DRAFTING ARBITRATION CLAUSES AND AGREEMENTS Michael D. Madigan Madigan, Dahl & Harlan P.A. 222 South Ninth Street, Suite 3150 Minneapolis, MN

Introduction Arbitration in the Business World Ambiguity in “Arising” Phrases: Caution for Drafters of Intended Narrow Arbitration Clauses. Arbitration clauses embodied in standard terms and conditions: the Uniform Commercial Code and the battle of the forms. Arbitration Clauses and the Internet. Structuring the arbitration: Single arbitrator vs. panel, arbitrator selection process, arbitration provider, discovery, obligation to follow the law, appeal, record, and form of the award. Questions and discussion. 2

Arbitration in the Business World A survey of General Counsel and Chief In-House Litigators revealed that:  85% had used arbitration in commercial or contract disputes  62% had used arbitration in employment disputes  40% had used arbitration in construction disputes  21% had used arbitration in intellectual property disputes  17% had used arbitration in consumer rights disputes Reasons cited for preferring arbitration were:  Savings in time and litigation expenses  Increased ability to manage the dispute, particularly control over who decides the dispute and scheduling  Private nature of the proceedings and confidentiality 3

Disputes Regarding Interpretation of "Arising" ● Most arbitration clauses utlilize some variation of an “arising out of” clause. ● Many courts have often characterized such clauses as vague and ambiguous. ● Judicial interpretations of such clauses are often unpredictable and conflicting. ● If you want to limit the types of claims subject to arbitration, you will want to consider alternative language to the typical “arising out of” clauses. ● If arbitrability is an issue and an arbitration clause is determined to be vague or ambiguous, courts will attempt to classify the clause as "narrow" or broad“ in order to resolve the ambiguity and determine its reach. Courts will examine the language of the arbitration clause itself in order to discern the intention of the parties. o Courts generally favor arbitration so they will ordinarily broadly construe arbitration clauses as they relate to arbitrability unless the language of the clause or the intention of the parties dictate otherwise. o "Arising out of or relating to" and "arising out of or in connection with" clauses have been generally construed as evidencing a broad intent with respect to the issue of arbitrability. 4

Tort and Other Claims ● Are there tort or other claims between the parties which you wish to exclude from arbitration? ● Including such claims in an arbitration can prove to be problematic because you may not be able to join other tortfeasors or responsible parties in the arbitration leading to the possiblity of inconsistent results. ● If you utilize a "arising out of or relating to" or "arising out of or in connection with" clause, it is highly possible that a court will determine that the parties intended a broad intepretation of arbitrability and conclude that tort or other peripheral claims are related to or connected with the agreement and are therefore arbitrable. ● If on the other hand, you utilize a "arising from" or "arising under" clause (omitting “relating to” and “in connection with”), courts may determine that the parties intended a narrow interpretation. Accordingly, tort and other claims peripheral to the agreement may not be arbitrable. ● Obviously, the best course is to specify exactly which claims are arbitrable and which claims are not. 5

Model Arbitration Clauses AAA :  “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules” UNCITRAL :  “Any dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.” Int’l Chamber of Commerce :  “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” London Court of Int’l Arbitration:  “Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity, or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.” 6

Arbitration clauses embodied in standard terms and conditions: the Uniform Commercial Code and the battle of the forms ● Businesses that desire to arbitrate rather than litigate commercial disputes will often include arbitration clauses in their transaction documents such as order forms, purchase orders, and acknowledge of order forms. ● Such documents may recite that the contract is subject to all of the terms and conditions on the reverse side of a purchase order form. On the reverse side, often in flyspeck text, an arbitration clause may be included providing, for instance, for the arbitration of disputes by a specific arbitration provider and mandating that arbitration occur in a certain venue. ● The enforceability of such a clause may be challenged if it was not specifically accepted by the other party or if the other party's acceptance form provides that the transaction is conditioned upon the acceptance of all of the acceptee’s terms and conditions to the exclusion of any other term. ● The enforceability of such a clause may also be challenged if it first appears in the acceptee's documents, rather than in the offeror's documents, and the offeror does not specifically accept arbitration as the dispute resolution procedure. 7

Battle of the Forms ● In this battle of the forms situation, can the party who prefers arbitration enforce the clause? ● The Supreme Court has held that the Federal Arbitration Act (FAA) generally preempts any state state statute which purports to impose special requirments on the enforceability of an arbitration clause. Accordingly, provisions in statutes like franchise laws which purport to give a franchisee the right to sue in state or federal court in that state are ordinarily held to be preempted by the FAA. ● But the FAA does not address whether a unilateral arbitration clause becomes part of the parties‘ agreement. ● State commercial law decides that issue. 8

The Uniform Commercial Code: Offer and Acceptance ● Most courts hold under the UCC that if the initial written specification or similar offer contains an arbitration clause, even if embodied in standard terms and conditions, the arbitration clause becomes part of the contract unless the offeree specifically rejects it or explicitly conditions its acceptance upon its terms and conditions. ● However, if only the offeree’s written acceptance contains an arbitration clause, the clause does not necessarily become part of the contract. ● Under Article 2, a definite and seasonable expression of acceptance operates as an acceptance of the original offer even if it states terms additional to or different from the original offer. The additional terms are to be construed as a proposal for addition to the contract. 9

The Uniform Commercial Code: The Acceptance ● Between merchants, such terms become part of the contract unless the original offer expressly limits acceptance to the terms of the offer, they materially alter it, or notification of objection has already been given. ● If, as often happens, both parties' forms state that the transaction depends on the other party's acceptance of their terms or there are explicitly conflicting provisions, then "[t]he contract... consists of the terms originally agreed to, terms on which the confirmations agree, and terms supplied by the [UCC], including subsection 2 [of section 207]." Section rejects the common law "mirror image" rule. ● Accordingly, where either form mandates acceptance of its terms and where the terms are conflicting on arbitration, the enforceability of a unilateral arbitration provision will depend on whether the provision is deemed to have "materially" altered the agreement. ● Needless to say, the UCC does not define what constitutes a "material" alteration in this context 10

The Uniform Commercial Code: Is Inclusion of an Arbitration Clause a "Material" Alteration? ● Not surprisingly, courts are split on the issue of whether an arbitration clause is a material alteration and the issue is often decided on a case by case basis. ● A course of dealing between the parties or a trade usage may be relevant to this inquiry. ● Accordingly, if the parties have previously arbitrated disputes under similar language, it is likely that a court would conclude that an arbitration clause is not a material alternation. ● Similarly, if disputes in the applicable industry are typically arbitrated, it is possible that a court would conclude that an arbitration clause is not a material alteration. ● Choice of law and a shortening of a statute of limitations have been held not to be material alterations and such clauses are more likely "outcome determinative" and thus more "material" than an arbitration clause. 11

The New York Rule ● In New York, courts generally hold that unilateral inclusion of an arbitration clause in a standard acknowledgement form is a material alteration. The Rule is based on the perceived public policy that arbitration clauses are only to be enforced when both of the parties expressly agree to them. ● Even the New York Rule is not absolute, however, and the course of dealing between the parties or trade usage might, under the right facts, lead to a different result. ● In Schubtex, Inc. vs. Allen Snyder, Inc., the New York Court of Appeals held that an arbitration clause on the back of a standard acknowledgement form did not bind the purchaser and stated that while a course of dealing could result in an arbitration clause becoming enforceable, such forms alone did not establish a course of dealing no matter how many times the seller sent them to the buyer. 12

Seventh Circuit ● Other courts (including presumably Minnesota) sharply disagree with the New York Rule. ● In Schulze and Birch Bisquit Co., the Seventh Circuit, on facts very similar to the Schubtex case, noted that in 9 prior transations, the parties has 9 similar confirmation forms which embodied an arbitration clause. ● Thus, in the Seventh Circuit’s view, the purchaser had ample notice that the arbitration clause would be included in the 10th form and could have objected within a reasonable time. ● Under these circumstances, there was no "unfair suprise". ● Accordingly, because the purchaser did not timely object, the clause was deemed enforceable. ● It is unclear under existing law who bears the burden of proving that a unilateral arbitration clause is a material alteration of the offer. ● Presumably, if the parties are litigating that issue, it is certainly material to the party making the assertion. 13

Arbitration Clauses and the Internet ● Today, most businesses are operating a website on the internet. ● Often, courts have found that the operation of a website may subject a business to the personal jurisdiction of the courts in the state or country where the website user is located. Some courts distinguish between "passive" and "interactive" websites for purposes of determining personal jurisdiction. ● An interactive website is one which permits the user to become engaged with the business in some significant way. For example, the user may be able to order goods or services from the business. In such circumstances, the user and business are forming a contract through the internet. ● The prospect of having to litigate contract disputes in another state or country triggers substantial concern for those businesses in terms of litigation cost and expense. ● Accordingly, many businesses seek to incorporate either a choice of forum clause or an arbitration clause in their website in order to manage and mitigate this risk and cost. 14

Choice of Forum Clauses vs. Arbitration Clauses ● Choice of forum clauses, however, are not universally enforced. ● At present, there is no multilateral convention among nations on the recognition and enforcement of choice of forum clauses. ● In the United States, there is no national law that mandates that courts in each state must give full force and effect to a clause that requires litigation in a particular forum. ● On the other hand, arbitration clauses are generally enforceable as a matter of state, national and international law. ● Most states have enacted the Uniform Arbitration Act which requires courts to enforce arbitration clauses as they would enforce other contracts. ● The FAA has the same effect on a national level. ● Finally, on an international level, the New York Convention on the Recognition and Enforcement of Arbitral Awards, to which more than 100 countries are signatories, binds the courts in each country to enforce arbitration clauses. 15

Enforceability of Arbitration Clauses in Websites ● For obvious reasons, courts are generally reluctant to enforce an arbitration clause in a website unless there is an express manifestation on the part of the website user to consent to arbitration. ● For this reason, it is generally advisable when drafting such clauses to: o Require express consent (i.e. prior to completing a transaction, the user must click on an icon indicating "I consent" or "I agree" to the terms and conditions, including the arbitration clause). o The arbitration clause should be prominently displayed in order to avoid claims of inadvertance or fraud. Highlighting the clause in some way is advisable. o The arbitration clause should be clearly explained (i.e. the user is giving up their right to litigate, to have their claim heard by a jury, that the award will be final and binding, and that their is no right to appeal). o The arbitration clause should be procedurally fair. o The venue for the arbitration should be reasonable. o The fees and costs should be reasonable and should not preclude participation. 16

Structuring the Arbitration: Designing your own Process Arbitration Provider (AAA, JAMS, Other?)  Cost  Benefit of Adminstrative Supervision  Benefit of Established Arbitration Rules Arbitrator Selection  Single arbitrator vs. panel  Process of Selection  Experience and expertise of arbitrator  Authority of the arbitrator (i.e. injunctive relief, requirement to follow the law?) Venue 17

Structuring the Arbitration: Designing your own Process ● Discovery Process (depositions, document exchange, experts, etc.) ● Motion Practice (allowed or not allowed) ● Pre-hearing and post-hearing briefs (page limits) ● Hearing (duration, etc.) ● Court Reporter and Record ● Form of the Award (Standard, Reasoned, Findings of Fact & Conclusions of Law) ● Appeal on Record 18

QUESTIONS & DISCUSSION 19