Tag: dispute resolution

Mediation vs. Arbitration Provisions in a Contract

All provisions of a contract are relevant, no matter how innocuous they appear to be and no matter how many times you are told that they are “just boilerplate.” Mediation and arbitration provisions often are deemed to fall in the “boilerplate” category, but the impact of these provisions cannot be understated.

Taking a step back, in the event of a dispute between contract counterparties, the underlying contract often provides an avenue for resolution of such dispute, which may require that the parties pursue such matter in court, through arbitration or by other means, including mediation. While most parties are familiar with the concept of litigation, the differences between mediation and arbitration are less well-known. Among the many relevant factors distinguishing between mediation and arbitration, the following three factors should be considered:

  1. Mediation in the United States is non-binding, meaning that a party is not obligated to follow the determination of a mediator. Arbitration, on the other hand, may be binding.

  2. From a timing standpoint, the mediation process is more expeditious, often being completed anywhere from one to three months after the process is initiated, depending upon the complexity of the issues and the parties’ agreements. Arbitration proceedings often last as long as a lawsuit with a formal discovery process and other formalities that commonly would be part of a lawsuit.

  3. From a cost perspective, mediation is more economical, largely due to the speed of the process and less legal formalities. This generally bodes well for the parties if they agree to abide by the determination of the mediator or view such decision as indicative of how an arbitrator or judge ultimately would rule on a matter. But since mediation is non-binding, parties may view this process as an unnecessary delay and waste of resources.

© 2023 Chuhak & Tecson P.C.

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Supreme Court Holds That Judges Can’t Invent Rules Governing Arbitration Waiver

Litigators who defend cases brought under the Fair Labor Standards Act (“FLSA”), particularly ‘collective actions” alleging wage-and-hour violations, often have been able to counter, or even sometimes support, allegations that arbitration agreements have been waived where the conduct of a party has caused prejudice to the other side. In the case of Morgan v. Sundance, Inc., a unanimous Supreme Court has now held that the determinant of waiver is solely dependent upon the nature and magnitude of the actions of the party that might be inconsistent with arbitration, without respect to alleged prejudice.

Morgan thus is an important case for any civil litigator, but it is especially significant for those who deal with employment disputes potentially governed by arbitration agreements, and for those who draw up such agreements in the first place. As is well known, the Court has, in recent years, frequently upheld the primacy of arbitration agreements pursuant to the Federal Arbitration Act (FAA). In the Morgan case, a unanimous Court does it again. Ms. Morgan was an hourly employee at a Taco Bell franchise who had signed an arbitration agreement intended to govern employment disputes. Notwithstanding the arbitration agreement, Morgan went to federal court to bring a nationwide “collective action” arguing that her employer had violated the Fair Labor Standards Act. Sundance, a franchisee of Taco Bell, initially defended against the lawsuit as if the arbitration agreement didn’t exist—filing a motion to dismiss (which the District Court denied) and engaging in mediation (which was unsuccessful). Next, Sundance moved to stay the litigation and compel arbitration under the FAA—almost eight months after Morgan filed the suit. Morgan then expectedly opposed on grounds of waiver of the right to arbitrate.

The governing precedent in the Eighth Circuit, where the case was litigated below, conditioned a finding of waiver of an arbitration agreement on whether the party knew of the right, “acted inconsistently with that right,” and—critical here– “prejudiced the other party by its inconsistent actions.” In deciding that issue, the Court below, as had eight other circuits, invoked “the strong federal policy favoring arbitration” to decide the matter of waiver. Two circuits rejected that rule, and the Supreme Court granted cert. to resolve that split. Justice Kagan, writing for all of the Justices, agreed with those two circuits.

Holding that “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules,” and deciding no other issue with respect to the merits, the Court remanded the case for further proceedings that focus on the whether the employer relinquished its right to arbitrate by its actions that were inconsistent with it. Whatever an employer might otherwise have preferred (given the prior law in most courts of appeals), given the Supreme Court’s holding that any presumption of arbitration and the fact of prejudice are irrelevant, the Morgan case gives clear guidance in several regards, particularly demanding arbitration, if applicable, at the outset of a formal dispute, and resisting any discovery, to the extent possible, until the issue of arbitrability is decided. A defense against waiver simply based on prejudice is not going to fly.

Article By Stuart M. Gerson of Epstein Becker & Green, P.C.

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©2022 Epstein Becker & Green, P.C. All rights reserved.

Half-Billion Dollar Arbitration Award in Trade Secrets Case Affirmed by Minnesota Supreme Court in Trade Secrets Dispute

Jackson Lewis Law firm

The Minnesota Supreme Court has affirmed an arbitrator’s eye-popping award of $525 million plus prejudgment interest totaling $96 million and post-award interest in a trade secrets dust up between Seagate Technology, LLC and Western Digital Corporation, et al. Seagate Technology, LLC v. Western Digital Corporation, et al and Sining Mao, No. A12-1994 (Minn. October 8, 2014).  The Court’s decision is replete with lessons about the legal boundaries, risks, and protections for litigants in arbitration. It is notable also for the magnitude of the award which was, in part, the consequence of falsified evidence.

Seagate designs and manufactures hard disk drives for computers. Sining Mao was a senior director for advanced head concepts at Seagate working on technology that involves incorporating tunneling magnetoresistance (“TMR”) in to read heads to improve storage capacity. When he was hired by Seagate, he signed an employment agreement which included a requirement to preserve the confidentiality of trade secrets and to return company documents. The employment agreement contained an arbitration clause which stated, in part, that the “arbitrator may grant injunctions or other relief in such controversy” arising out of the agreement.  Arbitration was subject to the rules of the American Arbitration Association (“AAA”).

Mao left Seagate in September 2006 to join Western Digital, a competitor. Seagate then commenced a district court action seeking injunctive relief and alleging misappropriation of trade secrets related to TMR technology.  Western Digital invoked the arbitration clause of Mao’s employment agreement with Seagate, and the district court stayed the lawsuit pending arbitration.

Things started to go south for Western Digital and Mao argued that three of the alleged trade secrets had been publicly disclosed before Mao left Seagate because they were included in a PowerPoint presentation he gave at a conference.  Seagate argued that Mao had fabricated and inserted additional PowerPoint slides containing the information after the fact to make it appear as if this information had been made public.  The arbitrator found that “[t]he fabrications were obvious. There is no question that Western Digital had to know of the fabrications and yet continued to represent to the Arbitrator that Dr. Mao did in fact insert the disputed slides at the time of the conferences.” The arbitrator found that the fabrication and Western Digital’s complicity was an egregious form of litigation misconduct that warranted severe sanctions.

Specifically, the arbitrator precluded any evidence or defense by Western Digital and Mao disputing the validity of the three trade secrets or any defense to the allegation of misappropriation or use of the three trade secrets, which resulted entry of judgment on liability and monetary damages in the amount of $525 million, calculated based on an unjust enrichment method. Western Digital brought a motion to vacate the award in district court. The district court granted the motion in part, finding that the arbitrator exceeded the scope of his authority under the arbitration agreement.  The Minnesota Court of Appeals reversed the district court on the ground that Western Digital had waived its right to challenge the arbitrator’s ability to issue punitive sanctions by not raising the issue with the arbitrator himself (and because Western Digital had earlier sought sanctions against Seagate in the same matter).

The Minnesota Supreme Court affirmed the Court of Appeals although based on a different analysis. The Supreme Court held that Western Digital did not waive its right to challenge the Arbitrator’s authority under Minnesota statutes regarding arbitrations and requests for vacatur, specifically Minn. Stat. Section 572.19.   The high Court then went on to conclude that the arbitrator did have the authority to impose the disputed sanctions, looking at the employment agreement, AAA arbitration rules, and case law.

The Court noted that:

Some believe that arbitration has benefits, potentially including faster resolution and less expense than the judicial system as well as a higher degree of confidentiality. But the benefits come with costs, including significantly less oversight of decisions, evidentiary and otherwise, and very limited review of the final award. Here, despite the best efforts of experienced appellate counsel to argue otherwise, Mao and Western Digital’s decision to demand arbitration necessarily limited the availability of the protections and advantages of the judicial system.

It is unclear if a district court could have reached the same result as the arbitrator in the Seagate case, but the Minnesota Supreme Court’s decision suggests that arbitrators can have greater discretion than judges.  The case certainly highlights the fact that arbitration may not always be the best forum, depending on which side of the dispute you are on.

Jackson Lewis P.C. © 2014
ARTICLE BY

V. John Ella
OF
Jackson Lewis P.C.