by Andrew Flake
When lawyers represent business clients in arbitration, they are often relying upon a contract, and an arbitration clause, they didn’t draft themselves. That may be because they are assisting a first-time client. It may be because of an artificial divide, the view that “the corporate lawyer prepares the agreement, and the litigator handles the dispute.” Or it may be some combination of both.
Where it is possible, though, seeking input on the drafting from a litigator experienced in arbitration has some decided benefits. One of them, illustrated by a recent Third Circuit case, is thinking through the kind of dispute scenarios that could arise, assessing whether the arbitration clause is up to the task, and if not, tailoring it to ensure it is.
The underlying case involved a dispute among members of a dentistry and oral surgery practice. After the members discovered that one of their number (Siegel) did not have a current dentistry license, as required by their Shareholders Agreement, they first tried to buy him out and then, when he refused, they voted to cancel his shares. He sued in federal court, alleging the cancellation was improper and seeking an order that his shares be returned.
The other members then initiated a JAMS arbitration. Here’s the arbitration clause, which includes what might be considered some “standard” categories of exclusion:
The parties are agreeing that expedited arbitration shall be the exclusive remedy to resolve any dispute or alleged breach relating to this agreement, whether statutory or sounding in contract or in tort, excepting (i) the enforcement of the restrictive covenants, (ii) other actions in equity, and (iii) actions with an amount in dispute of less than $12,000.00.
The reason for these kinds of carveouts, which most lawyers see in employment agreements connected to restrictive covenants, or in connection with confidentiality or IP protection, is that it may be necessary to seek a temporary injunction. And the conventional wisdom is that emergency injunctive relief, a TRO, is more readily available in court. I’d respectfully suggest, however, that this is not always the case. Most of the major administering institutions, AAA included (in its Commercial Rule 38), have time-tested and effective emergency relief provisions, permitting counsel to be immediately heard, often more quickly than in state courts, whose dockets are busier than ever.
What’s more, and here we get back to the feuding dentists, there are instances in which legal relief — like determining whether a shareholder agreement was breached, the amount of distributions, or the correct share ownership percentages — could be coupled with equitable relief, like ordering cancellation or redistribution of shares, or, in a corporate dissolution scenario, deciding issues raised by the parties in connection with corporate wind down. By trying to carve-out “equitable relief,” we can uncouple those related kinds of relief and create unintended consequences.
The JAMS arbitrator in Siegel, for example, agreed with the shareholder-group that without an active license, their fellow shareholder was not entitled to distributions and the revocation of his shares was proper, but the carve-out created further district court litigation: Even after the award, Siegel was allowed to amend his complaint, and he continued requesting an order directing return of his shares. Although the trial court granted a motion to dismiss the amended complaint, and the Third Circuit determined the arbitration award itself was proper, it still reversed the dismissal of the Complaint, finding that it sought “equitable” relief and sending it back to the district judge.
What that win gets Dr. Siegel is not clear, given the arbitrator’s award, now a final judgment, that he breached the agreement. And for all of the parties, it prolongs a dispute that, in its fundamental aspects, has already been decided. I don’t know that this kind of split or dual-track dispute resolution is what the shareholders would have chosen on the front-end, had they thought it through.
It’s another example of how, when it comes to arbitration clauses, one size does not always fit all. And for the parties, who have to spend time and expense on procedural disputes around the scope of clauses, and the meanings of carveouts, well, it can be like pulling teeth.[The case is Siegel v. Goldstein, 2022 WL 2234952, at *3 (Third Cir., decided June 22, 2022).]