Amend Your Arbitration Clause to Comply with New Rules

Franchising companies often select arbitration to resolve issues with their franchisees and critical vendors. An arbitral forum allows the parties to discuss and resolve marketing initiatives outside of the prying eyes of the media and competitors. Landlords may want to include arbitration to settle disputes as well. Although some companies welcome the limitations on appeals of arbitration awards as an advantage in reaching finality of business disputes, others find it a reason to avoid arbitration, because the costs of a bad outcome can be high.

For example, just recently, a JAMS arbitrator entered an arbitration award against the Starbucks chain in the amount of $2.8 billion in favor of Kraft Foods for terminating a marketing deal. There, the single arbitrator selected by the parties, Edward Bobrick, a retired magistrate judge for the U.S. District Court for the Northern District of Illinois, awarded $2.23 billion in damages and $527 million in legal fees and pre-award interest over Starbucks' termination of the deal in 2010.

Background

Kraft had signed a contract in 1998 under which it took exclusive responsibility for marketing Starbucks coffee in supermarkets. Starbucks terminated the contract in 2010 after becoming dissatisfied with Kraft's performance. Starbucks complained that Kraft had failed to cooperate in its sales planning, budgeting and advertising and undermined the contract by Kraft promoting its own Yuban coffee blend in violation of the exclusive deal.

After failing to renegotiate the agreement and refusing a proposal to be bought out of the contract, Kraft unsuccessfully sought an injunction in district court against the termination. The basis for the injunction was not only the lost revenue, but also the loss of a “category captain” for many retailers that opened doors for Kraft. After the injunction was denied, Kraft filed arbitration proceedings in November 2010, claiming compensation from Starbucks for unilaterally ending the contract.

Arbitration awards like those entered in the Starbucks case are generally affirmed by courts as the grounds for vacating such awards are severely limited. Recently, the American Arbitration Association (AAA) announced new rules creating a mechanism for appellate review from arbitrations with an elite appellate panel. This article examines how the new rules could apply in the future to large arbitration awards.

New Rules Bring Changes

Appeals of arbitration awards may become more frequent in the future, as the AAA and its affiliate for international cases, the International Centre for Dispute Resolution (ICDR), have introduced a new set of rules allowing parties to appeal arbitral awards to an internal appellate tribunal.

These optional appellate arbitration rules, which became effective Nov. 1, 2013, give parties to an arbitration the chance to apply to an ad-hoc appeal tribunal to vacate or modify an award if it is based on errors of law that are material and prejudicial, or on determinations of fact that are clearly erroneous. As these are optional rules, many franchises will need to amend their arbitration clauses to incorporate the new appellate process as a mandatory condition of arbitration.

The standard of review is broader than that allowed by existing federal and state laws to vacate or modify an award. Members of an appeal tribunal will be selected from the AAA's appellate panel, or its international appellate panel, if the matter is international. These panels will be composed of former federal and state judges and arbitrators with backgrounds in appellate proceedings. Appeal tribunals will be made up of three members, unless the parties opt for a sole arbitrator to hear the appeal.

Under the new rules, an appellate tribunal has the power to:

• Adopt an underlying award as its own;
• Substitute its own award for the underlying award while incorporating aspects of the underlying award that are not vacated or modified; or
• Request additional information and notify the parties of its exercise of an option to extend the time to render a decision, which shall not exceed 30 days.

An appellate tribunal may not, however, order a new arbitration or ask the original arbitrators to correct the award or conduct a review of their own findings. Parties may appeal an award to the appeal tribunal even if the underlying arbitration was not conducted pursuant to the rules of the AAA or ICDR, so long as there is an agreement between them to do so, by contract or stipulation. The introduction to the rules contains a sample clause that parties can use in their agreements.

To appeal an award, a party must file a notice of appeal within 30 days after the award was issued, and any cross-appeal must be filed within seven days after that. Any party wishing to appeal must also submit a $6,000 fee when filing the notice, as well as pay for the AAA's administrative fees, the appeal tribunal fees and costs arising from the appeal.

As a condition for filing a notice, parties must also agree that the underlying award will not be considered final for the purposes of any court action to modify, enforce, correct or vacate the award. AAA appeals will not be conducted through oral argument, unless the appeal tribunal directs otherwise. The appeal tribunal will instead base its decisions on written documents submitted by the parties.

Consider All Consequences

The new rules should be reviewed carefully. Granting a right of appellate review may add unnecessary time and complexity to cases. Judicial review of the appellate tribunal's decisions may also create cases of first impression. But if the parties have an arbitral dispute where more than $2 billion is at risk, having an appellate tribunal may add additional confidence to the outcome of arbitration awards.

Craig R. Tractenberg is the team leader of the franchise practice at Nixon Peabody, Philadelphia, and an adjunct professor of franchise law at Temple University's Beasley School of Law. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.

Franchising companies often select arbitration to resolve issues with their franchisees and critical vendors. An arbitral forum allows the parties to discuss and resolve marketing initiatives outside of the prying eyes of the media and competitors. Landlords may want to include arbitration to settle disputes as well. Although some companies welcome the limitations on appeals of arbitration awards as an advantage in reaching finality of business disputes, others find it a reason to avoid arbitration, because the costs of a bad outcome can be high.

For example, just recently, a JAMS arbitrator entered an arbitration award against the Starbucks chain in the amount of $2.8 billion in favor of Kraft Foods for terminating a marketing deal. There, the single arbitrator selected by the parties, Edward Bobrick, a retired magistrate judge for the U.S. District Court for the Northern District of Illinois, awarded $2.23 billion in damages and $527 million in legal fees and pre-award interest over Starbucks' termination of the deal in 2010.

Background

Kraft had signed a contract in 1998 under which it took exclusive responsibility for marketing Starbucks coffee in supermarkets. Starbucks terminated the contract in 2010 after becoming dissatisfied with Kraft's performance. Starbucks complained that Kraft had failed to cooperate in its sales planning, budgeting and advertising and undermined the contract by Kraft promoting its own Yuban coffee blend in violation of the exclusive deal.

After failing to renegotiate the agreement and refusing a proposal to be bought out of the contract, Kraft unsuccessfully sought an injunction in district court against the termination. The basis for the injunction was not only the lost revenue, but also the loss of a “category captain” for many retailers that opened doors for Kraft. After the injunction was denied, Kraft filed arbitration proceedings in November 2010, claiming compensation from Starbucks for unilaterally ending the contract.

Arbitration awards like those entered in the Starbucks case are generally affirmed by courts as the grounds for vacating such awards are severely limited. Recently, the American Arbitration Association (AAA) announced new rules creating a mechanism for appellate review from arbitrations with an elite appellate panel. This article examines how the new rules could apply in the future to large arbitration awards.

New Rules Bring Changes

Appeals of arbitration awards may become more frequent in the future, as the AAA and its affiliate for international cases, the International Centre for Dispute Resolution (ICDR), have introduced a new set of rules allowing parties to appeal arbitral awards to an internal appellate tribunal.

These optional appellate arbitration rules, which became effective Nov. 1, 2013, give parties to an arbitration the chance to apply to an ad-hoc appeal tribunal to vacate or modify an award if it is based on errors of law that are material and prejudicial, or on determinations of fact that are clearly erroneous. As these are optional rules, many franchises will need to amend their arbitration clauses to incorporate the new appellate process as a mandatory condition of arbitration.

The standard of review is broader than that allowed by existing federal and state laws to vacate or modify an award. Members of an appeal tribunal will be selected from the AAA's appellate panel, or its international appellate panel, if the matter is international. These panels will be composed of former federal and state judges and arbitrators with backgrounds in appellate proceedings. Appeal tribunals will be made up of three members, unless the parties opt for a sole arbitrator to hear the appeal.

Under the new rules, an appellate tribunal has the power to:

• Adopt an underlying award as its own;
• Substitute its own award for the underlying award while incorporating aspects of the underlying award that are not vacated or modified; or
• Request additional information and notify the parties of its exercise of an option to extend the time to render a decision, which shall not exceed 30 days.

An appellate tribunal may not, however, order a new arbitration or ask the original arbitrators to correct the award or conduct a review of their own findings. Parties may appeal an award to the appeal tribunal even if the underlying arbitration was not conducted pursuant to the rules of the AAA or ICDR, so long as there is an agreement between them to do so, by contract or stipulation. The introduction to the rules contains a sample clause that parties can use in their agreements.

To appeal an award, a party must file a notice of appeal within 30 days after the award was issued, and any cross-appeal must be filed within seven days after that. Any party wishing to appeal must also submit a $6,000 fee when filing the notice, as well as pay for the AAA's administrative fees, the appeal tribunal fees and costs arising from the appeal.

As a condition for filing a notice, parties must also agree that the underlying award will not be considered final for the purposes of any court action to modify, enforce, correct or vacate the award. AAA appeals will not be conducted through oral argument, unless the appeal tribunal directs otherwise. The appeal tribunal will instead base its decisions on written documents submitted by the parties.

Consider All Consequences

The new rules should be reviewed carefully. Granting a right of appellate review may add unnecessary time and complexity to cases. Judicial review of the appellate tribunal's decisions may also create cases of first impression. But if the parties have an arbitral dispute where more than $2 billion is at risk, having an appellate tribunal may add additional confidence to the outcome of arbitration awards.

Craig R. Tractenberg is the team leader of the franchise practice at Nixon Peabody, Philadelphia, and an adjunct professor of franchise law at Temple University's Beasley School of Law. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.