Sarah Ferraro and I (Cole Dowsley), both commercial litigation attorneys with Thompson Burton PLLC, recently successfully defended a well-known multi-level marketing (MLM) company in an arbitration proceeding brought by a distributor of the company.
The MLM company, a leading provider of nutritional supplements and health products, faced claims from one of its distributors that the company breached its own Policies and Procedures and refused to pay the distributor certain commissions. The claimant/distributor, represented by a large international law firm, sought over $500,000 in compensation from the company in addition to attorneys’ fees and costs. The distributor asserted claims for breach of contract, unjust enrichment and declaratory relief. After nearly of a year of litigation, a final arbitration hearing lasting three days was held before an arbitrator appointed by the American Arbitration Association (AAA). After the arbitrator heard testimony from several fact witnesses and expert witnesses and reviewed the submission of numerous documents, the arbitrator determined that the company was not responsible for any damages and that the claimant should take nothing as a result. The arbitrator issued a Final Award in favor of the company dismissing all of the distributor’s claims in their entirety.
The company was, of course, thrilled with the result and relieved that its business practices were exonerated by the arbitrator. In litigation, there are a number of uncertainties. It was refreshing to see things work out the way they should. To put it mildly, it was a big victory for our client.
While most companies include arbitration provisions in their Policies and Procedures, being a part of an actual arbitration proceeding is often unknown territory. Whether facing claims from a distributor or seeking to bring their own claims for violations of their policies, MLM companies will almost certainly find themselves in arbitration at some point. The following are some common questions we get from clients:
What is Arbitration?
Arbitration is a form of alternative dispute resolution (ADR), meaning it is a way to resolve a dispute outside of the court system. Arbitration is a private process—usually required by a contract between two parties—in which a dispute is decided by an independent third party, the arbitrator. Arbitrators are typically practicing attorneys or retired/former judges that have expertise in the type of case involved.
The arbitration may be conducted by a single arbitrator or a panel of arbitrators. Arbitration is typically administered by private companies like the AAA or JAMS. Once an arbitrator is appointed, the arbitrator typically has a lot of discretion to determine how the case will progress. The arbitrator ultimately will set the case for a final hearing, similar to a trial in the court system, at which the arbitrator will receive evidence in the form of testimony from witnesses and document submissions. At the end, sometimes after taking weeks or months to review the evidence, the arbitrator will issue a final award, usually in the form of a written opinion. The decision of the arbitrator is final and legally binding.
Why are Arbitration Provisions Common in MLM Documents?
Arbitration is becoming increasingly common in different types of commercial agreements. MLM companies often include mandatory arbitration provisions in agreements with their independent distributors in order to keep the disputes confidential. Because arbitration is a private proceeding, the filings are not a matter of public record. This may be important to an MLM company who does not want to spook its customers or distributors by its involvement in often contentious disputes with past or current independent distributors. It also provides a disincentive for distributors to sling mud publicly in an effort to get a company to yield to his or her demands. Arbitrations, by design, are structured to prioritize the relevant issues.
For some businesses, arbitration is believed to be a more predictable forum for resolving business disputes than juries and the court system. Having an arbitrator with industry specific knowledge and experience decide the dispute may give the company confidence the process will be fair. It can be difficult to find a qualified arbitrator with MLM-specific experience, so often our jobs are to educate the arbitrator on the nuances of the industry.
Is Arbitration Cheaper or Faster than Traditional Litigation?
It depends. Many think that arbitration is cheaper and faster than traditional litigation in the court system; however, this is a common misconception. Our experience is that arbitration can be faster and cheaper, but oftentimes lawyers, who are accustomed to litigating lawsuits in court, attempt to treat an arbitration like a court case. This can lead to extensive written discovery and depositions and end up just as expensive and take just as long as a court case. Also, unlike the court system, the parties in an arbitration are responsible for paying the arbitrator’s compensation (they are not cheap!) and the arbitration administration fees (e.g., AAA fees). In state or federal court, taxpayers cover most of those costs. In arbitration, the litigants pay.
The appeals process is one way that arbitration is cheaper and faster than the court system. The avenues to appeal or challenge an arbitrator’s final award are very narrow and courts are reluctant to modify or overturn a final arbitration award. Also, scheduling a final arbitration hearing can be much easier and faster than dealing with court schedules that most likely have a backlog of trial dockets.
What Else Do I Need to Know About Arbitration?
Contractual clauses providing for arbitration may not always be enforceable. It is important that an arbitration provision is drafted so that it complies with certain state and federal statutes regulating arbitration. This is where having a skilled attorney drafting your policies can save you considerable costs and frustration in the future.
Even if the provision is enforceable, arbitration may not be the best dispute resolution method for every business. The rules of civil procedure and/or evidence do not apply in arbitration, unless it is specifically provided for in the arbitration agreement. This can give the parties more flexibility, such as submitting documents without worrying about typical evidentiary hurdles. At the same time, however, lawyers may be hamstrung by the inability to conduct discovery, such as taking depositions and subpoenaing witnesses and documents. Attorneys will likely head into a final arbitration hearing without knowing all of the evidence or without knowing exactly what witnesses will say. It is important, therefore, that you have experienced counsel to navigate the arbitration process.
The firm has served as counsel to MLM/direct sales companies in arbitration proceedings across the country concerning violations of policies and procedures, unfair competition, cross-recruiting, non-competition, and sales organization raiding. Our firm accepts MLM disputes and other complex business cases on an ongoing basis. We have a pretty good handle on the process. Based on experience, we see larger companies make the mistake of retaining counsel at larger firms thinking it’ll lead to better outcomes. In our view, this is not always the best route.
We’re open for business. If you need help with arbitration, reach out.