Sunday, June 14, 2009

Litigation vs. Arbitration: A Primer, Particularly for International Companies, Part I

By John L. Watkins

Many business people do not understand the difference between proceedings in court (lawsuits) and the most commonly used alternative dispute resolution proceedings, mediation and arbitration. This post (which will appear in two parts) will briefly address mediation, but will focus on the differences between court proceedings and arbitration. This post will hopefully be useful to all business people, but also focuses on some particular concerns of international companies.

Our firm's litigators are of course familiar with the civil litigation process, but also have considerable experience in arbitration and mediation, and can be consulted for more specific information.

The Civil Litigation System

Private parties have always used lawsuits to settle business and other disputes. Civil litigation begins with one party filing a pleading known as a “complaint” (in some states it is called a “petition”) against the other party. The complaint sets forth the background of the dispute and the basis for the claim. The party filing the complaint is known as the “plaintiff.” A copy of the complaint is “served” (delivered) to the other party, known as the “defendant.”

The civil rules (which vary somewhat depending on the court) provide a certain period for the defendant to file a responsive pleading, known as an “answer.” The answer admits or denies the allegations of the complaint, and may set forth additional defenses. The defendant may also include its own claims (known as “counterclaims”) against the plaintiff.

If the defendant fails to answer the complaint in the required period of time, the defendant becomes in “default” and may have a default judgment taken. This means that the defendant loses -- without the plaintiff having to prove anything on the merits -- simply because an answer was not filed in time.

Assuming that the parties file timely pleadings, the case then proceeds to “discovery.” Discovery refers to the information exchange process. The civil rules generally provide for (1) compelling the other party, or third parties, to produce documents ("documents" include electronically stored information), (2) requiring the other party to answer written questions, called “interrogatories,” under oath, and (3) taking sworn oral statements, known as “depositions,” from potential witnesses, who may be affiliated with the other party or not. The civil rules provide a number of ways, if necessary, to compel discovery from the other party or third parties. Courts may also assess attorney’s fees and potentially other sanctions against parties failing to provide discovery.

In general, the scope of discovery has been viewed as very broad, based on the theory that the facts ought to be freely available to both parties before trial. This broad scope of discovery has been one of the most controversial aspects of the civil litigation process. Critics of the process complain that discovery is too intrusive, too time consuming, and too expensive. Critics suggest that discovery has become nothing more than an end unto itself which becomes the focus of lawsuits, instead of getting to the merits of the dispute. Critics also argue that discovery has become a weapon used by lawyers to bludgeon the other party into settlement rather than a means to gathering necessary information.

The issues regarding discovery have become compounded, particularly in the federal court system, by the rise of “e-discovery.” “E-discovery” refers to the discovery of electronically stored information, including emails, instant messages, and other information. Because the use of email and other electronic communications techniques has become party of every day business life, the process of gathering and retrieving electronically stored information can greatly add to the costs associated with discovery. There are many computer consulting firms who now provide services to lawyers and their clients about managing e-discovery.

In addition, because simply the possibility of being required to produce electronic information is a given, and because the potential sanctions for having deleted electronically stored information are great, lawyers and consulting firms also advise clients regarding electronic information policies and technical solutions for managing and storing data.

There have been efforts to limit wide-ranging discovery. One of the most frequent complaints about the discovery process is that parties will seek information regarding other transactions or matters that do not appear directly relevant to the dispute. The Federal Rules of Civil Procedure, which apply to lawsuits in the federal court system, have been amended to include rules that -- on their face at least -- contain mandatory limitations on such discovery.

Even without the new limitations, the Federal Rules and analogous state rules have always provided judges with the ability to limit and control discovery. In fact, there is little doubt that the Federal Rules -- originally conceived at a time when the courts were less burdened that today -- assume that there will be active judicial management of discovery from the outset.

The problem is that, at least in most courts, active judicial management does not happen. Further, despite the new mandatory limitations on discovery, most judges have so far seemed to ignore them and proceed as they always have. In most courts, this means that the lawyers are left to “work it out” without substantial guidance from the court. Litigation attorneys are by training and general disposition vigorous advocates who press the positions of their clients. As a result, discovery disputes often occur, resulting in formal motions to compel and more expense.

There is no doubt that judges seem to have a loathsome view of any discovery issue. The issue has often become acrimonious by the time the lawyers get in front of the court. In such instances, many litigators have observed that judges handling a discovery dispute just seem to get mad, and often at the wrong party. Eventually, however, there will finally be a ruling, perhaps with attorney’s fees or other sanctions, and the process will continue. Often, there is a second or even a third round about whether a party has complied with the court’s order.

As a footnote, proceedings do not always happen this way and they do not have to be that way. On occasion, I have had the opportunity to practice in front of judges who become actively involved in discovery, or who will take a telephone call to resolve disputes between counsel informally. In the instances where judges will make themselves available, the chances for a full blown discovery dispute (and the resulting costs) are much less. It is not surprising, because those judges are applying the rules as they were intended.

Following the discovery process, the lawyers will usually need to prepare a pretrial order, which is a detailed document that governs the conduct of the trial. The specificity of this document varies from court to court. In the federal system, it is not unusual for the document to be so detailed that it essentially requires the parties to diagram the trial on paper. Needless to say, this can also be an expensive process.

At the end of the day, the case will be tried. Most cases will be tried to a jury. Potential jurors are simply citizens summoned to play a role in the judicial system. A juror cannot be related to a party or employed by a corporate party, but, generally, there are very few qualifications. There is no requirement that a juror have a basic level of general education, much less know anything about the subject matter of the dispute.

The parties will have a limited number of “peremptory challenges” for jurors, meaning that they can remove potential jurors they believe might tend to favor the other side. Some lawyers will use their strikes to eliminate any jurors who may have relevant knowledge of the issue at hand.

The case will then proceed to trial. Each side’s lawyer will get to make an opening statement regarding what they believe the evidence will show. Then the party’s present their witnesses and documentary evidence. The plaintiff goes first, and the defendant follows. At various points, there may be motions to the judge (such as following the plaintiff’s case or following the presentation of all the evidence) to “direct a verdict” for a party. Usually, these motions fail. The lawyers will then make closing statements to the jury. The judge will then “instruct” the jury on the law applicable to the dispute, and may frame the issues the jury is to decide.

The jury will then meet alone to make a decision. The jury may find for the plaintiff and award damages (money) to the plaintiff. The jury may render a “defense verdict,” meaning that it finds no liability on the party of the defendant. If the defendant has a counterclaim, the jury may find for the defendant on the counterclaim and award the defendant money.

The jury may also, in some cases, determine that there is reason to impose “punitive damages.” Punitive damages are, in essence, a monetary fine or penalty designed to punish the defendant and are meant to deter future misconduct. Punitive damages require proof of more than negligence or gross negligence. In Georgia, punitive damages must generally be based on willful misconduct or a "conscious indifference" to the consequences of its actions.

Punitive damages are normally imposed only in a two step process, meaning that the jury first has to decide whether to impose punitive damages. If the jury finds punitive damages are warranted, then there is further evidence and proceedings, and the jury will have to meet again to decide how much to award.

After a jury award is made, it is made the “judgment” of the court, which is, in effect, an order for a party to pay money. A judgment can be enforced through various mechanisms, such as “garnishing” the party’s bank account or wages, or by “levying” on the party’s assets (seizing them and selling them to satisfy the judgment).

There may also be an appeal. If there has been a money judgment, in some instances, enforcement of the judgment will be stayed pending the appeal, although this may require the losing party to post a bond.

So, there you have it: How a lawsuit runs its course from the filing of the complaint to the judgment. Usually, civil litigation is a slow process, taken one to two years or more. However, the length of time depends on the court. Some courts move faster than others and may decide a civil case in a matter of months.

Because of the time and expense involved, most lawsuits settle. Statistics routinely show that ninety-five percent (95%) or more of lawsuits settle.

Some Observations for International Companies

I have had the good fortune of representing a large number of international companies or their U.S. subsidiaries in connection with litigation or possible litigation in the U.S. I have also given seminars on various aspects of the U.S. legal system to international audiences. I have thus had many opportunities to discuss the U.S. legal system to many international business people. (Actually, it must be remembered that each state largely has its own legal system, but the comments here are of more general application).

International business people tend be particularly surprised about the following aspects of our legal system:

The Scope of Discovery. International business people are often surprised to find that the scope of discovery includes their emails, internal meeting notes, and their personal notes. As a general matter, if a document is within the scope of discovery, and if it is not part of an attorney/client communication or specifically prepared in anticipation of or in reference to litigation, it will probably be found discoverable.

Contingency legal fees. In the U.S., it is often permissible for lawyers to take plaintiff’s cases based on a percentage (typically 33-40%) of the settlement or judgment they collect.

Generally, no “loser pays” rule. Generally, the “American rule” is that each side to a dispute will bear its own attorney’s fees. Although there are exceptions to this rule, it holds true in many instances. Conversely, in many other parts of the world, a party that brings an unsuccessful suit is bound to pay the other side’s legal fees.

The jury system. International business people tend to be surprised (if not a little appalled) that citizens off the street are permitted to decide complicated business or product liability disputes about which they have no experience. This fear is heightened when it is known that the other side will probably try to eliminate anyone from the jury with any knowledge. The concern is that an important decision will be made out of ignorance, and probably based on sympathy for one party or the other.

Punitive damages. The prospect of large punitive damages is frightening to many international businesses. It is often impossible to insure against such an award, and a large punitive damages award might put a smaller company out of business. Although there have been efforts to reform punitive damages in many states, and although the U.S. Supreme Court has recently established some limitations on punitive damages, this is a valid concern.

Elected state court judges. In many states, judges in the state court system are elected. Because they are elected, such judges need to raise money to fund their campaigns. Local lawyers or law firms, as well as businesses, are often heavy contributors. This raises concern about whether such judges will act fairly, particularly in cases involving “outsiders.” It should be noted that judges in the federal system are appointed by the President and confirmed by the Senate, essentially for life. As a result, if an international company is sued in the U.S., the company will typically try to “remove” (transfer) the case to federal court.

Conclusion of Part I

In this Part, we have outlined how cases proceed in litigation. We have also discussed some concerns about the litigation process, particularly for international companies. In the next Part, we will briefly discuss mediation. Then, we will focus on arbitration, how it proceeds, and compare it to the litigation process.

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