Administered Arbitration: Getting to be an even better idea

 

In an earlier article and in my recent ABA book, Arbitrating Patent Disputes, a Practical Guide, I addressed whether it was a good idea to include an administrator, such as AAA, CPR, or ICDR, in your arbitration clause. Now there is another reason for your arbitration clause to designate an administrator. The clause may be found invalid without it.

A reason to avoid administration

Some folks are determined to avoid the fees these administrators charge. Those fees can seem hefty, particularly compared to court filing fees.

Reasons in favor of administration

But by failing to name an administrator they are giving up (1) professional case administration, (2) a set of carefully drafted and tested that will apply to the arbitration, (3) access to a panel of qualified and experienced arbitrators, and (4) procedures to address disputes about an alleged arbitrator conflict of interest or the like. And they probably won’t save all that much in the end. Somebody has to administer the arbitration. Arbitrators make expensive administrators.

Another reason for administration

Consider Flanzman v. Jenny Craig, Inc., No. A-2580-17T1 (N.J. App. Oct 17, 2018). There, Ms. Flanzman sued her employer and others for age discrimination and related matters. Jenny Craig moved to compel arbitration. On appeal, the court reversed an order compelling arbitration. It found a lack of mutual assent because the arbitration clause did not specify an arbitral institution or method of picking the arbitrator. The court held, “the parties lacked a ‘meeting of the minds’ because they did not understand the rights under the arbitration agreement that ostensibly foreclosed plaintiff’s right to a jury trial.”

The court explained that selecting an arbitral institution would inform the parties of the basic rules and procedures that would apply to the arbitration. Without knowing that basic information, the parties were “unfamiliar with the judicial rights that replaced judicial adjudication.”

The court said that the parties should have at least described a process for picking an arbitrator in the event they could not agree on an arbitrator. But without this, they simply had no mutual agreement of what rights replaced the right to jury trial they gave up.

A curious decision

The decision is curious. The procedure that applies when the parties cannot agree on selection of an arbitrator is set forth in the Federal Arbitration Act and New Jersey’s Arbitration Act. The party seeking arbitration can approach the court, which will appoint an arbitrator. Why failure of the arbitration clause to include the procedure set out in the statutes demonstrates a lack of meeting of the minds is unclear. The point is they were going to have an arbitrator decide the dispute. The FAA and New Jersey Arbitration Act set out the powers of arbitrators to do that.

A main driver of the decision may have been a sympathetic plaintiff. Ms. Flanzman was an eighty-two-year-old twenty-six-year employee of the defendant. Another driver may have been the court’s distrust of arbitration to provide a fair decision. The court recognized the law and decisions require that arbitration agreements be placed “on equal footing with all other contracts.” But it noted that “ a party from whom an arbitration clause has been extracted,” needs to be clearly waive his or her rights. Use of the word “extracted” suggests the court feels arbitration is inherently unfavorable to an employee.

This is not to say that all courts will take this tack. After all, as noted, the FAA and most state arbitration acts contemplate that the parties may agree to arbitrate but not set out the specifics. This suggests many courts will just follow the statute and move the arbitration along by designating an arbitrator. But it is expensive and time consuming to go to court to have an arbitrator appointed. And you still have the risk a court follow the Jenny Craig approach and refuse to require arbitration or reverse a trial court that orders it.

What about commercial cases?

How does this all affect commercial arbitration clauses? It may well be that a court wouldn’t take the Jenny Craig approach in a commercial context. As arbitration has expanded more into the consumer and general employment area, there has been push back. Some courts are likely to distrust arbitrations that don’t stay in their traditional lane of commercial disputes or some specialized labor disputes. You are unlikely to face the same judicial distrust of arbitration in a commercial case that Jenny Craig faced.

Still, the case does provide another reason to name an administrator in arbitration clauses. The logic of the decision was that the clause was not clear enough to demonstrate a meeting of the minds, not that one party was an employee and therefore more sympathetic.

Most commercial cases will involve the FAA, which applies in cases involving interstate commerce and pre-empts state law where it applies. Courts applying the FAA will not find a state appellate case controlling and are unlikely to find it particularly compelling.

In the end, you may decide the Jenny Craig case or cases like it are unlikely to be applied in a commercial context and not cause for great concern. But if providing for administration was a good idea in the first place, it is at least a little bit better idea now. It avoids one other area of possible attack on the arbitration clause.