1. Emerging Issues in Management (Mgmt 440) Professor Charles H. Smith Law and Ethics of Dispute Resolution Summer 2009

2. Introduction to Dispute Resolution Disputes are inevitable in the competitive business world. Therefore, businesspeople need to know how to deal with disputes quickly, inexpensively, ethically and – of course – successfully, without laying waste to their businesses and themselves. What factors should be considered before pursuing/defending a dispute? Is going to court the only answer or are there other alternatives?

3. Cost/Benefit Analysis – is the Matter Worth Pursuing/Defending? Factors to consider ◦ Likelihood of success. ◦ Expense of legal dispute (attorney’s fees as well as financial and other costs) vs. benefit(s) to be derived (not just money). ◦ Resolution without going through the court system? ◦ Intangible benefits/costs to business (e.g., preservation/loss of relationship/reputation). ◦ Cost to business (e.g., time taken away from business to attend to legal dispute). ◦ Emotional cost (e.g., no “closure” so long as dispute is unresolved).

4. Cost/Benefit Analysis cont. Based on this cost/benefit analysis, legal avenues include ◦ Do nothing and write off the “bad debt” (check with your accountant). ◦ Alternative dispute resolution (ADR)  Negotiation.  Mediation.  Arbitration. ◦ Litigation  Small claims action.  Superior Court lawsuit.

5. Introduction to Alternative Dispute Resolution ADR is any process by which a dispute is resolved without a decision by the court. Parties exert more control over ADR proceedings than they do over court proceedings because ADR is private and thus subject to parties’ own rules. ADR usually results in savings of time and money. ADR more likely to help parties to continue their relationship. Parties typically happier with ADR due to these characteristics. ADR can be used in any kind of dispute and at any time during the dispute. Many contracts include ADR requirements; e.g., buying car from dealership, C.A.R. residential real estate contract.

6. Negotiation Parties themselves and/or their representatives communicate with intent to resolve dispute. Very common way to resolve dispute; good way to “nip problem in the bud” before dispute becomes a lawsuit with attendant financial and emotional issues. However, parties can negotiate at any time during dispute, even during or after trial. May be accomplished through phone calls, e-mails, letters and/or meetings – one communication may be enough, though often need many communications to resolve matter through negotiation.

7. Negotiation cont. Confidentiality – are statements or settlement offers made during negotiation admissible in court? ◦ If you want your negotiations to remain confidential, make that part of the agreement to negotiate. ◦ In any event, settlement offers usually inadmissible to show liability (e.g., California Evidence Code § 1152).  Ethics/policy question – why should settlement offers made during negotiation remain confidential? Parties maintain control in negotiation by (1) agreeing to negotiate (no one can be forced to negotiate) and (2) retaining power whether or not to agree to a settlement (no one can be forced to settle).

8. Mediation/Settlement Conference Parties use services of 3 rd party neutral (mediator) to facilitate settlement negotiations by keeping the parties talking in order to reach common ground; mediation often called “facilitated negotiation.” Mediator can be retired or active judge, experienced attorney, or non-attorney who has expertise re dispute or position of authority/respect; mediator may be paid or provide volunteer services; no license or training is required to be a mediator. Need to recognize legal and non-legal issues, such as settlement value vs. greatest potential value, parties’ past relationship and possibility to continue the relationship, emotions, culture, desire to “save face.”

9. Mediation/Settlement Conference cont. No one can be forced to settle and the mediator makes no judgments, orders or other rulings. Statements made during mediation are not admissible into evidence in subsequent trial or other proceedings; however, good to make clear that you are participating in a “mediation” in order to preserve this protection though settlement offers usually inadmissible to show liability. Also, if you want your negotiations to remain confidential, make that part of the mediation agreement. ◦ Ethics/policy question – why should statements or settlement offers made during mediation remain confidential? (E.g., California Evidence Code § 1115 et seq.) Parties maintain control in mediation by (1) agreeing to mediation (no one can be forced to negotiate) and (2) retaining power whether or not to agree to a settlement (no one can be forced to settle).

10. Arbitration Arbitration is a process much like a nonjury trial where neutral decision-maker (“arbitrator”), to whom the parties present their evidence and legal arguments, makes a final decision. Generally, this final decision is obtained cheaper and faster than in court; also, greater flexibility since parties have great discretion to craft their own substantive and procedural rules. Arbitrator is often a retired judge but, like mediation, anyone can be an arbitrator since no license or training required.

11. Arbitration cont. Arbitration is product of parties’ agreement and courts are eager to enforce arbitration agreements since ◦ This is the policy under the Federal Arbitration Act and state arbitration statutes as announced by the U.S. Supreme Court and many lower courts. ◦ As a practical matter, sending case to arbitration for resolution takes case out of busy court system. Any arbitration agreement can be declared void based on any reason under which any contract can be declared void; e.g., no binding contract, waiver, etc. (see next slide re unconscionability challenge).

12. Arbitration cont. Common challenge to enforceability of an arbitration agreement – whether arbitration agreement is “unconscionable” and therefore void ◦ Procedural unconscionability – presented on “take it or leave it” basis. ◦ Substantive unconscionability – procedure favors one party over the other. ◦ Must have both for an arbitration agreement to be declared void on unconscionability grounds though need not have equal amounts of both.  Ethics/policy question – what are some examples of when an arbitration agreement should be declared void due to unconconscionability?

13. Arbitration cont. Other issues to consider when determining whether to have dispute decided in arbitration or court ◦ Privacy ◦ Selection of the arbitrator ◦ Choice of forum ◦ No jury trial ◦ Discovery before arbitration ◦ “Repeat customer” problem ◦ Appeal

14. Arbitration cont. Usually, the losing party voluntarily complies with the arbitration award; e.g., losing plaintiff does not “re-file” or losing defendant pays the money owed per the award. If no voluntary compliance, the prevailing party files a petition/motion to confirm the arbitration award as a judgment; easier to enforce/collect a judgment since court process can be used; court process not available to enforce arbitration award itself. If some problem with arbitration process or award, either party can file a petition/motion to vacate or correct the arbitration award; but, no vacatur or correction due to arbitrator’s error of law or fact which is consistent with arbitration’s policy of finality. ◦ Ethics/policy question – since arbitration is the product of the parties’ agreement, should the parties be able to agree to judicial review of their arbitration award on grounds other than those provided by statute?

15. Small Claims Court Designed for efficient resolution of claims of $7,500.00 or less. Streamlined procedure – trial within a few months of filing, no lawyers allowed, and court permitted to be more “equitable” regarding application of procedural and substantive law as well as in crafting the judgment.

16. Introduction to Litigation “Road to justice” in a civil lawsuit can consume much time and money – may not conclude for several years due to delays, appeals, etc.; attorney’s fees and costs may be in 10’s of 1,000’s of dollars even in average case. Many procedures to follow before, during and after trial, such as filing deadlines, rules of evidence, motions, etc.; noncompliance with these procedures may result in monetary, evidence and/or terminating sanctions. Remember – in court, the key to winning may not be the truth, but what you can prove! ◦ Ethics/policy question – is the court system set up to determine the truth or simply to achieve victory?

17. Litigation Chronology Accident, breach of contract or other incident(s) – may be one event or series of events over days, weeks, months or years. Party consults with attorney – initial client interview; review facts, documents, etc.; signing of retainer agreement; evaluate deadlines such as statute of limitations. Informal investigation and/or settlement negotiations prior to lawsuit; note that investigation and negotiation can happen at any time during lawsuit. ◦ Ethics/policy question – are there limits on information investigation?

18. Litigation Chronology cont. Filing of complaint and summons issued – complaint specifies parties, ultimate facts in support of causes of action and relief sought; summons is pre-printed form identifying parties, court’s and plaintiff’s attorney’s contact information, and admonition to respond within certain time. Service of summons and complaint – notice to defendant of lawsuit required by due process. ◦ Ethics/policy question – what other purpose(s) could be achieved through service?

19. Litigation Chronology cont. Discovery (depositions, written discovery) and related motions – purpose of discovery is to gather information to prepare for trial or settlement; motion to compel if party does not respond properly or at all; discovery and related motions often over-used/abused and can be most expensive part of litigation. ◦ Ethics/policy question – what limits should party/attorney impose on discovery in addition to limits set by law? Why? Motion for summary judgment – granted only if no triable issue of material fact and moving party entitled to judgment as a matter of law. If MSJ denied (or no MSJ) – further discovery, including designation and depositions of experts.

20. Litigation Chronology cont. Trial (12-18 months from filing of complaint to trial) – result is judgment (usually) or mistrial (rarely). Post-trial motions – new trial, judgment notwithstanding the verdict (JNOV), attorney’s fees, costs. Appeal – can take 1-3 years; about 1 of 8 contested civil cases result in appeal; about 1 of 4 appeals successful due to presumption that trial court made correct decision and appellate court will not review fact disputes. ◦ Ethics/policy question – what purpose(s) can be achieved by appealing in addition to reversal of incorrect decision? Collection/enforcement of judgment – if losing party does not voluntarily comply with judgment.

21. Dispute Resolution Exercise #1 Nano (pedestrian) sued Second (driver) for injuries sustained in a car accident (medical bills = $50K); issue was whether the light was red or yellow when Second entered the intersection; Second has the minimum amount of insurance required by law; Nano has no insurance. Discuss various ways this dispute could be resolved – priorities are time, cost and getting best result.

22. Dispute Resolution Exercise #2 Kaur was employed by Patel per a written contract that included an arbitration agreement which provided that arbitration would proceed with three arbitrators selected by Patel; Kaur told by Patel that the employment contract “must include arbitration or no job for you.” Discuss whether the arbitration agreement should be enforceable.

23. Dispute Resolution Exercise #3 Newman bought vacant land from Dovel for $2,000,000.00 in February 2007; Newman intended to develop the land; Newman paid $100,000 down and is making monthly payments to Dovel on a 30-year note secured by the land; due to financial problems, Newman is no longer able to make the monthly payments; Dovel is threatening to foreclose. How should Newman and Dovel resolve their dispute?

24. Dispute Resolution Exercise #4 Same facts as #3, but now Dovel has started foreclosure proceedings; also, Newman has sued Dovel for breach of contract and fraud, alleging that Dovel agreed to renegotiate the deal if Newman had financial problems. Dovel has proposed that the parties submit their dispute to arbitration – analyze their respective positions to determine whether arbitration or litigation would be the best option.