Though it has a reputation for being cheaper and faster than litigation, arbitration was on trial in a recent district court decision.
In CELLInfo v. “American Tower,” CELLInfo (CI) sued American Tower Corp (ATC) for, among other things, trade secret infringement and breach of contract. ATC responded by making a motion to dismiss the case or, alternatively, to stay the lawsuit and compel arbitration (because the contract provided for arbitration). CI not only opposed the motion to dismiss, but also brought motions for expedited discovery and for preliminary injunction, seeking to stop ATC from continuing to breach its promise, in the agreement, to keep certain information confidential.
When appearing before Judge William G. Young in the District of Massachusetts for preliminary injunction, CI was surprised when Judge Young instead offered to immediately hold a trial — not just review affidavits from the parties, or what the principals suggest had happened, but with real witnesses and real evidence. The judge claimed he could determine quickly, thoroughly, and accurately whatever needed to be determined.
CI backed down. They said they were not ready for a trial and only wanted the judge to stop the defendants from continuing to breach confidentiality, and of course, to give an early message that the bad guys were likely to lose (because one element of an injunction is demonstrating a “likelihood of success on the merits”). CI wanted everything else in the case to be determined in arbitration.
Sounds like a simple matter of contract law, right? Well, this case turned interesting when Judge Young issued his decision. He went out of his way to debunk what, in his view, is the myth of the advantages of arbitration over federal litigation. He argued that, at least in his court, litigation is often faster and cheaper than arbitration.
Judge Young then expounded on how this case demonstrates how the virtues of arbitration are largely overstated. He articulated the three factors in which arbitration is supposed to be better: speed, cost, and confidentiality.
- Speed: Using his willingness to find facts in an impromptu trial as an example, the judge said that if the litigants are interested in speed, federal court (at least, in his courtroom) is the clear winner over arbitration.
- Expense: As for expense, the judge showed how it is equally expensive to have discovery in arbitration as it is in federal court. It’s actually cheaper to draft and file a complaint, and as any seasoned trial attorney will tell you, the prospect of going to court forces a discussion that may end in settling the dispute. In arbitration, parties might spend a lot up front to choose a panel before discovery even starts. Certainly the start-up costs of arbitration are more expensive.
- Confidentiality: The judge conceded that arbitration does have an advantage over litigation when it comes to avoiding the airing of trade secrets or other dirty laundry. But when it comes to enforcing employee or consumer arbitration clauses, Judge Young noted that the opacity of the proceedings tends to work against the little guy.
Judge Young also took issue with the provision in the agreement governing arbitration (devoting 14 pages of a 22-page decision to it), calling it ambiguous, convoluted, and difficult to understand to the extent that it wasn’t clear whether they could litigate over preliminary injunctive relief for things like confidentiality.
At the end of the day, the judge said, arbitration leaves you stuck with a potentially unwritten decision, just a yes or no, that is virtually unappealable. (Basically, you can only appeal if you can demonstrate the arbitrators were biased — that is, corrupt.)
It’s unfortunate that an agreement which attorneys presumably spent a lot of time drafting — or maybe, just using the old form that had been used time and again — was an agreement that ultimately was deemed ambiguous at the one time that it needed to be clear: what was intended to be covered by arbitration?
To quote Judge Young: Which course is better? You be the judge.
