Innovation Through Arbitration

I wanted to highlight a recent case involving a distinctive arbitration clause.  In Int’l Corrugated & Packing Supplies, Inc. v. Lear Corp., No. 15-CV-00405, 2018 WL 1041309 (Feb. 22, 2018), the corporate parties entered into an agreement for packaging materials with the following arbitration clause:

All disputes . . .  shall be finally settled by arbitration . . . conducted under the AAA’s commercial arbitration rules then in effect . . . provided, however, that discovery shall be permitted in accordance with the United States Federal Rules of Civil Procedure.

In this case, the court ultimately held that the arbitration agreement was not enforceable because the arbitration agreement was not properly incorporated by reference into the parties’ contract pursuant to Texas state law.  However, the language of the arbitration clause caught my attention because of the clause’s incorporation of federal court discovery rules.  Typically, arbitration involves limited discovery, but the parties in this case chose to adopt broad discovery procedures.  I am often troubled by the limited discovery that may occur in consumer or employment arbitration because in some cases, key evidence may be in possession of the respondent.  Without broad discovery, it may become difficult to collect sufficient evidence to prove certain types of cases.  Although the due process protocols from the 1990s are a step in the right direction, I believe the protocols are outdated and could be stronger.  For example, the employment due process protocols provide (weakly and vaguely in my mind) for “adequate but limited” discovery.  Thus, I appreciate the broader discovery rights created by the arbitration agreement in this case.

Also, this case reminds me of the potential innovation that can occur with arbitration.  Arbitration is sometimes discussed, analyzed, or treated as a homogeneous process.  However, one of the benefits of arbitration is that parties can specially tailor arbitration procedures to suit their needs.  When used appropriately and where there is meaningful consent, parties can in effect create their own fairly unique justice system through an arbitration clause.  If there is a robust system of arbitration, where all interests are trying to innovate and improve procedures, I believe arbitration can help provide ideas or spur innovation in court procedures, and there are examples of this competitive innovation process where arbitration inspires court reforms in some state court systems in America as well as in other countries.  At the federal court level, I tend to view procedural reform as occurring at a glacial pace, but through arbitration, parties can innovate almost instantaneously if they so desire through an arbitration clause.  Although I can be a harsh critic of abusive arbitration practices and the Supreme Court’s erroneous interpretations of the FAA, this case reminds me of the potential innovation that can occur through arbitration.


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