or restitution for the amount Jindal paid to PPA under the Settlement Agreement, (3) promissory estoppel, and (4) money had and received. The court encouraged settlement of the dispute, and over the next several months, the district court held a series of off-record conferences with the parties. However, on May 29, 2008, ten days after the last conference and a year after PPA had sued, Jindal moved to compel arbitration. PPA resisted the order and argued that (1) the the claims did not fall within the scope of the Settlement Agreement and (2) Jindal waived its right to arbitrate by substantially invoking the judicial process. The district court denied the motion to compel arbitration and Jindal now appeals. The Fifth Circuit now decides whether Jindal has waived its right to arbitrate. First, the court pointed out that a court finds waiver “when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.” The court then cited three factors to consider in the finding of prejudice: (1) whether discovery occurred relating to arbitrable claims; (2) the time and expense incurred in defending against a motion for summary judgment; and (3) a party’s failure to timely assert its right to arbitrate. After discussing the arguments presented by the parties, the court held that “Jindal substantially invoked the judicial processby waiting to move to arbitrate until the district court’s pronouncements in the May 19 conference and that PPA was prejudiced thereby.” Accordingly, the court affirmed the district court’s judgment to stay arbitration and compel arbitration. Technorati Tags: arbitration, ADR, law, Fifth Circuit, arbitration waiver

Mediation Channel and “unofficial taxonomist of the ADR blogosphere,” has named Disputing as one of the 5 additions to her worldwide directory of ADR blogs at ADRBlogs.com. Diane said: I’ve been tracking and cataloging bloggers world-wide who write about ADR, negotiation, and conflict resolution. It gives me the ability to introduce new and worthy ADR blogs to readers – like the following five blogs. I hope you enjoy them: Loree Reinsurance and Arbitration Forum provides discussion and insights on reinsurance litigation and arbitration and is published by New York-based boutique commercial and industry arbitration firm Loree & Loree. This blog demonstrates quality writing on newsworthy topics that distinguish the top ADR blog; a recent example is “The AAA Commercial Rules and the Pig in a Poke: Gilbert Street Developers, LLC v. La Quinta Homes, LLC“. Business Conflict Blog provides perspectives on managing the business disputes that companies around the globe face, a focus reflected in posts such as “Contract Drafting for Dispute Management“, aimed for the transactional lawyer seeking to protect the value of the deal. This blog is written by F. Peter Phillips, a commercial arbitrator and mediator based in New Jersey. Mediation Matters is published by California lawyer and mediator Steve Mehta, who has translated his experience litigating and mediating complex cases into engaging posts that share his reflections on ADR practice, including this one on his experiences going green to conserve energy at his office. Cross Collaborate serves as a learning resource for all those involved in shaping or influencing governmental decisions, offering commentary on leading issues and innovative practices. It is published by John Folk-Williams, a practitioner and writer in the field of public policy collaboration and interest-based negotiation. His thoughtfulness as a practitioner is evident in posts like “Power Differences, Consensus Building & Collaborative Networks“. Disputing: Conversations about Dispute Resolution is a dependable source for news, updates and commentary on the law pertaining to arbitration, with a special focus on Texas demonstrated by posts such as “Texas HB 2256 Makes Possible a New Mediation Procedure for ‘Balance Billing‘”. Thank you Diane! Karl Bayer, Alyson Chaky, Holly Hayes, and Victoria VanBuren.

By Peter Friedman In Part One, we asked whether there is any solution to the problem created by mandatory arbitration clauses and class action waivers in consumer online transactions. As a general rule, courts hold that mandatory arbitration clauses are enforceable. Thus, for example, the Pennsylvania Law Encyclopedia explains that under the Uniform Arbitration Act, a version of which governs the use of arbitration in virtually 36 states, mandatory arbitration clauses in contracts are enforceable and irrevocable except “upon such grounds as exist at law or in equity relating to the validity, enforceability or revocation of any contract”: The Uniform Arbitration Act provides that a written agreement to subject any existing controversy to arbitration or a provision in a written agreement to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity relating to the validity, enforceability or revocation of any contract, and the constitutionality thereof has been upheld against the objection that the exception of contracts for personal services is an improper basis of classification. P.L.E., Contracts § 536 (Matthew Bender 2007)(footnotes omitted). Under generally applicable precedent, mandatory arbitration clauses in online transactions are upheld on the grounds that these transactions are not “take it or leave it” propositions. This was the reasoning applied by the New York state appellate court sitting in Manhattan in upholding a mandatory arbitration clause in a contract for the purchase of a computer by telephone or mail in Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569, 37 U.C.C. Rep. Serv. 2d 54 (N.Y. App. Div. 1st Dep’t 1998). The court explained first that “although the parties clearly do not possess equal bargaining power, this factor alone does not invalidate the contract as one of adhesion. As the [trial court] observed, with the ability to make the purchase elsewhere and the express option to return the goods, the consumer is not in a ‘take it or leave it’ position at all; if any term of the agreement is unacceptable to the consumer, he or she can easily buy a competitor’s product instead–either from a retailer or directly from the manufacturer–and reject Gateway’s agreement by returning the merchandise.” Id. at 251. The court also examined the trial court’s determination that “while a class action lawsuit . . . may be a less costly alternative to the arbitration (which is generally less costly than litigation),” that fact does not alter the binding effect of the valid arbitration clause contained in the agreement. Thus, the court affirmed the enforceability of the agreement to arbitrate while nonetheless holding that the specific forum for arbitration specified by the contract at issue was unreasonably expensive. Accordingly, the court remanded the case “so that the parties have the opportunity to seek appropriate substitution of an arbitrator pursuant to the Federal Arbitration Act (9 USC § 1 et seq.), which provides for such court designation of an arbitrator upon application of either party, where, for whatever reason, one is not otherwise designated (9 USC § 5).” Id. at 255. Fortunately, however, courts have very recently begun to refuse to enforce mandatory arbitration clauses in consumer transaction because they are recognizing, as the Pennsylvania Law Encyclopedia quoted above states, there are “grounds in law or in equity” for doing so. Two years ago, in Douglas v. Talk America (9th Cir. 2007), the plaintiff challenged, by means of a class action complaint, the validity of an amendment made to the contract governing his telephone service. The amendment to the contract, among other things, required arbitration of all disputes arising under the contract. Moreover, the amendment was made unilaterally and without any notice other than the posting of the revision on the defendant’s web site. The U.S. Court of Appeals for the 9th Circuit, applying California law, held that the amended contract, including the arbitration provision, was unenforceable and dismissed the defendant’s motion to compel arbitration. The court rejected the reasoning applied by the New York courts that the plaintiff had “meaningful alternative choices for telephone service.” Id. at 8. The court also made clear that, absent the inclusion of the arbitration clause in the defendant’s unilateral modification of the original contract, a relinquishment of the right to bring a class action also “may be” unenforceable under California law, though it would be enforceable under New York law. Id. at 8-9. Douglas, however, may be of limited use as precedent in challenging mandatory arbitration clauses even outside of New York because the arbitration clause was added by means of the defendant’s unilateral amendment to the contract, an amendment that was unenforceable merely by virtue of the fact that a party can’t unilaterally change the terms of a contract; it must obtain the other party’s consent before doing so.” Id. at 4 (citations omitted). This 9th Circuit’s reasoning in Douglas was extended in Harris v. Blockbuster, Inc. (N.D. Tex. April 15, 2009). In Harris, the court, applying Texas law, refused to enforce a mandatory arbitration clause in an online transaction despite the fact the clause was in the original contract and the contract had not been amended. Nonetheless, the court reasoned that the contract was unenforceable merely because the defendant had reserved the right to unilaterally amend its all of its terms, including the arbitration clause. Thus, the court concluded, the original contract had been “illusory.” Harris represents an extension of Douglas in that the right to amend even in the absence of amendment voids the entire contract. Nonetheless, as a matter of contract doctrine the case is problematic, at least outside of Texas. Generally, courts will find consideration supporting a contract that has not been amended, even if the contract purports to grant a right of unilateral amendment. Given the presence of consideration, the unmodified original contract would not be “illusory.” Indeed, the court in Douglas seemed to be operating on the assumption that under California law the contract in that case would have been enforceable […]

By Peter Friedman Part One – The Problem: Mandatory Arbitration clauses that preclude class relief in consumer agreements make arbitration a means of precluding consumers from obtaining any feasible relief. Calling “Alternative Rock” a certain style of music some students at liberal arts colleges enjoy has long given the music a sheen of integrity, the kind of integrity parodied as pretense by calling those fans “granola eaters” who wear Birkenstocks. I’ll confess – I love Alternative Rock, and I find Birkenstocks thoroughly comfortable (albeit too expensive). (And granola is too sweet for my taste). But I recognize the rhetoric of naming when I see it. Precisely the same connotations that adhere to alternative rock seem to apply to the term “alternative dispute resolution,” a term so well established its acronym, ADR, is the conventional way of referring to arbitration and mediation. Calling these procedures “alternative” connotes integrity and goodness, especially in contrast to what they are an alternative to – litigation. Litigation, of course, is the dispute resolution procedure desired by the big, bad wolves of our country – the corporations that use their amoral BigLaw lawyers to grind the everyday little guy (the wholesome guy with integrity) into dust. I see this reaction all the time in my students. So, for example, this last semester I gave an exam in a course in lawyering skills that was based on a hypothetical in which the business client the students were supposed to be representing was entering into a contract to have its photocopiers and printers serviced. This particular question asked whether the students would recommend to the client a contractual clause requiring mandatory arbitration of all disputes arising under the service contract or mandatory litigation in the client’s home state under that state’s laws. Most of the students, including all of the brightest ones, identified as a principal goal of the client the negotiation of the disputes. But then almost all of the students did a funny thing – they recommended that the client insist on the mandatory arbitration clause. Why? From the explanations the reasoning was clear – arbitration is faster and cheaper. Faster and cheaper is always better. And a negotiated resolution is better than resolution by means of an adversary proceeding. Since arbitration is faster and cheaper and “alternative” to the system preferred by the big, bad wolves, it’s more like negotiation than is litigation. Thus, the arbitration clause is the better choice. This chain of reasoning doesn’t work as a matter of logic, and, though it seemed paradoxical to my students, the proper answer was precisely the opposite: the contractual provision that would force negotiated resolution of disputes under the contract was the mandatory litigation provision. Many of the students recognized that the disputes under the contract — over payment for allegedly inadequate service to the client’s photocopiers and printers — would hardly be worth litigating. But they did not think through, first, that our client could withhold payment if it were dissatisfied with performance, and, second, that therefore the service provider would be the one who would have to commence any adversary proceeding necessary to an adversarial resolution of its insistence that it should be paid in full. Since the disputes were likely to be so small it would be irrational for the service provider to begin a lawsuit to be paid in full, it would be forced by a mandatory litigation clause to negotiate resolution of the disagreement. But they were prevented from realizing that, by requiring litigation as an adversary means of resolving these small value disputes, all the disputes would be resolved by negotiation. In contrast, arbitration would be affordable enough that the service provider could force some of those disputes into the adversarial arbitration process. A similar dynamic is often at work in construction contracts. My father, who at 85 is in his 59th year of practice, recommended long ago that a client property owner engaged in a small development project remove a mandatory arbitration clause in the draft construction contract for the project. First, he pointed out that, since the client would be paying the contractor in installments, the client’s remedy for inadequate performance would be simply to withhold payment. The contractor, on the other hand, would be the one who would have to force the issue on any dispute in order to get paid. If the contractor had the burden of filing a complaint in court and pursuing a remedy through litigation, he would only do so if there was a lot at stake and a high likelihood he would succeed. Thus, requiring litigation of disputes would force the contractor to negotiate resolutions to almost every complaint he had. The client was convinced, and, lo and behold, the client gratefully saw that the number of adversarial disputes it had to defend drop precipitously. My dad had earned a client for life. So let’s be clear: in some cases, alternative dispute resolution is not necessarily better dispute resolution. Nowhere is the inappropriate nature of mandatory arbitration more apparent than in agreements governing consumer transactions and, especially, online consumer transactions. Every online purchase agreement I can recall includes a mandatory arbitration clause. Thus, for example, if you own a Kindle and want to sue Amazon for deleting George Orwell’s 1984 and Animal Farm from your electronic reading device, the Kindle’s End User License Agreement (“EULA”) requires that you instead commence arbitration against Amazon in Seattle, Washington. You might be interested in doing so because Amazon seems to be in breach of the Kindle’s EULA in deleting 1984 without your consent; Amazon had agreed your purchase of the eBook entitled you “ to keep a permanent copy of the applicable Digital Content and to view, use, and display such Digital Content an unlimited number of times.” (emphasis added) But why would you go to the trouble of hiring a lawyer in Seattle to file an arbitration petition when you’ve suffered virtually no harm from the breach? Even had Amazon not refunded the […]