Legalese Column: Arbitration, One of the Hottest Litigation Topics Going

This article originally ran in the November 2016 issue of AVN magazine. See the digital edition here. Normally, if a dispute arises between parties to a contract that cannot be resolved—and it is worth it to do so—the disgruntled party will file a lawsuit in court. However, more often than not, parties will include dispute-resolution provisions in their contract when they draft it in the first place. Why do that? Many reasons. What follows illustrates this: If you utilize form contracts, not only have the good sense to have an attorney draft them for you, but also periodically ask the attorney to review and, if needed, update them. Read on. For example, suppose a Nevada company and a California company come to an agreement for some commercial transaction. If anyone involved has an ounce of sense, the agreement will be reduced to writing. Why? Obviously, the parties don’t want to get into an expensive squabble over the terms of the agreement. Unfortunately, too many agreements go no further than that. Now, assume that a dispute arises and a lawsuit is filed and an initial dispute arises over which state should try the case. Deciding where to try the case could be expensive. And it might be a big issue because Nevada and California might have different rules. Then there are other issues: discovery, motions, scheduling orders, waiting for an opportunity to try the case (which will get continued many times for whatever reasons), judgment, appeals ... and on and on and on. Thus, over a century ago, there was invented arbitration. In arbitration, a lawyer, usually a retired judge decides the dispute. The topic here relates to disputes over whether arbitration clauses in contracts are enforceable. This invariably arises when a big guy writes a form contract. The little guy often claims that the arbitration provision is unconscionable. Why? Because the plaintiff wants a jury trial and a class action because juries run the risk of a “runaway verdict”—and class actions make a whole bunch of money for the plaintiffs’ attorneys. The latest wrinkle in this range war between class action attorneys and businesses is the question of who decides the validity of the arbitration provision—the arbitrator or the judge. The presumption is that the court makes the decision. How it works is that the individual plaintiff files a lawsuit—seeking class action status—against the company that wrote the contract. The defendant company will respond with a motion to dismiss the complaint or to stay the case and compel arbitration. In response, the plaintiff might claim that the arbitration provision is invalid for whatever reason, usually because it is procedurally and/or substantively unconscionable. The law presumes that the judge will decide that issue. Recently, however, attorneys have started including contractual provisions stating in essence that the arbitrator will make that decision, not the judge. Why? Arbitrators lean toward arbitration because they believe in it; because that’s what they do; and they don’t get paid if they decide that the arbitration clause is no good. A recent example of this is Mohamed v. Uber Technologies, Inc., ___ F.3d ___, 2016 WL 4651409 (9th Cir., September 7, 2016). Mr. Mohamed, a former Uber driver, and one of his former colleagues had a beef with Uber. Claiming that they were just two of an army of Uber drivers who had suffered the same wrong, they sought class action status. (Their claim? You guessed it—that they should have been treated as employees rather than independent contractors.) Uber filed a motion to compel arbitration, which was based upon a contractual arbitration provision. The court found the provision invalid; Uber appealed. Notably, the important issue on appeal involved the arbitration provision in the second of the two contracts; it provided that the arbitrator, not the judge, would decide any issue of the validity of the arbitration provision. Parenthetically, a lesson can be learned from this. Uber’s lawyers apparently were on the ball; and they updated the existing agreement in 2014 to add to a provision designating the arbitrator, not the judge, would decide the validity and interpretation of the arbitration provision. In any event, the court agreed with Uber. The trial judge was wrong to decide that the arbitration provision of the second was invalid. Rather, the trial judge should have sent the case to the arbitrator to decide that issue, as the arbitration provision stated. So, when is the last time you had an attorney review your form contracts? A stitch in time ... Clyde DeWitt is a Las Vegas and Los Angeles attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at ClydeDeWitt@earthlink.net. More information can be found at ClydeDeWitt.com. This column is not a substitute for personal legal advice. Rather, it is to alert readers to legal issues warranting advice from your personal attorney.