Pitfalls of Arbitration
Gibbs joined Holland & Knight, LLP (“H&K”) as a “Class C Partner” in 2000, pursuant to a Class C Partner Admission Agreement.[1] In 2003, Gibbs executed an amendment, which superseded and replaced the prior agreement and made reference to the “H&K Partnership Agreement dated January 1, 1982 as amended and revised through August 11, 2001.”[2] Subsequently, the partnership agreement was amended in 2005, 2007, 2009, and 2012.[3] The final version, the 2012 agreement, provides for a three-step process for resolving disputes between the parties, including negotiation, mediation, and mandatory arbitration, the last of which is governed by the Federal Arbitration Act (“FAA”).[4] Each year, Gibbs certified the binding nature of the then-operative partnership agreement, including the 2012 agreement, as required of all H&K partners.[5]
In 2013, things went south between the parties. Gibbs claimed that he was not provided with proper notice of termination of their agreement and invoked the three-step dispute resolution mechanism.[6] When negotiations failed, however, Gibbs filed a lawsuit, claiming that he was not required to mediate or arbitrate, while H&K opposed the action and sought to compel arbitration.[7] In determining whether the parties have entered into a valid agreement to arbitrate, the court noted that Gibbs acknowledged that his relationship with H&K was governed by the partnership agreement in effect for that year and that it was Gibbs who acknowledged the requirement to follow the dispute resolution mechanism under the agreement to commence negotiations.[8] According to the court, it did not matter that Gibbs did not sign the 2012 partnership agreement, as there is no signature requirement under the FAA, which requires only that an arbitration agreement be in writing, not that it be signed.[9] Thus, while Gibbs never signed the 2012 agreement, the court said, he indisputably agreed to be bound by it and unequivocally expressed that understanding on numerous occasions. [10] That Gibbs now prefers litigation is to no avail.[11] Accordingly, the court ordered that the litigation be stayed and directed the parties to proceed to mediation and then, if necessary, binding arbitration.[12]
So now you know you do not need to sign an agreement to be bound by its arbitration clause under federal law. But if there are so many benefits of arbitration, why would anyone refuse to submit to arbitration and go to court instead? First of all, in arbitration, it is the arbitrator, rather than a jury, that hears the case, and individual plaintiffs tend to prefer a jury trial when they believe that a jury comprised of their peers will render more favorable results for their particular claims. Moreover, it is very difficult to appeal arbitration rulings, except in very limited circumstances, if you do not like the results. Some people complain that a particular arbitrator, of all things, acted in an arbitrary manner or was biased and they have limited rights to appeal to get to a fair outcome. Last, but not least, contrary to conventional wisdom, arbitration can be very expensive, with much higher administrative costs (e.g., filing fees and compensation for arbitrators) and more impediments to the recovery of attorney’s fees for the winning party. In other words, while there are situations where arbitration can be mutually beneficial, it is not always advisable, and a party about to enter into an agreement that contains a mandatory arbitration clause should give it careful consideration.
This post is a part of a two-part blog series on Gibbs v. Holland & Knight LLP and enforceability of a mandatory arbitration clause. You can find the other post by searching our blogs. If you have any questions about the content of this blog series or other issues not discussed here, please contact us.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Office, P.L.L.C. She concentrates her practice on business law. So-Eun can be contacted at: (347) 921-0173 or [email protected]. Her profile is available on www.mcbrideattorneys.com.
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] Id. at 1.
[2] Id.
[3] Id. at 2.
[4] Id. at 3.
[5] Id.
[6] Id. at 4–5.
[7] Id. at 5.
[8] Id. at 7.
[9] Id. (internal quotations omitted).
[10] Id. at 8.
[11] Id. at 7.
[12] Id. at 9.