Australia • Brazil • Japan • Korea • Mexico • Singapore Spain • United Kingdom • United States Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. T rials are costly and time consuming. It has been said that this is the result of “too many lawyers, too many lawsuits, and too many laws.” In fact, since 1960, the number of lawyers has tripled, the number of lawsuits has tripled, and the number of laws has multiplied, while the numbers of judges and courts have not kept pace. Although it is true that the number of lawsuits filed has grown rapidly, only 5 to 10 percent of lawsuits filed actually go to trial. Most cases are settled or dismissed long before the parties enter a courtroom. Moreover, the number of cases that are litigated does not appear to be growing any faster than the population. When compared with the large number of transactions that occur in our highly complex economy, the rate of litigation appears low to some. Nevertheless, in any individual case, it may be months before a hearing can be scheduled. Depending on the complexity of the case, the extent of discovery proceedings required, the delaying tactics of the opposing party, and the backlog of cases pending in the particular court, several years may pass before a case is actually tried. Even in the best of situations, the civil procedures discussed in Chapter 2 all require much time and expense, particularly when electronic discovery is involved. As the cost and complexity of litigation have grown, businesspersons and other individuals have asked, “Is there a more appropriate way to resolve disputes?” SECTION 1 THE SEARCH FOR ALTERNATIVES TO LITIGATION A number of solutions have been proposed, and some have been implemented, to reduce the congestion in our court system and to reduce the litigation costs facing all members of society. The enforcement of arbitration clauses, the use of court-referred arbitration and mediation, and the emergence of an increasing number of private forums for dispute resolution have all helped to reduce the caseload of the courts. Another solution to the problem involves putting caps on damage awards, particularly for pain and suffering. Without the probability of obtaining multimillion-dollar judgments for pain and suffering, some potential litigants will be deterred from undertaking lawsuits to obtain damages. Another avenue of attack is to penalize those who bring frivolous lawsuits. Rule 11 of the Federal Rules of Civil Procedure allows for disciplinary sanctions against lawyers and litigants who bring frivolous lawsuits in federal courts. Many courts require mediation or arbitration before a case goes to trial. There are proposals to further reduce delay and expenses in federal civil cases, and proposals are being considered by the states as well. Some of the proposals can be viewed as casemanagement plans. One proposal, for example, would require each federal district court to implement procedures for placing cases on different tracks, with simple cases being handled more quickly than complex ones. Politics and Law Because reforms of any system affect individuals and groups differently, they seldom are accomplished easily and quickly. Reform of the court system is a prime example. At the federal level, members of Congress long have been concerned with bringing court costs and delay under control. These concerns 57 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 58 UNIT ONE TH E FOU N DATIONS led to legislation that required the federal courts to develop a plan to cut costs and reduce delay within the federal judicial system. New Methods and Arrangements The search for alternative means to resolve disputes has produced several distinct methods and arrangements. These range from neighbors sitting down over a cup of coffee to work out their differences to huge multinational corporations agreeing to resolve a dispute through a formal hearing before a panel of experts. All of these alternatives to traditional litigation make up what is broadly termed alternative dispute resolution (ADR). ADR describes any procedure or device for resolving disputes outside the traditional judicial process. ADR normally is a less expensive and less timeconsuming process than formal litigation. In some instances, it also has the advantage of being more private. Except in disputes involving court-annexed arbitration (as will be discussed later in this chapter), no public record of ADR proceedings is created; only the parties directly involved are privy to the information presented during the process. This is a particularly important consideration in many business disputes, because such cases may involve sensitive commercial information. Today, ADR also includes online methods of resolving disputes. The great advantage of ADR is its flexibility. Normally, the parties themselves can control how the dispute will be settled, what procedures will be used, whether a neutral third party will be present or make a decision, and whether that decision will be legally binding or nonbinding. ADR also offers more privacy than court proceedings and allows disputes to be resolved relatively quickly. Today, more than 90 percent of civil lawsuits are settled before trial using some form of ADR. Indeed, most states either require or encourage parties to undertake ADR prior to trial. Many federal courts have instituted ADR programs as well. In the following pages, we examine the basic forms of ADR. Keep in mind, though, that new methods of ADR—and new combinations of existing methods—are constantly being devised and employed. SECTION 2 NEGOTIATION AND MEDIATION Alternative dispute resolution methods differ in the degree of formality involved and the extent to which third parties participate in the process. Generally, negotiation is the least formal method and involves no third parties. Mediation may be similarly informal but does involve the participation of a third party. Negotiation The simplest form of ADR is negotiation. In the process of negotiation, the parties come together informally, with or without attorneys to represent them. Within this informal setting, the parties air their differences and try to reach a settlement or resolution without the involvement of independent third parties. Because no third parties are involved and because of the informal setting, negotiation is the simplest form of ADR. Even if a lawsuit has been initiated, the parties may continue to negotiate their differences at any time during the litigation process and attempt to settle their dispute. PREPARATION FOR NEGOTIATION In spite of the informality of negotiation, each party must carefully prepare his or her side of the case. The elements of the dispute should be considered, documents and other evidence should be collected, and witnesses should be prepared to testify. Negotiating from a well-prepared position improves the odds of obtaining a favorable result. Even if a dispute is not resolved through negotiation, preparation for negotiation will reduce the effort required to prepare for the next step in the dispute-resolution process. ASSISTED NEGOTIATION To facilitate negotiation, various forms of what might be called “assisted negotiation” have emerged in recent years. Assisted negotation, as the term implies, involves the assistance of a third party. Forms of ADR associated with the negotation process include mini-trials, early neutral case evaluation, and facilitation. Another form of assisted negotiation—the summary jury trial—will be discussed later in this chapter. A mini-trial is a private proceeding in which each party’s attorney briefly argues the party’s case before the other party. Typically, a neutral third party, who acts as an adviser and an expert in the area being disputed, is also present. If the parties fail to reach an agreement, the adviser renders an opinion as to how a court would likely decide the issue. The proceeding assists the parties in determining whether they should negotiate a settlement of the dispute or take it to court. In early neutral case evaluation, the parties select a neutral third party (generally an expert in the subject matter of the dispute) to evaluate their Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 59 Alternative and Online Dispute Resolution respective positions. The parties explain their positions to the case evaluator however they wish. The evaluator then assesses the strengths and weaknesses of the parties’ positions, and this evaluation forms the basis for negotiating a settlement. Disputes may also be resolved in a friendly, nonadversarial manner through facilitation, in which a third party assists disputing parties in reconciling their differences. The facilitator helps to schedule negotiating sessions and carries offers back and forth between the parties when they refuse to face each other in direct negotiations. Technically, facilitators are not to recommend solutions. (In practice, however, they often do.) In contrast, a mediator is expected to propose solutions. Mediation One of the oldest forms of ADR is mediation. In mediation, a neutral third party acts as a mediator and works with both sides in the dispute to facilitate a resolution. The mediator normally talks with the parties separately as well as jointly, emphasizes points of agreement, and helps the parties to evaluate their options. Although the mediator may propose a solution (called a mediator’s proposal), he or she does not make a decision resolving the matter. The mediator, who need not be a lawyer, usually charges a fee for his or her services (which can be split between the parties). States that require parties to undergo ADR before trial often offer mediation as one of the ADR options or (as in Florida) the only option. Mediation is essentially a form of assisted negotiation. We treat it separately here because traditionally it has been viewed as an alternative to negotiation. Additionally, a mediator usually plays a more active role than the neutral third parties in negotiationassociated forms of ADR. Today, characteristics of mediation are being combined with those of arbitration (to be discussed next). In binding mediation, for example, the parties agree that if they cannot resolve the dispute, the mediator can make a legally binding decision on the issue. In mediation-arbitration, or “med-arb,” the parties first attempt to settle their dispute through mediation. If no settlement is reached, the dispute will be arbitrated. ADVANTAGES OF MEDIATION Few procedural rules are involved in the mediation process—far fewer than in a courtroom setting. The proceedings can be tailored to fit the needs of the parties—the mediator can be told to maintain a diplomatic role or be asked to express an opinion about the dispute, lawyers can be excluded from the proceedings, and the exchange of a few documents can replace the more expensive and time-consuming process of pretrial discovery. Disputes are often settled far more quickly in mediation than in formal litigation. One of the bigger advantages of mediation is that it is not as adversarial in nature as litigation. In mediation, the mediator takes an active role and attempts to bring the parties together so that they can come to a mutually satisfactory resolution. The mediation process tends to reduce the antagonism between the disputants, allowing them to resume their former relationship while minimizing hostility. For this reason, mediation is often the preferred form of ADR for disputes involving business partners, employers and employees, or other parties involved in longterm relationships. Another important benefit of mediation is that the mediator is selected by the parties. In litigation, the parties have no control over the selection of a judge. In mediation, the parties may select a mediator on the basis of expertise in a particular field as well as for fairness and impartiality. To the degree that the mediator has these attributes, he or she will more effectively aid the parties in reaching an agreement over their dispute. DISADVANTAGES OF MEDIATION Mediation is not without disadvantages. A mediator is likely to charge a fee. (This can be split between the parties, though, and thus may represent less expense than would both sides’ hiring lawyers.) Informality and the absence of a third party referee can also be disadvantageous. (Remember that a mediator can only help the parties reach a decision, not make a decision for them.) Without a deadline hanging over the parties’ heads, and without the threat of sanctions if they fail to negotiate in good faith, they may be less willing to make concessions or otherwise strive honestly and diligently to reach a settlement. This can slow the process or even cause it to fail. SECTION 3 ARBITRATION A more formal method of ADR is arbitration, in which an arbitrator (a neutral third party or a panel of experts) hears a dispute and imposes a resolution on the parties. Arbitration differs from other forms of ADR in that the third party hearing the dispute makes a decision for the parties. Exhibit 3–1 on the following page outlines the basic differences among Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 60 UNIT ONE TH E FOU N DATIONS E X H I B I T 3–1 • Basic Differences in the Traditional Forms of ADR NEUTRAL THIRD PARTY PRESENT WHO DECIDES THE RESOLUTION TYPE OF ADR DESCRIPTION Negotiation Parties meet informally with or without their attorneys and attempt to agree on a resolution. This is the simplest and least expensive method of ADR. No The parties themselves reach a resolution. Mediation A neutral third party meets with the parties and emphasizes points of agreement to bring them toward resolution of their dispute. 1. This method of ADR reduces hostility between parties. 2. Mediation is preferred for resolving disputes between business partners, employers and employees, or others involved in long-term relationships. Yes The parties, but the mediator may suggest or propose a resolution. Arbitration The parties present their arguments and evidence before an arbitrator at a hearing, and the arbitrator renders a decision resolving the parties’ dispute. 1. This ADR method is the most formal and resembles a court proceeding because some rules of evidence apply. 2. The parties are free to frame the issues and set the powers of the arbitrator. 3. If the parties agree that the arbitration is binding, then the parties’ right to appeal the decision is limited. Yes The arbitrator imposes a resolution on the parties that may be either binding or nonbinding. the three traditional forms of ADR. The key difference between arbitration and the forms of ADR just discussed is that in arbitration, the third party’s decision may be legally binding on the parties. Usually the parties in arbitration agree that the third party’s decision will be legally binding, although the parties can also agree to nonbinding arbitration. When a dispute arises, the parties can agree to settle their differences informally through arbitration rather than formally through the court system. Alternatively, the parties may agree ahead of time that, if a dispute should arise, they will submit to arbitration rather than bring a lawsuit. If the parties agree that the arbitrator’s decision will be legally binding, they are obligated to abide by the arbitrator’s decision regardless of whether or not they agree with it. (See this chapter’s Insight into Ethics feature on the facing page for a discussion of some potential ethical implications of the use of arbitration.) The federal government and many state governments favor arbitration over litigation. The federal policy favoring arbitration is embodied in the Federal Arbitration Act (FAA) of 1925.1 The FAA requires that courts give deference to all voluntary 1. 9 U.S.C. Sections 1–15. arbitration agreements in cases governed by federal law. Virtually any dispute can be the subject of arbitration. A voluntary agreement to arbitrate a dispute normally will be enforced by the courts if the agreement does not compel an illegal act or contravene public policy. The Federal Arbitration Act The Federal Arbitration Act does not establish a set arbitration procedure. The parties themselves must agree on the manner of resolving their dispute. The FAA provides the means for enforcing the arbitration procedure that the parties have established for themselves. Section 4 allows a party to petition a federal district court for an order compelling arbitration under an agreement to arbitrate a dispute. If the judge is “satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed with arbitration in accordance with the terms of the agreement.” Under Section 9 of the FAA, the parties to the arbitration may agree to have the arbitrator’s decision confirmed in a federal district court. Through Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 61 Alternative and Online Dispute Resolution Implications of an Increasingly Private Justice System Downtown Houston boasts a relatively new courthouse with thirty-nine courtrooms, but often, many of those courtrooms stand empty. Has litigation in Texas slowed down? Indeed, it has not—the courtrooms are empty because fewer civil lawsuits are going to trial. A similar situation is occurring in the federal courts. In 1984, more than 12,000 civil trials were heard in our federal courts. Today, only about 3,500 federal civil trials take place annually. Two developments in particular are contributing to the disappearance of civil trials—arbitration and private judges. Corporations Use Arbitration Instead of Courts Since the 1980s, corporations have been avoiding the public court system and taking cases to arbitration instead. Every day, millions of Americans sign arbitration agreements, often unknowingly committing themselves to allow private arbitrators to solve their disputes with employers and the corporations with which they do business. This trend raises some troublesome ethical issues, however. For instance, arbitration agreements may force consumers to travel long distances to participate in these private forums. Perhaps more disturbing is that the supposedly neutral arbitrators may actually be captive to the industries they serve. Arbitrators are paid handsomely and typically would like to serve again. Thus, they may be reluctant to rule against a company that is involved in a dispute. After all, the company may well need arbitrators to resolve a subsequent dispute, whereas the other party—a consumer or employee—is unlikely to need the arbitrators again. Private Judges Reduce Court Cases, Too Another reason for the decline in the number of civil trials in our public courts is the growing use of private judges. A private judge, usually a retired judge, has the power to conduct trials and grant legal resolutions of disputes. Private judges increasingly are being used to resolve commercial disputes, as well as divorces and custody battles, for two reasons: (1) a case can be heard by a private judge much sooner than it would be heard in a public court, and (2) proceedings before a private judge can be kept secret. their choosing who will make a decision in the matter.a Recently, though, private judging came under criticism in that state because private judges were conducting jury trials in county courtrooms at taxpayers’ expense. One public judge refused to give up jurisdiction over a case on the ground that private judges are not authorized to conduct jury trials. Private judging raises significant public-policy issues that legislatures might wish to resolve. Another issue is that private judges charge relatively large fees. This means that litigants who are able to pay the extra cost can have their case heard long before they would be able to obtain a trial date in a regular court. Is it fair for those who cannot afford private judges to wait longer for justice? Similarly, is it ethical to allow parties to pay extra for secret proceedings before a private judge and thereby avoid the public scrutiny of a regular trial? Some suggest that the use of private judges is leading to two different systems of justice. A Threat to the Common Law System? As discussed in Chapter 1, courts are obligated to consider precedents—the decisions rendered in previous cases with similar facts and issues—when deciding the outcome of a dispute. If fewer disputes go to trial because they are arbitrated or heard by a private judge, then they will never become part of the body of cases and appeals that form the case law on that subject. With fewer precedents on which to draw, individuals and businesses will have less information about what constitutes appropriate business behavior in today’s world. Furthermore, private dispute resolution does not allow our case law to keep up with new issues related to areas such as biotechnology and the online world. Thus, the long-term effects of the decline of public justice could be a weakening of the common law itself. CRITICAL THINKING INSIGHT INTO THE SOCIAL ENVIRONMENT If wealthier individuals increasingly use private judges, how will our justice system be affected in the long run? The Consequences of Private Judges In Ohio, a state statute allows the parties to any civil action to have their dispute tried by a retired judge of a. See Ohio Revised Code Section 2701.10. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 62 UNIT ONE TH E FOU N DATIONS confirmation, one party obtains a court order directing another party to comply with the terms of the arbitrator’s decision. Section 10 establishes the grounds by which the arbitrator’s decision may be set aside (canceled). The grounds for setting aside a decision are limited to misconduct, fraud, corruption, or abuse of power in the arbitration process itself; a court will not review the merits of the dispute or the arbitrator’s judgment. The FAA covers any arbitration clause in a contract that involves interstate commerce. Business activities that have even remote connections or minimal effects on commerce between two or more states are considered to be included. Thus, arbitration agreements involving transactions only slightly connected to the flow of interstate commerce may fall under the FAA, even if the parties, at the time of contracting, did not expect their arbitration agreement to involve interstate commerce. Conference of Commissioners on Uniform State Laws in 1955. Those states that have not adopted the uniform act nonetheless follow many of the practices specified in it. Under the uniform act, the basic approach is to give full effect to voluntary agreements to arbitrate disputes between private parties. The act supplements private arbitration agreements by providing explicit procedures and remedies for enforcing arbitration agreements. The uniform act does not, however, dictate the terms of the agreement. Moreover, under both federal and state statutes, the parties are afforded considerable latitude in deciding the subject matter of the arbitration and the methods for conducting the arbitration process. In the absence of a controlling statute, the rights and duties of the parties are established and limited by their agreement. C A S E I N PO I NT Buckeye Check Cashing, Inc., cashes personal checks for consumers in Florida. Buckeye would agree to delay submitting a consumer’s check for payment if the consumer paid a “finance charge.” For each transaction, the consumer signed an agreement that included an arbitration clause. A group of consumers filed a lawsuit claiming that Buckeye was charging an illegally high rate of interest in violation of state law. Buckeye filed a motion to compel arbitration, which the trial court denied, and the case was appealed. The plaintiffs argued that the entire contract—including the arbitration clause—was illegal and therefore arbitration was not required. The United States Supreme Court found that the arbitration provision was severable, or capable of being separated, from the rest of the contract. The Court held that when the challenge is to the validity of a contract as a whole, and not specifically to an arbitration clause within the contract, an arbitrator must resolve the dispute. This is true even if the contract later proves to be unenforceable, because the FAA established a national policy favoring arbitration and that policy extends to both federal and state courts.2 The arbitration process begins with a submission. Submission is the act of referring a dispute to an arbitrator. The next step is the hearing, in which evidence and arguments are presented to the arbitrator. The process culminates in an award, which is the decision of the arbitrator. The right to appeal the award to a court of law is limited. If the award was made under a voluntary arbitration agreement, a court normally will not set it aside even if it was the result of an erroneous determination of fact or an incorrect interpretation of law by the arbitrator. This limitation is based on at least two grounds. First, if an award is not treated as final, then rather than speeding up the dispute-resolution process, arbitration would merely add one more layer to the process of litigation. Second, the basis of arbitration—the freedom of parties to agree among themselves how to settle a controversy—supports treating an award as final. Having had the opportunity to frame the issues and to set out the manner for resolving the dispute, one party should not complain if the result was not what that party had hoped it would be. State Arbitration Statutes SUBMISSION The parties may agree to submit questions of fact, questions of law, or both to the arbitrator. The parties may even agree to leave the interpretation of the arbitration agreement to the arbitrator. In the case of an existing agreement to arbitrate, the clause itself is the submission to arbitration. The submission typically states the identities of the parties, the nature of the dispute to be resolved, Nearly all states follow the federal approach to voluntary arbitration. Most of the states and the District of Columbia have adopted the Uniform Arbitration Act, which was drafted by the National 2. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006). The Arbitration Process Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 63 Alternative and Online Dispute Resolution the monetary amounts involved in the controversy, the location at which the arbitration is to take place, and the intention of the parties to be bound by the arbitrator’s award. Exhibit 3–2 on the next page contains a sample submission form. Most states require that an agreement to submit a dispute to arbitration be in writing. Moreover, because the goal of arbitration is speed and efficiency in resolving controversies, most states require that matters be submitted within a definite period of time, generally six months from the date on which the dispute arises. THE HEARING Because the parties are free to construct the method by which they want their dispute resolved, they must state the issues that will be submitted and the powers that the arbitrator will exercise. The arbitrator may be given power at the outset of the process to establish rules that will govern the proceedings. Typically, these rules are much less restrictive than those governing formal litigation. Regardless of who establishes the rules, the arbitrator will apply them during the course of the hearing. Restrictions on the kind of evidence and the manner in which it is presented may be less rigid in arbitration, partly because the arbitrator is likely to be an expert in the subject matter involved in the controversy. Restrictions may also be less stringent because there is less fear that the arbitrator will be swayed by improper evidence. In contrast, evidence in a jury trial must sometimes be presented twice: once to the judge, outside the presence of the jury, to determine if the evidence may be heard by the jury, and—depending on the judge’s ruling—again, to the jury. In the typical hearing format, the parties begin as they would at trial by presenting opening arguments to the arbitrator and stating what remedies should or should not be granted. After the opening statements have been made, evidence is presented. Witnesses may be called and examined by both sides. After all the evidence has been presented, the parties give their closing arguments. On completion of the closing arguments, the arbitrator closes the hearing. THE AWARD After each side has had an opportunity to present evidence and to argue its case, the arbitrator reaches a decision. The final decision of the arbitrator is referred to as an award, even if no monetary payment is conferred on a party as a result of the proceedings. Under most statutes, the arbitrator must render an award within thirty days of the close of the hearing. In most states, the award need not state the arbitrator’s findings regarding factual questions in the case. Nor must the award state the conclusions that the arbitrator reached on any questions of law that may have been presented. All that is required for the award to be valid is that it completely resolve the controversy. Most states do, however, require that the award be in writing, regardless of whether any conclusions of law or findings of fact are included. If the arbitrator does state his or her legal conclusions and factual findings, then a letter or an opinion will be drafted containing the basis for the award. Even when there is no statutory requirement that the arbitrator state the factual and legal basis for the award, the parties may impose the requirement in their submission or in their predispute agreement to arbitrate. Enforcement of Agreements to Submit to Arbitration The role of the courts in the arbitration process is limited. One important role is played at the prearbitration stage. A court may be called on to order one party to an arbitration agreement to submit to arbitration under the terms of the agreement. The court in this role is essentially interpreting a contract. The court must determine what the parties have committed themselves to before ordering that they submit to arbitration. THE ISSUE OF ARBITRABILITY When a dispute arises as to whether or not the parties have agreed in an arbitration clause to submit a particular matter to arbitration, one party may file suit to compel arbitration. The court before which the suit is brought will not decide the basic controversy but must decide the issue of arbitrability—that is, whether the issue is one that must be resolved through arbitration. If the court finds that the subject matter in controversy is covered by the agreement to arbitrate, then a party may be compelled to arbitrate the dispute involuntarily. Although the parties may agree to submit the issue of arbitrability to an arbitrator, the agreement must be explicit; a court will never infer an agreement to arbitrate. Unless a court finds an explicit agreement to have the arbitrator decide whether a dispute is arbitrable, the court will decide the issue. This is an important initial determination, because no party will be ordered to submit to arbitration unless the court is convinced that the party has consented to do so. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 64 UNIT ONE TH E FOU N DATIONS E X H I B I T 3–2 • Sample Submission Form Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 65 Alternative and Online Dispute Resolution The terms of an arbitration agreement can limit the types of disputes that the parties agree to arbitrate. When the parties do not specify limits, however, disputes can arise as to whether the particular matter is covered by the arbitration agreement, and it is up to the court to resolve the issue of arbitrability. In the following case, the parties had previously agreed to arbitrate disputes involving their contract to develop software, but the dispute involved claims of copyright infringement (see Chapter 14). The question was whether the copyright infringement claims were beyond the scope of the arbitration clause. United States Court of Appeals, Sixth Circuit, 512 F.3d 807 (2008). www.ca6.uscourts.gova COMPANY PROFILE • In 1884, John H. Patterson founded the National Cash Register Company (NCR), maker of the first mechanical cash registers. In 1906, NCR created a cash register run by an electric motor. By 1914, the company had developed one of the first automated credit systems. By the 1950s, NCR had branched out into transistorized business computers, and later it expanded into liquid crystal displays and data warehousing. Today, NCR is a worldwide provider of automated teller machines (ATMs), integrated hardware and software systems, and related maintenance and support services. More than 300,000 NCR ATMs are installed throughout the world. BACKGROUND AND FACTS • To upgrade the security of its ATMs, NCR developed a software solution to install in all of its machines. At the same time, Korala Associates, Ltd. (KAL), claimed to have developed a similar security upgrade for NCR’s ATMs. Indeed, KAL had entered into a contract with NCR in 1998 (the “1998 Agreement”) to develop such software. To facilitate that process, NCR had loaned to KAL a proprietary ATM that contained copyrighted software called APTRA XFS. NCR alleged that KAL had “obtained access to, made unauthorized use of, and engaged in unauthorized copying of the APTRA XFS software.” NCR further claimed that KAL had developed its version of the security upgrade only by engaging in this unauthorized activity. When NCR brought a suit claiming copyright infringement, KAL moved to compel arbitration under the terms of the 1998 Agreement. At trial, KAL prevailed. NCR appealed the order compelling arbitration. IN THE LANGUAGE OF THE COURT Chief Justice BATCHELDER delivered the opinion of the court. * * * * The arbitration clause contained within the 1998 Agreement provides that: Any controversy or claim arising out of or relating to this contract, or breach thereof, shall be settled by arbitration and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall be appointed upon the mutual agreement of both parties failing which both parties will agree to be subject to any arbitrator that shall be chosen by the President of the Law Society. The parties do not dispute that a valid agreement to arbitrate exists; rather the issue of contention is whether NCR’s claims fall within the substantive scope of the agreement. As a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Despite this strong presumption in favor of arbitration, “arbitration is a matter of contract between the parties, and one cannot be required to submit to arbitration a dispute which it has not agreed to submit to arbitration.” When faced with a broad arbitration clause, such as one covering any dispute arising out of an agreement, a court should follow the presumption of arbitration and resolve doubts in favor of arbitration. Indeed, in such a case, only an express provision excluding a specific dispute, or the most forceful evidence of a purpose to exclude a. Click on “Opinions Search” and then on “Short Title,” and type “NCR.” Click on “Submit Query.” Next, click on the opinion link in the first column of the row corresponding to the name of this case. C A S E CO NTI N U E S 쏡 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 66 UNIT ONE TH E FOU N DATIONS C A S E 3.1 CO NTI N U E D 쏡 the claim from arbitration, will remove the dispute from consideration by the arbitrators. [Emphasis added.] * * * It is sufficient that a court would have to reference the 1998 Agreement for part of NCR’s direct [copyright] infringement claim. Under these circumstances, we find that the copyright infringement claim as to APTRA XFS falls within the scope of the arbitration agreement. DECISION AND REMEDY • The U.S. Court of Appeals for the Sixth Circuit affirmed the part of the district court’s decision compelling arbitration of NCR’s claims of direct copyright infringement relating to the APTRA XFS software. THE LEGAL ENVIRONMENT DIMENSION • Why did NCR not want its claims decided by arbitration? THE ETHICAL DIMENSION • Could NCR have a claim that KAL engaged in unfair competition because KAL engaged in unethical business practices? (Hint: Unfair competition may occur when one party deceives the public into believing that its goods are the goods of another.) Why or why not? COMPULSORY ARBITRATION AGREEMENTS A significant question in the last several years has concerned compulsory arbitration agreements. For example, many claim that employees’ rights are not sufficiently protected when they are forced, as a condition of being hired, to agree to arbitrate all disputes and thus waive their rights under statutes specifically designed to protect employees. The United States Supreme Court, however, has held that mandatory arbitration clauses in employment contracts generally are enforceable.3 Arbitration clauses in contracts for consumer goods and services have also been a source of controversy. Generally, the criticism of compulsory arbitration in these contexts has to do with the parties’ unequal bargaining power. For example, an employment contract that provides for mandatory arbitration of any disputes might be presented to a job applicant on a take-it-or-leave-it basis. In 3. For a landmark decision on this issue, see Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). other words, if the applicant wants the job, he or she will have to sign the contract. As you will read in Chapter 9, a contract or clause drafted by one party (the dominant party) and presented to the other party on a take-it-or-leave-it basis is referred to as an adhesion contract. Although the courts normally enforce contractual agreements, when enforcement would be manifestly unfair or oppressive, a court may deem the contract unconscionable—that is, contrary to public policy—and refuse to enforce it. Compulsory arbitration agreements often spell out the rules for a mandatory proceeding. For example, an agreement may address in detail the amount and payment of filing fees and other expenses. When an individual worker lacks the ability to pay, some courts have overturned provisions in employment-related agreements that require the parties to split the costs. In the following case, a travel agency included an arbitration clause in its contract with two clients who participated in an agency expedition to Mt. Kilimanjaro, the highest mountain in Africa. The court had to determine whether the agreement to arbitrate should be enforced. California Court of Appeal, First District, 181 Cal.App.4th 816, 104 Cal.Rptr.3d 844 (2010). I N TH E L AN G UAG E O F T H E CO U RT SIGGINS, J. [Judge] * * * * Jason Lhotka was thirty-seven years old when he died of an altitude-related illness while on a GeoEx [Geographic Expeditions, Inc.] expedition up Mount Kilimanjaro with his mother, plaintiff Sandra Menefee. GeoEx’s limitation of liability and release form, which both Lhotka and Menefee signed as a requirement of participating in the expedition, provided that each of them released GeoEx from all liability in connection with the trek and waived any claims for liability “to the maximum extent permitted by law.” The Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 Alternative and Online Dispute Resolution E X TE N D E D C A S E 3.2 CO NTI N U E D 쒆 release * * * reads: “I understand that all Trip Applications are subject to acceptance by GeoEx in San Francisco, California, USA. I agree that in the unlikely event a dispute of any kind arises between me and GeoEx, the following conditions will apply: (a) the dispute will be submitted to a neutral third-party mediator in San Francisco, California, with both parties splitting equally the cost of such mediator. If the dispute cannot be resolved through mediation, then (b) the dispute will be submitted for binding arbitration to the American Arbitration Association in San Francisco, California; (c) the dispute will be governed by California law; and (d) the maximum amount of recovery to which I will be entitled under any and all circumstances will be the sum of the land and air cost of my trip with GeoEx. I agree that this is a fair and reasonable limitation on the damages, of any sort whatsoever, that I may suffer. I agree to fully indemnify [compensate] GeoEx for all of its costs (including attorneys’ fees) if I commence an action or claim against GeoEx based upon claims I have previously released or waived by signing this release.” Menefee paid $16,831 for herself and Lhotka to go on the trip. A letter from GeoEx president James Sano that accompanied the limitation of liability and release explained that the form was mandatory and that, on this point, “our lawyers, insurance carriers and medical consultants give us no discretion. A signed, unmodified release form is required before any traveler may join one of our trips. * * * My review of other travel companies’ release forms suggests that our forms are not a whole lot different from theirs.” After her son’s death, Menefee sued GeoEx for wrongful death and alleged various theories of liability including fraud, gross negligence and recklessness, and intentional infliction of emotional distress. GeoEx moved to compel arbitration. The trial court found the arbitration provision was unconscionable * * * and on that basis denied the motion. It ruled: “The agreement at issue is both procedurally and substantively unconscionable * * * . This appeal timely followed. * * * * We turn * * * to GeoEx’s contention that the court erred when it found the arbitration agreement unconscionable. Although the issue arises here in a relatively novel setting, the basic legal framework is well established. “Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Phrased another way, unconscionability has both a procedural and a substantive element. The procedural element requires oppression or surprise. * * * The substantive element concerns whether a contractual provision reallocates risks in an objectively unreasonable or unexpected manner.” * * * [Emphasis added.] GeoEx argues the arbitration agreement involved neither the oppression nor surprise aspects of procedural unconscionability. GeoEx argues the agreement was not oppressive because plaintiffs made no showing of an “industry-wide requirement that travel clients must accept an agreement’s terms without modification” and “they fail[ed] even to attempt to negotiate” with GeoEx. We disagree. GeoEx’s argument cannot reasonably be squared with its own statements advising participants that they must sign an unmodified release form to participate in the expedition; that GeoEx’s “lawyers, insurance carriers and medical consultants give [it] no discretion” on that point; and that other travel companies were no different. In other words, GeoEx led the plaintiffs to understand not only that its terms and conditions were nonnegotiable, but that plaintiffs would encounter the same requirements with any other travel company. This is a sufficient basis for us to conclude the plaintiffs lacked bargaining power. GeoEx also contends its terms were not oppressive, apparently as a 67 matter of law, because Menefee and Lhotka could have simply decided not to trek up Mount Kilimanjaro. It argues that contracts for recreational activities can never be unconscionably oppressive because, unlike agreements for necessities such as medical care or employment, a consumer of recreational activities always has the option of [forgoing] the activity. The argument has some initial resonance [significance], but on closer inspection we reject it as unsound. * * * * Here, certainly, plaintiffs could have chosen not to sign on with the expedition. That option, like any availability of market alternatives, is relevant to the existence, and degree, of oppression. But we must also consider the other circumstances surrounding the execution of the agreement. GeoEx presented its limitation of liability and release form as mandatory and unmodifiable, and essentially told plaintiffs that any other travel provider would impose the same terms. “Oppression arises from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice * * * .” GeoEx presented its terms as both nonnegotiable and no different than what plaintiffs would find with any other provider. Under these circumstances, plaintiffs made a sufficient showing to establish at least a minimal level of oppression to justify a finding of procedural unconscionability. [Emphasis in original.] * * * [We now] address whether the substantive unconscionability of the GeoEx contract warrants the trial court’s ruling. * * * * The arbitration provision in GeoEx’s release * * * guaranteed that plaintiffs could not possibly obtain anything approaching full recompense for their harm by limiting any recovery they could obtain to the amount they paid GeoEx for their trip. In addition to a limit on their recovery, plaintiffs, residents of Colorado, were required to mediate E X TE N D E D C A S E CO NTI N U E S 쏡 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 68 UNIT ONE TH E FOU N DATIONS E X TE N D E D C A S E 3.2 CO NTI N U E D 쒆 and arbitrate in San Francisco—all but guaranteeing both that GeoEx would never be out more than the amount plaintiffs had paid for their trip, and that any recovery plaintiffs might obtain would be devoured by the expense they incur in pursuing their remedy. The release also required plaintiffs to indemnify GeoEx for its costs and attorney fees for defending any claims covered by the release of liability form. Notably, there is no reciprocal limitation on damages or indemnification obligations imposed on GeoEx. Rather than providing a neutral forum for dispute resolution, GeoEx’s arbitration scheme provides a potent disincentive for an aggrieved client to pursue any claim, in any forum—and may well guarantee that GeoEx wins even if it loses. Absent reasonable justification for this arrangement— and none is apparent—we agree with the trial court that the arbitration clause is so one-sided as to be substantively unconscionable. * * * * The order denying GeoEx’s motion to compel arbitration is affirmed. 1. What did the judge mean when he said that GeoEx’s one-sided arbitration scheme “may well guarantee that GeoEx wins even if it loses”? 2. Did the fact that the terms of the release were nonnegotiable contribute to its procedural unconscionability or its substantive unconscionability? Explain. Setting Aside an Arbitration Award After the arbitration has been concluded, the losing party may appeal the arbitrator’s award to a court, or the winning party may seek a court order compelling the other party to comply with the award. The scope of review in either situation is much more restricted than in an appellate court’s review of a trial court decision. The court does not look at the merits of the underlying dispute, and the court will not add to or subtract from the remedies provided by the award. The court’s role is limited to determining whether there exists a valid award. If so, the court will order the parties to comply with the terms. The general view is that because the parties were free to frame the issues and set the powers of the arbitrator at the outset, they cannot complain about the result. FACT FINDINGS AND LEGAL CONCLUSIONS The arbitrator’s fact findings and legal conclusions are normally final. That the arbitrator may have erred in a ruling during the hearing or made an erroneous fact finding is normally no basis for setting aside an award: the parties agreed that the arbitrator would be the judge of the facts. Similarly, no matter how obviously the arbitrator was mistaken in a conclusion of law, the award is normally nonetheless binding: the parties agreed to accept the arbitrator’s interpretation of the law. A court will not look at the merits of the dispute, the sufficiency of the evidence presented, or the arbitrator’s reasoning in reaching a particular decision. This approach is consistent with the underlying view of all voluntary arbitration—that its basis is really contract law. If the parties freely contract with one another, courts will not interfere simply because one side feels that it received a bad bargain. Any party challenging an award must face the presumption that a final award is valid. But is an award final or binding if the parties did not agree that it would be? PUBLIC POLICY AND ILLEGALITY In keeping with contract law principles, no award will be enforced if compliance with the award would result in the commission of a crime or would conflict with some greater social policy mandated by statute. A court will not overturn an award, however, simply because the arbitrator was called on to resolve a dispute involving a matter of significant public concern. For an award to be set aside, it must call for some action on the part of the parties that would conflict with or in some way undermine public policy. DEFECTS IN THE ARBITRATION PROCESS There are some bases for setting aside an award when there is a defect in the arbitration process. These bases are typified by those set forth in the Federal Arbitration Act. Section 10 of the act provides four grounds on which an arbitration award may be set aside. 1. The award was the result of corruption, fraud, or other “undue means.” 2. The arbitrator exhibited bias or corruption. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 Alternative and Online Dispute Resolution 3. The arbitrator refused to postpone the hearing despite sufficient cause, refused to hear evidence pertinent and material to the dispute, or otherwise acted to substantially prejudice the rights of one of the parties. 4. The arbitrator exceeded his or her powers or failed to use them to make a mutual, final, and definite award. The first three bases for setting aside the award include actions or decisions that are more than simply mistakes in judgment. Each requires some “bad faith” on the part of the arbitrator. Bad faith actions or decisions are ones that affect the integrity of the arbitration process. The honesty and impartiality, rather than the judgment, of the arbitrator are called into question. Sometimes, it is difficult to make the distinction between honest mistakes in judgment and actions or decisions made in bad faith. A bribe is clearly the kind of “undue means” included in the first basis for setting aside an award. Letting only one side argue its case is likewise a clear violation of the second basis. Meetings between the arbitrator and one party outside the presence of the other party also taint the arbitration process. Although meetings might not involve the kind of corruption that results from taking a bribe, they do affect the integrity of the process; the third basis for setting aside an award is meant to protect against this. Not every refusal by an arbitrator to admit certain evidence is grounds for setting aside an award under the third basis. As noted, to provide a basis for overturning an award, the arbitrator’s decision must be more than an error in judgment, no matter how obviously incorrect that judgment might appear to another observer. The decision must be so obviously wrong or unfair as to imply bias or corruption. Otherwise, the decision normally cannot be a basis for setting aside an award. The fourth basis for setting aside an award is that the arbitrator exceeded his or her powers in arbitrating the dispute. This issue involves the question of arbitrability. An arbitrator exceeds his or her powers and authority by attempting to resolve an issue that is not covered by the agreement to submit to arbitration.4 WAIVER Although a defect in the arbitration process is sufficient grounds for setting aside an award, 4. See, for example, Major League Baseball Players Association v. Garvey, 532 U.S. 1015, 121 S.Ct. 1724, 149 L.Ed.2d 740 (2001). 69 a party sometimes forfeits the right to challenge an award by failing to object to the defect in a timely manner. The party must object when he or she learns of the problem. After making the objection, the party can proceed with the arbitration process and still challenge the award in court after the arbitration proceedings have concluded. If, however, a party makes no objection and proceeds with the arbitration process, then a later court challenge to the award may be denied on the ground that the party waived the right to challenge the award on the basis of the defect. Frequently, this occurs when a party fails to object that an arbitrator is exceeding his or her powers in resolving a dispute because the subject matter is not arbitrable or because the party did not agree to arbitrate the dispute. The question of arbitrability is one for the courts to decide. If a party does not object on this issue at the first demand for arbitration, however, a court may consider the objection waived. CONFLICTS OF LAW Parties are afforded wide latitude in establishing the manner in which their disputes will be resolved. Nevertheless, an agreement to arbitrate may be governed by the Federal Arbitration Act (FAA) or one of the many state arbitration acts, even though the parties do not refer to a statute in their agreement. Recall that the FAA covers any arbitration clause in a contract that involves interstate commerce. Frequently, however, transactions involving interstate commerce also have substantial connections to particular states, which may in turn have their own arbitration acts. In such situations, unless the FAA and state arbitration law are nearly identical, the acts may conflict. How are these conflicts to be resolved? As a general principle, the supremacy clause and the commerce clause of the U.S. Constitution are the bases for giving federal law preeminence; when there is a conflict, state law is preempted by federal law. Thus, in cases of arbitration, the strong federal policy favoring arbitration can override a state’s laws that might be more favorable to normal litigation. CHOICE OF LAW Notwithstanding federal preemption of conflicting state laws, the FAA has been interpreted as allowing the parties to choose a particular state law to govern their arbitration agreement. The parties may choose to have the laws of a specific state govern their agreement by including in the agreement a choice-of-law clause. The FAA does not mandate any particular set of rules that parties must follow in arbitration; the parties are free to agree on the manner best suited to their needs. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 70 UNIT ONE TH E FOU N DATIONS Consistent with this view that arbitration is at heart a contractual matter between private parties, the United States Supreme Court has upheld arbitration agreements containing choice-of-law provisions. to institute a voluntary arbitration program at the appellate court level. In the South Carolina system, litigants must waive a court hearing when requesting arbitration. All decisions by the arbitrators are final and binding. Disadvantages of Arbitration Arbitration has some disadvantages. The result in any particular dispute can be unpredictable, in part because arbitrators do not need to follow any previous cases in rendering their decisions. Unlike judges, arbitrators do not have to issue written opinions or facilitate a participant’s appeal to a court. Arbitrators must decide disputes according to whatever rules have been provided by the parties, regardless of how unfair those rules may be. In some cases, arbitration can be nearly as expensive as litigation. In part, this is because both sides must prepare their cases for presentation before a third party decision maker, just as they would have to do to appear in court. Discovery usually is not available in arbitration, however, which means that during the hearing the parties must take the time to question witnesses whom, in a lawsuit, they would not need to call. SECTION 4 THE INTEGRATION OF ADR AND FORMAL COURT PROCEDURES Increasingly, courts are requiring that parties attempt to settle their differences through some form of ADR before proceeding to trial. For example, several federal district courts encourage nonbinding arbitration for cases involving amounts less than $100,000. Less than 10 percent of the cases referred for arbitration ever go to trial. About half of all federal courts have adopted formal rules regarding the use of ADR, and many other courts without such rules use ADR procedures. Most states have adopted programs that allow them to refer certain types of cases for negotiation, mediation, or arbitration. Typically—as in California and Hawaii—court systems have adopted mandatory mediation or nonbinding arbitration programs for certain types of disputes, usually involving less than a specified threshold dollar amount. Only if the parties fail to reach an agreement, or if one of the parties disagrees with the decision of a third party mediating or arbitrating the dispute, will the case be heard by a court. South Carolina was the first state Court-Annexed Arbitration Court-annexed arbitration differs significantly from the voluntary arbitration process discussed above. There are some disputes that courts will not allow to go to arbitration. Most states, for example, do not allow court-annexed arbitration in disputes involving title to real estate or in cases in which a court’s equity powers are involved. A FUNDAMENTAL DIFFERENCE The fundamental difference between voluntary arbitration and courtannexed arbitration is the finality and reviewability of the award. With respect to court-annexed arbitration, either party may reject the award for any reason. In the event that one of the parties does reject the award, the case will proceed to trial, and the court will hear the case de novo—that is, the court will reconsider all the evidence and legal questions as though no arbitration had occurred. Everyone who has a recognizable cause of action or against whom such an action is brought is entitled to have the issue decided in a court of law. Because court-annexed arbitration is not voluntary, there must be some safeguard against using it in a way that denies an individual his or her “day in court.” This safeguard is provided by permitting either side to reject the award regardless of the reason for so doing. The party rejecting the award may be penalized, however. Many statutes providing for courtannexed arbitration impose court costs and fees on a party who rejects an arbitration award but does not improve his or her position by going to trial. Thus, for example, if a party rejects an arbitration award, and the award turns out to be more favorable to that party than the subsequent jury verdict, the party may be compelled to pay the costs of the arbitration or some fee for the costs of the trial. In court-annexed arbitration, discovery of evidence occurs before the hearing. After the hearing has commenced, a party seeking to discover new evidence must usually secure approval from the court that mandated the arbitration. This is intended to prevent the parties from using arbitration as a means of previewing each other’s cases and then rejecting the arbitrator’s award. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 71 Alternative and Online Dispute Resolution THE ROLE OF THE ARBITRATOR Notwithstanding the differences between voluntary and court-annexed arbitration, the role of the arbitrator is essentially the same in both types of proceedings. The arbitrator determines issues of both fact and law. The arbitrator also makes all decisions concerning applications of the rules of procedure and evidence during the hearing. WHICH RULES APPLY Regarding the rules of evidence, there are differences among the states. Most states impose the same rules of evidence on an arbitration hearing as on a trial. Other states allow all evidence relevant to the dispute regardless of whether the evidence would be admissible at trial. Still other jurisdictions leave it to the arbitrator to decide what evidence is admissible. WAIVER Once a court directs that a dispute is to be submitted to court-annexed arbitration, the parties must proceed to arbitration. As noted above, either side may reject the award that results from the arbitration for any reason. If a party fails to appear at, or participate in, the arbitration proceeding as directed by the court, however, that failure constitutes a waiver of the right to reject the award. traditional court process is through the use of summary jury trials. A summary jury trial is a mock trial that occurs in a courtroom before a judge and jury. Evidence is presented in an abbreviated form, along with each side’s major contentions. The jury then presents a verdict. The fundamental difference between a traditional trial and a summary jury trial is that in the latter, the jury’s verdict is only advisory. A summary jury trial’s goal is to give each side an idea of how it would fare in a full-blown jury trial with a more elaborate and detailed presentation of evidence and arguments. At the end of the summary jury trial, the presiding judge meets with the parties and may encourage them to settle their dispute without going through a standard jury trial. SECTION 5 ADR FORUMS AND SERVICES Services facilitating dispute resolution outside the courtroom are provided by both government agencies and private organizations, as well as by companies conducting business online. Court-Related Mediation Nonprofit Organizations Mediation is proving to be more popular than arbitration as a court-related method of ADR, and mediation programs continue to increase in number in both federal and state courts. Today, more court systems offer or require mediation, rather than arbitration, as an alternative to litigation. Mediation is often used in disputes relating to employment law, environmental law, product liability, and franchises. One of the most important business advantages of mediation is its lower cost, which can be 25 percent (or less) of the expense of litigation. Another advantage is the speed with which a dispute can go through mediation (possibly one or two days) compared with arbitration (possibly months) or litigation (possibly years). Part of the popularity of mediation is that its goal, unlike that of litigation and some other forms of ADR, is for opponents to work out a resolution that benefits both sides. The rate of participants’ satisfaction with the outcomes in mediated disputes is high. The major source of private arbitration services is the American Arbitration Association (AAA). Most of the largest law firms in the nation are members of this association. Founded in 1926, the AAA now settles more than 200,000 disputes a year and has offices in every state. Cases brought before the AAA are heard by an expert or a panel of experts—of whom usually about half are lawyers—in the area relating to the dispute. To cover its costs, this nonprofit organization charges a fee, paid by the party filing the claim. In addition, each party to the dispute pays a price for each hearing day, as well as a special additional fee in cases involving personal injuries or property loss. In addition to the AAA, hundreds of other state and local nonprofit organizations provide arbitration services. For example, the Arbitration Association of Florida provides ADR services in that state. The Better Business Bureau offers ADR programs to aid in the resolution of certain types of disagreements. Many industries—including the insurance, automobile, and securities industries— also now have mediation or arbitration programs to facilitate timely and inexpensive settlement of claims. Summary Jury Trials Another means by which the courts have integrated alternative dispute-resolution methods into the Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 72 UNIT ONE TH E FOU N DATIONS For-Profit Organizations Those who seek to settle their disputes quickly can turn to private, for-profit organizations to act as mediators or arbitrators. The leading firm in this private system of justice is JAMS/Endispute, which is based in California. The private system of justice includes hundreds of firms throughout the country offering dispute-resolution services by hired judges. Procedures in these private courts are fashioned to meet the desires of the clients seeking their services. For example, the parties might decide on the date of the hearing, the presiding judge, whether the judge’s decision will be legally binding, and the site of the hearing—which could be a conference room, a law school office, or a leased courtroom complete with the American flag and Bible. The judges may follow procedures similar to those of the federal courts and use similar rules. Each party to the dispute may pay a filing fee and a designated fee for a half-day hearing session or a special, one-hour settlement conference. Online Organizations An increasing number of companies and organizations are offering dispute-resolution services using the Internet. The settlement of disputes in these online forums is known as online dispute resolution (ODR). To date, the disputes resolved in these forums have most commonly involved disagreements over the rights to domain names (Web site addresses—see Chapter 14) and disagreements over the quality of goods sold via the Internet, including goods sold through Internet auction sites. ODR may be best for resolving small- to mediumsized business liability claims, which may not be worth the expense of litigation or even traditional methods of alternative dispute resolution. Rules being developed in online forums, however, may ultimately become a code of conduct for everyone who does business in cyberspace. Most online forums do not automatically apply the law of any specific jurisdiction. Instead, results are often based on general, more universal legal principles. As with traditional offline methods of dispute resolution, any party may appeal to a court at any time. NEGOTIATION AND MEDIATION SERVICES The online negotiation of a dispute generally is simpler and more practical than litigation. Typically, one party files a complaint, and the other party is notified by e-mail. Password-protected access is possible twenty-four hours a day, seven days a week. Fees are usually low (often 2 to 4 percent, or less, of the disputed amount). CyberSettle.com, National Arbitration and Mediation (NAM), and other Web-based firms offer online forums for negotiating monetary settlements. The Better Business Bureau also provides online dispute settlement. The parties to a dispute may agree to submit offers. If the offers fall within a previously agreed-on range, they will end the dispute. Special software keeps secret any offers that are not within the range. If there is no agreed-on range, typically an offer includes a deadline when the offer will expire, and the other party must respond before then. The parties can drop the negotiations at any time. ARBITRATION PROGRAMS A number of organizations, including the American Arbitration Association, offer online arbitration programs. For example, the Internet Corporation for Assigned Names and Numbers (ICANN), a nonprofit corporation that the federal government set up to oversee the distribution of domain names, has issued special rules for the resolution of domain name disputes. ICANN has also authorized several organizations to arbitrate domain name disputes in accordance with ICANN’s rules. SECTION 6 INTERNATIONAL DISPUTE RESOLUTION Businesspersons who engage in international business transactions normally take special precautions to protect themselves in the event that a party with whom they are dealing in another country breaches an agreement. Often, parties to international contracts include special clauses in their contracts providing for how any disputes arising under the contracts will be resolved. Forum-Selection and Choice-of-Law Clauses Parties to international contracts often include forum-selection clauses. These clauses designate the jurisdiction (court or country) in which any dispute arising under the contract will be litigated and the nation’s law that will be applied. Choice-of-law clauses are also frequently included in international contracts. If no forum and choice-of-law clauses have been included in an international contract, however, legal proceedings will be more complex Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 73 Alternative and Online Dispute Resolution and attended by much more uncertainty. For example, litigation may take place in two or more countries, with each country applying its own national law to the particular transactions. Furthermore, even if a plaintiff wins a favorable judgment in a lawsuit litigated in the plaintiff’s country, there is no guarantee that the court’s judgment will be enforced by judicial bodies in the defendant’s country. As will be discussed in Chapter 8, for reasons of courtesy, the judgment may be enforced in the defendant’s country, particularly if the defendant’s country is the United States and the foreign court’s decision is consistent with U.S. national law and policy. Other nations, however, may not be as accommodating as the United States, and the plaintiff may be left empty-handed. clauses in their contracts, requiring that any contract disputes be decided by a neutral third party. In international arbitration proceedings, the third party may be a neutral entity (such as the International Chamber of Commerce), a panel of individuals representing both parties’ interests, or some other group or organization. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards5—which has been implemented in more than fifty countries, including the United States—assists in the enforcement of arbitration clauses, as do provisions in specific treaties among nations. The American Arbitration Association provides arbitration services for international as well as domestic disputes. Arbitration Clauses In an attempt to prevent such problems, parties to international contracts often include arbitration 5. June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997 (the “New York Convention”). Adrian Reese, a resident of New York, owned a strip mall located in Ohio, which he leased out to different businesses. The tenants in the building had complained that the two public restrooms were substandard and in need of repair. Reese therefore contracted with Lyle Copeland, a licensed contractor in Ohio, to remodel the bathrooms and fix the outdated plumbing. Copeland began the work on the date promised but progressed very slowly. Then, while ripping out the existing pipes, Copeland accidentally broke the main pipe, which caused flooding and water damage to the building. Several of the tenants immediately vacated the property after the incident. Reese claimed that Copeland was legally responsible for $300,000 in property damage because his actions were reckless and incompetent. Copeland maintained that it was an accident and refused to pay for the damage. Using the information presented in the chapter, answer the following questions. 1. What types of assisted negotiation might the parties use to settle this dispute? 2. Does the fact that the parties reside in different jurisdictions have any effect on whether they might try mediation or negotiation? Why or why not? 3. Why would the parties wish to use some method of alternative dispute resolution (ADR) rather than filing a traditional lawsuit? 4. Suppose that one of the parties rejects any attempt at using ADR and instead files a lawsuit in a federal district court. That court happens to require that this dispute be arbitrated prior to any trial on the matter. Explain whether this arbitration is likely to be legally binding on the parties. DEBATE THIS: Prior to all litigation, the opposing parties must submit to mediation or arbitration. Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 74 UNIT ONE TH E FOU N DATIONS alternative dispute resolution (ADR) 58 American Arbitration Association 71 arbitration 59 arbitrator 59 award 63 choice-of-law clause 69 early neutral case evaluation 58 3–1. Arbitration In an arbitration proceeding, the arbitrator need not be a judge or even a lawyer. How, then, can the arbitrator’s decision have the force of law and be binding on the parties involved? 3–2. QUESTION WITH SAMPLE ANSWER: Choice-of-Law. Two private U.S. corporations enter into an agreement to conduct mining operations in the newly formed Middle Eastern nation of Euphratia. As part of the agreement, the companies include an arbitration clause and a choice-of-law provision. The first states that any controversy arising out of the performance of the agreement will be settled by arbitration. The second states that the agreement is to be governed by the laws of the location of the venture, Euphratia. A dispute arises, and the parties discontinue operations. One of the parties claims sole ownership to the Euphratian mines and orders the other party to remove its equipment from the mines. The other party disputes the claim of sole ownership and seeks an order from a U.S. federal court compelling the parties to submit to arbitration over the ownership issue and alleged breaches of the agreement. How should the court rule if the laws of Euphratia state that, whereas arbitration agreements are to be enforced generally, matters of ownership of natural resources can only be resolved in a Euphratian court of law? Does it matter that two U.S. companies engaged in international commerce would be governed by the Federal Arbitration Act? Explain. • For a sample answer to Question 3–2, go to Appendix F at the end of this text. 3–3. Award Two brothers, both of whom are certified public accountants (CPAs), form a professional association to provide tax-accounting services to the public. They also agree, in writing, that any disputes that arise between them over matters concerning the association will be submitted to an independent arbitrator, whom they designate to be their father, who is also a CPA. A dispute arises, and the matter is submitted to the father for arbitration. During the course of arbitration, which occurs over several weeks, the father asks the older brother, who is visiting one evening, to explain a certain entry in the brothers’ association facilitation 59 mediation 59 mediator 59 mini-trial 58 negotiation 58 online dispute resolution (ODR) 72 submission 62 summary jury trial 71 accounts. The younger brother learns of the discussion at the next meeting for arbitration; he says nothing about it, however. The arbitration is concluded in favor of the older brother, who seeks a court order compelling the younger brother to comply with the award. The younger brother seeks to set aside the award, claiming that the arbitration process was tainted by bias because “Dad always liked my older brother best.” The younger brother also seeks to have the award set aside on the basis of improper conduct in that matters subject to arbitration were discussed between the father and older brother without the younger brother’s being present. Should a court confirm the award or set it aside? Why or why not? 3–4. Award After resolving their dispute, the two brothers encountered in Question 3–3 decide to resume their tax-accounting practice according to the terms of their original agreement. Again a dispute arises, and again it is decided by the father (now retired except for numerous occasions on which he acts as an arbitrator) in favor of the older brother. The older brother files a petition to enforce the award. The younger brother seeks to set aside the award and offers evidence that the father, as arbitrator, made a gross error in calculating the accounts that were material to the dispute being arbitrated. If the court is convinced that the father erred in the calculations, should the award be set aside? Why or why not? 3–5. Arbitration Agreement Licensed real estate brokers in Colorado who belong to the Denver Metropolitan Commercial Association of Realtors (DMCAR) agree, as a condition of membership, to submit all disputes about real estate transactions to binding arbitration in accordance with procedures of the National Association of Realtors. Some realtors challenged the arbitration agreement, contending it was invalid because the parties did not execute arbitration agreements with each other and because membership in DMCAR is voluntary, so it does not create a binding obligation to arbitration if a member resigns from the association. Would such a condition of membership be valid and binding on members in the event a dispute arose? [Lane v. Urgitus, 145 P.3d 672 (Colo.Sup.Ct. 2006)] 3–6. Arbitration Clause Kathleen Lowden sued cellular phone company T-Mobile USA, Inc., contending that Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 3 75 Alternative and Online Dispute Resolution its service agreements were not enforceable under Washington state law. Lowden requested that the court allow a class-action suit, in which her claims would extend to similarly affected customers. She contended that T-Mobile had improperly charged her fees beyond the advertised price of service and charged her for roaming calls that should not have been classified as roaming. T-Mobile moved to force arbitration in accordance with the provisions that were clearly set forth in the service agreement. The agreement also specified that no classaction suit could be brought, so T-Mobile also asked the court to dismiss the request for a class-action suit. Was T-Mobile correct that Lowden’s only course of action was to file arbitration personally? Why or why not? [ Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008)] 3–7. CASE PROBLEM WITH SAMPLE ANSWER: Arbitration. Thomas Baker and others who bought new homes from Osborne Development Corp. sued for multiple defects in the houses they purchased. When Osborne sold the homes, it paid for them to be in a new home warranty program administered by Home Buyers Warranty (HBW). When the company enrolled a home with HBW, it paid a fee and filled out a form that stated the following: “By signing below, you acknowledge that you . . . consent to the terms of these documents including the binding arbitration provision contained therein.” HBW then issued warranty booklets to the new homeowners that stated: “Any and all claims, disputes and controversies by or between the Homeowner, the Builder, the Warranty Insurer and/or HBW . . . shall be submitted to arbitration.” Were the new homeowners bound by the arbitration agreement, or could they sue the builder, Osborne, in court? Explain. [Baker v. Osborne Development Corp., 159 Cal.App.4th 884, 71 Cal.Rptr.3d 854 (2008)] • To view a sample answer for Problem 3–7, go to this book’s Web site at www.cengage.com/blaw/cross, select “Chapter 3,” and click on “Case Problem with Sample Answer.” 3–8. Arbitration PRM Energy Systems, Inc. (PRM), owned technology patents that it licensed to Primenergy to use and to sublicense in the United States. The agreement stated that all disputes would be settled by arbitration. Kobe Steel of Japan was interested in using the technology at its U.S. subsidiary. PRM directed Kobe to talk to Primenergy about that. Kobe talked to PRM directly about using the technology in Japan, but no agreement was reached. Primenergy then agreed to let Kobe use the technology in Japan without telling PRM. The dispute between PRM and Primenergy about Kobe went to arbitration, as required by the license agreement. In addition, PRM sued Primenergy for fraud and theft of trade secrets. PRM also sued Kobe for using the technology in Japan without its permission. The district court ruled that PRM had to take all complaints about Primenergy to arbitration. PRM also had to take its complaint about Kobe to arbitration because the complaint involved a sublicense Kobe was granted by Primenergy. PRM appealed, contending that the fraud and theft of trade secrets went beyond the license agreement with Primenergy and that Kobe had no right to demand arbitration because it never had a right to use the technology under a license from PRM. Is PRM correct, or must all matters go to arbitration? Why or why not? [PRM Energy Systems, Inc. v. Primenergy, 592 F.3d 830 (8th Cir. 2010)] 3–9. A QUESTION OF ETHICS: Agreement to Arbitrate. Nellie Lumpkin, who suffered from various illnesses, including dementia, was admitted to the Picayune Convalescent Center, a nursing home. Because of her mental condition, her daughter, Beverly McDaniel, filled out the admissions paperwork and signed the admissions agreement. It included a clause requiring parties to submit to arbitration any disputes that arose. After Lumpkin left the center two years later, she sued, through her husband, for negligent treatment and malpractice during her stay. The center moved to force the matter to arbitration. The trial court held that the arbitration agreement was not enforceable. The center appealed. [ Covenant Health & Rehabilitation of Picayune, LP v. Lumpkin, 23 So.3d 1092 (Miss.App. 2009)] (a) Should a dispute involving medical malpractice be forced into arbitration? This is a claim of negligent care, not a breach of a commercial contract. Is it ethical for medical facilities to impose such a requirement? Is there really any bargaining over such terms? (b) Should a person with limited mental capacity be held to the arbitration clause agreed to by the nextof-kin who signed on behalf of that person? Go to this text’s Web site at www.cengage.com/blaw/cross, select “Chapter 3,” and click on “Practical Internet Exercises.” There you will find the following Internet research exercises that you can perform to learn more about the topics covered in this chapter. Practical Internet Exercise 3–1: Legal Perspective Alternative Dispute Resolution Practical Internet Exercise 3–2: Management Perspective Resolve a Dispute Online Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This page contains answers for this chapter only 3–2A. Question with Sample Answer This page contains answers for this chapter only Because the joint venture in Euphratia would naturally be subject to that country’s laws, company lawyers would have to look to both the agreements that the joint venture had signed with the national government as well as Euphratia’s laws relating to the ownership of natural resources to determine whether they would interfere with the efforts by the two companies to resolve their dispute. All countries have the right to expropriate foreign-owned property as long as they pay adequate compensation to the owners. Because the Federal Arbitration Act accords the parties significant discretion in deciding where disputes should be heard and which law should govern, virtually any dispute can be the subject of arbitration. The terms of a voluntary arbitration agreement normally will be enforced by the courts if the agreement does not compel an illegal act or contravene public policy. Assuming that Euphratia’s laws did not violate U.S. public policy, the dispute itself should be arbitrable. This page contains answers for this chapter only A–63 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Australia • Brazil • Japan • Korea • Mexico • Singapore Spain • United Kingdom • United States Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. I n the early part of the first decade of the 2000s, ethics scandals erupted throughout corporate America. Heads of major corporations (some of which no longer exist) were tried for fraud, conspiracy, conspiracy to commit securities fraud, grand larceny, and obstruction of justice. Former multimillionaires (and even billionaires) who once ran multinational corporations are now serving sentences in federal penitentiaries. The giant energy company Enron in particular dominated headlines. Its investors lost around $60 billion when the company ceased to exist. Fast-forward to 2009. One man, Bernard Madoff, was convicted of bilking investors out of more than $50 1 billion through a Ponzi scheme that he had perpetrated for decades. Madoff’s victims included not only naïve retirees but also some of the world’s biggest and best-known financial institutions, including the Royal Bank of Scotland, France’s BNP Paribas, Spain’s Banco Santander, and Japan’s Nomura. But ethical lapses were not limited to Madoff. Ethical problems in many financial institutions contributed to the onset of the deepest recession since the Great Depression of the 1930s. Not only did some $9 trillion in investment capital 1. A Ponzi scheme is a type of illegal pyramid scheme named after Charles Ponzi, who duped thousands of New England residents into investing in a postagestamp speculation scheme in the 1920s. SECTION 1 BUSINESS ETHICS As you might imagine, business ethics is derived from the concept of ethics. Ethics can be defined as the study of what constitutes right or wrong behavior. It is a branch of philosophy focusing on morality and the way moral principles are derived. Ethics has to do with the fairness, justness, rightness, or wrongness of an action. Business ethics focuses on what is right and wrong behavior in the business world. It has to do with how businesses apply moral and ethical principles to situations that arise in the workplace. Because business decision makers often address more complex ethical issues than they face in their personal evaporate, but millions of workers lost their jobs. The point is clear: the scope and scale of corporate unethical behavior, especially in the financial sector, skyrocketed in the first decade of the twenty-first century—with enormous repercussions for everyone. The ethics scandals of the last fifteen years have taught businesspersons all over the world that business ethics cannot be taken lightly. Acting ethically in a business context can mean billions of dollars—made or lost—for corporations, shareholders, and employees and can have farreaching effects on society and the global economy. lives, business ethics may be more complicated than personal ethics. Why Is Business Ethics Important? All of the corporate executives who are sitting behind bars could have avoided these outcomes had they engaged in ethical decision making during their careers. As a result of their crimes, all of their companies suffered losses, and some, such as Enron, were forced to enter bankruptcy, causing thousands of workers to lose their jobs. The corporations, shareholders, and employees who suffered because of those individuals’ unethical and criminal behavior certainly paid a high price. Thus, an indepth understanding of business ethics is important to the long-run viability of any corporation today. 76 Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C HAPTE R 4 77 Ethics and Business Decision Making It is also important to the well-being of individual officers and directors and to the firm’s employees. Finally, unethical corporate decision making can negatively affect suppliers, consumers, the community, and society as a whole. At the end of every unit in this book, a series of ethical issues will be presented in features called Focus on Ethics. In each of these unit-ending features, we expand on the concepts of business ethics that we present in this chapter. The Moral Minimum The minimum acceptable standard for ethical business behavior—known as the moral minimum—is normally considered to be compliance with the law. In many corporate scandals, had most of the businesspersons involved simply followed the law, they would not have gotten into trouble. Note, though, that in the interest of preserving personal freedom, as well as for practical reasons, the law does not— and cannot—codify all ethical requirements. As they make business decisions, businesspersons must remember that just because an action is legal does not necessarily make it ethical. For instance, no law specifies the salaries that publicly held corporations can pay their officers. Nevertheless, if a corporation pays its officers an excessive amount relative to other employees, or relative to what officers at other corporations are paid, the executives’ compensation might be challenged as unethical. (Executive bonuses can also present ethical problems—see the discussion later in this chapter.) “Gray Areas” in the Law In many situations, business firms can predict with a fair amount of certainty whether a given action would be legal. For instance, firing an employee solely because of that person’s race or gender would clearly violate federal laws prohibiting employment discrimination. In some situations, though, the legality of a particular action may be less clear. In part, this is because there are so many laws regulating business that it is increasingly possible to violate one of them w...
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