Jury Is Still Out On Scope Of Arbitration Clauses

Sep 05, 2014   


By Allan A. Joseph
September 5, 2014    

Our country rose from the discontent of oppressive power. It is within our genetic makeup to be vested with fundamental rights ensuring fairness, equality and justice. Indeed, on July 4, 1776, our Founding Fathers explained in declaring our separation from the tyrannical King of England:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.

One of the most important rights guaranteed to us is a right to a jury trial. This right has ensured that there is a just avenue to justice without regard to the size or power of the litigants. The right to a trial by a jury of our peers has long been deemed to be the great equalizer between the might of Corporate America and the grievance of the individual. Understandably, a level playing field has not been in Corporate America’s playbook.

Companies have learned that because most consumer disputes concern relatively small amounts, and the costs of bringing such suits will far exceed the expected recovery, most consumers cannot afford to bring individual action to redress corporate misconduct. The sole vehicle for relief to the consumer is through class action procedures, where the accretive nature of the claims-by-numbers provides the economic incentive to challenge the alleged corporate misconduct. In order to block such consumer remedies, companies have taken to inserting mandatory arbitration clauses that are in fact intended to strip away the rights of consumers to have an effective avenue of redress.

Recently, the U.S. Supreme Court has handed Corporate America a series of successful decisions enforcing arbitration clauses, which effectively preclude classwide relief. In a string of decisions the court eviscerated the class action remedy and empowered Corporate America to effectively contract its way out of liability for misconduct.[1] Corporate counsel across the country celebrated with each passing decision.

However, consumers have fought back and the state courts have listened. The Florida Supreme Court recently invalidated an arbitration clause and held that even with the signatures of all parties, there must be a “meeting of minds” regarding the agreement to arbitrate.[2] The California Supreme Court served its retort by finding that arbitration clauses are unenforceable in qui tam, private attorney general cases.[3] Just last week, Florida’s Third District Court of Appeals issued the Allscripts decision, which took yet another bite from the reach of an arbitration clause.[4]

In Allscripts, the subsidiary entity entered into licensing agreements with end-user doctors for the use of electronic health care software. The doctors have contended that as a result of the cost of maintenance, coupled with the drag on its bottom line, Allscripts caused the software to be effectively discontinued and forced the end-users to migrate to another product. This forced migration would cause a dramatic loss of productivity to the doctor’s practice as the product was installed, and then cause debilitating losses while the doctor’s staff was trained on the use of the new program. Rather than explain to the doctors that their software was effectively discontinued, Allscripts misrepresented that the forced migration was simply a “free upgrade” to their existing software. A class action was filed by the doctors against Allscripts — not its subsidiary — because Allscripts itself used its officers to promote the deceptive schemes.

Parroting the tactics of Corporate America, the subsidiary incorporated an arbitration provision in its licensing agreement, which required all disputes to be arbitrated in North Carolina. However, the subsidiary added a sentence to the boilerplate clause which stated that, other than the end-user doctor and subsidiary, “no other party may sue or be sued under this agreement.” After Allscripts unsuccessfully petitioned the court to enforce its subsidiary’s arbitration provision, Allscripts appealed. The appellate court affirmed the trial court, finding that the class claims were against the nonsignatory parent, not against the signatory subsidiary. Because the claims were outside the license agreements, Allscripts had no right to seek refuge behind its subsidiary’s arbitration clause. The class action was allowed to proceed.

Corporate America should take notice of this trend by the state courts of narrowing the scope and reach of arbitration, and consider revisiting the engineering behind its protective shield. Arbitration clauses should explicitly define, among other things, what claims are intended for resolution and what claims are not intended for resolutions. However, because the arbitration clauses ultimately insulate the company from liability due to the barriers to bring arbitration, Corporate America needs to exercise a degree of caution in creating the de facto limitations of liability clauses.

In crafting the Declaration of Independence, our Founding Fathers scribed a litany of tyrannical grievances which gave rise to the extraordinary need of the American colonies to be free from British rule. The egregious deprivations included, “for depriving us, in many cases, of the benefits of Trial by Jury.” Our courts have a duty to preserve this right whenever lawfully possible.

Thus, if Corporate America becomes too greedy in its quest to insulate itself liability from its own misconduct, the arbitration tool may be whittled away to dust. But, for now, corporate counsel across the country should replace the corks in their celebratory bottles of champagne.

—By Allan A. Joseph, Fuerst Ittleman David & Joseph PL

Allan Joseph is a partner and founding member of Fuerst Ittleman David & Joseph and is located in the firm’s Miami office.