Category Archives: Arbitration

Arbitral Award of Perpetual License Upheld by Fifth Circuit

Posted on by Richard Birke
Richard Birke

Richard Birke

Once in a while it seems the people who design live-action war-based video games get into real-world non-virtual disputes of their own. When “Timegate” promised to “Southpeak” that it would design a videogame named “Section 8,” the parties agreed to split profits.

Things went badly and Southpeak alleged that Timegate used Southpeak’s money to do a number of things that didn’t involve the development of Section 8, and that Timegate failed to live up to its promise to devote its own money and resources toward the game’s development.

The matter went to arbitration and the arbitrator awarded Southpeak more than $7 million and a perpetual license to use everything Timegate had developed for the Section 8 project.

A district court judge thought the arbitrator overstepped his authority when he granted a perpetual license and the award was vacated.

On further appeal, the U.S. Court of Appeal for the Fifth Circuit reversed the district court and reinstated the award. The Court wrote, “[t]he entire Agreement can accurately be summed up as the creation of a mutually beneficial business relationship between two parties with distinct expertise: a video game developer and a video game publisher. The parties were to work jointly to create, market and popularize a video game whose success would yield financial benefits to be distributed between the two parties in accordance with their respective contributions to the joint effort as required by the contract…..The perpetual license furthers these general aims of the Agreement.”

In conclusion, the Court noted that “the Section 8 perpetual license is rationally rooted in the Agreement’s essence. Timegate committed an extraordinary breach of the Agreement, and an equally extraordinary realignment of the parties’ original rights is necessary to preserve the essence of the Agreement.”

The Present and Future of ADR

Posted on by Chris Poole

At the recent ABA Dispute Resolution Section conference in Chicago a panel that included myself, Debbie Masucci, past president of the DR section; India Johnson, CEO of AAA; and Dale Matschullat of Schiff Hardin, discussed “The present and Future of ADR.” The primary topics included the financial crisis in the courts, international ADR, online dispute resolution and diversity in ADR.

The budget cuts to the court system have perhaps been felt more severely in California. In March, California Chief Justice Tani Cantil-Sakauye lamented in a speech to the state legislature, “our judicial branch budget has been cut greater and deeper than any other court in the United States.” The roughly $1 billion in reductions have led to closure of a large percentage of civil courtrooms. The impact on ADR, however is less clear. The panel generally felt that the desire for swift justice would increase the demand for mediation and arbitration, but that hasn’t always been the case.

On the international front, there is a similarly mixed message. Changes like the 2007 Mediation Directive passed by the European Union have had little impact on the demand for ADR in Europe. In other parts of the world, arbitration has seen slow but steady growth, while mediation has yet to become a significant part of the ADR process.  Brazil was cited by the panel as a prime example of a rapidly expanding economy with an active and growing litigation market, but a lack of interest in commercial mediation.

Online dispute resolution (ODR) has become a hot topic in ADR. A number of ADR providers are exploring piloting online offerings. Although the panel was clear on the inevitable growth in ODR, interest and momentum is more apparent in smaller commercial disputes where human facilitators are often not involved.  The panel also felt that the use of ODR in more complex disputes will become more common as technologies and offerings improve.

The panel concluded with a robust discussion of diversity in ADR, highlighted by a recognition that the ADR industry reflects the same challenges as most law firms where women and minorities represent a small percentage of equity partners. JAMS, for example, recruits its neutrals primarily from the judiciary, but also from the senior ranks of law firms where the vast majority of partners are white males.  ADR providers have focused diversity programs in place, but are struggling to achieve as much progress on the demand side of the equation, where women and minority neutrals are not chosen proportionately to their population in those organizations.

We found it difficult to draw any single conclusion about the future of ADR. However, the message of slow, steady growth stood out as well as the need for ADR organizations to innovate in terms of efficiency, cost effectiveness and flexibility to adapt to changes driven by a more sophisticated clientele and an anemic domestic economy.

The Kinkade Case, Or How Not to Conduct an Arbitration

Posted on by Richard Birke
Richard Birke

Richard Birke

While all arbitrators aim for the highest level of quality control, errors occur. Sometimes these errors are pretty egregious, which is why we always recommend using a trusted and well-respected ADR provider and arbitrator.

In a recent case coming out of Michigan, the Thomas Kinkade art company alleged that one of its dealers failed to pay for art it received. The dealer counterclaimed that Kinkade had fraudulently induced it to enter the dealership agreement. The matter went to arbitration where the dealer chose an arbitrator, Kinkade chose an arbitrator and the two arbitrators chose a third. The court opinion noted “Per the arbitration rules, each party was entitled to appoint one arbitrator, who would de facto advocate that party’s position on the panel.”  In this system, most people refer to the appointed arbitrators as “party arbitrators” and the third as the “neutral arbitrator.”

Despite years of delays, the matter was finally in arbitration when Kinkade discovered that the dealer had hired the third arbitrator’s law firm to do a large batch of business, and the dealer’s arbitrator had done the same. Kinkade was facing two arbitrators doing business with each other and with the dealer.

Kinkade asked the arbitrator to withdraw. He refused. Kinkade asked the arbitral organization overseeing the matter to disqualify him. They refused.

The arbitral panel closed proceedings and then sua sponte asked for documents that the dealer had told Kinkade “do not exist.”  The dealer provided 8,800 pages of business records to the arbitrators but not to Kinkade. The panel noted in an interim award that no one was entitled to attorney’s fees.

The panel made a final award giving the dealer $1.4 million, including nearly $500,000 in fees and costs.

The Sixth Circuit found an arbitrator committed both transgressions, and affirmed the district court’s decision to vacate the resulting arbitration award.

On appeal, the courts said this was about the most egregious example of “evident partiality” that they had ever seen. Compounding this was the fact that the dealer’s law firm had switched lawyers several times – once because counsel had been convicted of tax fraud.

While the courts can fix things like this – and they did – it’s clearly a better course to avoid doing business with a bad arbitrator in the first place. The vast majority of arbitrators and organizations do the right thing in nearly every case, but it’s that rare case – like this one – that keeps us all on our toes.

Signing Arbitration Contracts on Admission to a Nursing Home – Who Is Bound?

Posted on by Richard Birke
Richard Birke

Richard Birke

As our population ages, more and more people are being admitted to nursing homes at or near the end of their lives.  But when a person is admitted to a nursing home and they sign a contract agreeing to arbitrate any disputes arising out of the care they receive, should their heirs and the estate be bound by that contract?  The situations typically arise when the admitted person has died and the heirs or estate want to bring a tort action against the nursing home. The nursing home moves to compel arbitration and the heirs or estate wish to avoid arbitration.

There are strong arguments on both sides.  On the one hand, the only person who could effectively contract with the nursing home is the person being admitted, and that person should be able to contract with anyone they want to resolve their disputes. On the other hand, the estate and the heirs may have claims against the nursing home that are independent of the claims that the admitted patient may have had.

Courts across the country have not reached consensus on this topic. Recently, there was a case from the United States Court of Appeal for the Eighth Circuit, GGNSC Omaha Oak Grove, LLC v. Payich, which held that Ivan Payich could sue on behalf of himself and the estate of his mother Nada Payich. This was despite the fact that Nada had signed a form agreeing to arbitrate any claims “relating in any way to the Admission Agreement or any service or health care provided by the Facility to the Resident shall be resolved exclusively by binding arbitration.”

Contrasting this case is Laizure v. Avante at Leesburg, Inc., in which Debra Laizure was made to arbitrate the wrongful death of Harry Lee Stewart who signed a similar agreement to the one in the Payich case. In Laizure, the Florida Supreme Court held that “in wrongful death actions in Florida, the defendant’s liability flows from actions toward the decedent, and the ability of the estate and heirs to recover is predicated on the decedent’s entitlement to maintain an action and recover damages if death had not ensued.”

Courts across the nation make decisions every day about whether a particular set of litigants are required to arbitrate or whether they will process their disputes in court. Lawyers also try to shape arbitration contracts to serve their clients’ desire to achieve prompt and efficient resolution of disputes. As courts and attorneys continue to debate this topic and work to reach more of a consensus, we’ll continue to monitor and report any updates that may occur.