Arbitration agreements are the single best defense against class action claims including class action claims alleging workers were misclassified as independent contractors. From Lexology,, Daniel T. Pascucci provides excellent guidance on what an arbitration clause should do and what it can do. Daniel writes:
What an Arbitration Clause Should Do
While there are few limits to how creative parties can be in an arbitration clause, certain provisions should be considered in crafting all arbitration clauses.
Scope of Disputes
Every arbitration clause should define the scope of the disputes to be arbitrated. The language in the sample clauses above – i.e. “any controversy or claim arising out of or relating to this Agreement” – is sufficient to refer contract-related disputes broadly to arbitration, and parties drafting arbitration clauses ought to consider starting with a broad clause like that and then considering whether any carve outs should be added. Common carve outs might include patent disputes or other IP challenges, disputes concerning ITC or IPR rights, and disputes seeking only equitable relief like an injunction.
A factor that has a considerable impact on the cost and duration of arbitrations, as well as the potential outcome, is the determination of who will hear your case. Parties can agree in advance on the number of arbitrators (typically one or three), how the arbitrators are selected, and qualifications that are to be required of an arbitrator. For example, in contracts concerning a technically specialized industry, it may be advisable to have your case heard by a tribunal having experience (either general or specific) in or concerning that industry. In that case, the parties should consider how those arbitrators will be selected. For example, a clause that enables each party to designate an arbitrator with such experience may be easy to implement but makes the tribunal somewhat more likely to suffer internal advocacy, notwithstanding a general requirement that arbitrators be neutral; on the other hand, leaving arbitrator recruitment to the case administrator may better preserve arbitrator independence but may task the administrator with recruiting from an industry with which he/she has little familiarity.
c. Rules of Engagement
Perhaps the greatest opportunity to control the duration and expense of an arbitration lies in crafting the procedural rules of engagement. Parties may choose among various existing sets of arbitration rules, and they may amend those rules or they may create a set of their own according to their mutual wishes.
For example, (i) parties can determine the extent of document discovery, or indeed whether it should be permitted; (ii) the permissibility of depositions can be determined, and if permitted, they can be limited in number and duration; (iii) pre-hearing motions may be barred or limited. In that regard, it may be provided that any party may make such motions, but that the arbitrator must promptly review each motion and determine (perhaps after consulting with the parties) whether it has any potential merit so as to require the submission of opposing papers. (Such a provision effectively blunts the ability of a party to drive up litigation costs by engaging in frivolous motion practice.)
Moreover, the arbitral “hearing” can be shaped. Indeed, parties can elect to waive an oral hearing and submit evidence and arguments solely in writing. Limits on numbers of witnesses and/or time limits for each party’s presentation of its case may be imposed. Opening statements and closing arguments can be waived in favor of written briefing or vice versa. In technical cases, parties can require or limit technology tutorials by experts to educate the tribunal on the relevant technology. Parties can also impose page limits on briefs, limits on the number of written exhibits, and determine the form, the content, and to some extent the timing of an award.
What an Arbitration Clause can do
The examples above comprise a few common variables in arbitrations, including those with considerable potential to impact the scope and cost of a proceeding. However, an arbitration clause can go further, and there are some creative forms of arbitration that should be considered as well.
- Baseball arbitration: In baseball arbitration, each party submits a proposed outcome and the arbitrator may only select one of the proposed outcomes. The intended effect is that the parties will moderate their positions to make them more plausible.
- Issue-by-issue baseball arbitration: A variation on traditional baseball arbitration involves identifying the determinative issues that must be resolved, and then addressing each in sequence, with the parties submitting their respective proposed resolutions of each, the arbitrator choosing one for each issue, and the issuance of interim awards accordingly.
- Arbitration in writing: The parties can submit their evidence and arguments solely in writing.
- Bifurcation, trifurcation, or other staging: The parties can provide for staging of issues in arbitration phases, and the issuance of interim awards. If any of the issues may be determinative, there is a potential for shortcutting the conclusion of the arbitration as a whole. If none of the issues are likely to be determinative, the seriatim resolution of those issues may promote settlement. For example, an employer might benefit from the bifurcation of a proceeding to determine liability before any litigation or even discovery concerning damages. Similarly, a patent licensee might want a determination of whether new products are covered by a patent before discovery or litigation on royalties.
- Class Arbitration: In contracts used repeatedly — e.g., credit card agreements, consumer purchase agreements, employment agreements — “class arbitration” might be expressly prohibited (or “waived”) or permitted.
Read the full story at: Dissecting Common Basic Arbitration Clauses — You Can Build a Better One – Lexology