Case Study: Why You Should Approach Arbitration Like It’s Litigation

I recently worked with an out-of-state client who is a graphic designer. My client, we'll call her Jane, worked as an independent contractor for a large manufacturer of gift items, such as mugs and t-shirts.

This company, we'll call them The Company, had filed an arbitration demand seeking to terminate its relationship with her. The relationship had been going south for several months and, although I never quite understood why, The Company wanted a legal determination that the relationship was over and done. Jane contacted me because she wanted a lawyer to make sure she was properly defended in the arbitration process.

When Jane first explained her story, I thought she might have more than a defense against the arbitration demand. She told me that one of the issues was that The Company wasn't paying their agreed percentage. She also thought they had been using her copyrighted designs without permission. If either one of these claims turned out to be true, Jane could have a counterclaim and possibly win damages instead of just trying to defend herself. Perhaps her best defense would be a strong offense.

The ironic thing is that Jane wouldn't have likely filed a counterclaim if The Company hadn't forced her into arbitration. Jane wanted more than anything else to be finished with The Company and their demand for arbitration. She had no idea she could have money coming her way.

I had Jane send me the contract and all the emails, etc., between her and The Company. My staff and I sorted through all of the paperwork as well as years worth of emails and other correspondence. This gave us a clear, fact-driven picture of what was supposed to happen versus what actually happened. Long story short, the owner of The Company seemed to think he could change the terms of the contract without Jane's consent and whatever he decided became law. For example, their contract stipulated a 10% commission on Jane's designs but The Company only paid her 8%.

When confronted with the fact that they had been underpaying Jane, The Company claimed Jane waived her rights by accepting less than she was entitled to and thus couldn't sue for damages now.
We researched the laws related to commission payments and were able to show the arbitrator that, in fact, the law states that accepting less than she was due did not constitute a waiver of her rights.

I also put Jane in touch with a financial damages expert I've worked with before who I knew would carefully go through the contract and put numbers to her counterclaim. Not only would he find every penny she was owed but his findings would likely carry more weight with the arbitrator than numbers Jane pulled together herself.

The Company and their lawyers did not take Jane's counterclaim nearly as seriously as they should have. Either they did not understand Jane's case or they thought she was bluffing about pursuing damages.

So what happened? The Company got the severed relationship they wanted and Jane got a hefty seven figure award from the arbitrator.

Arbitration seems to have a reputation as less consequential than filing a lawsuit and going to court. Arbitration is like a jury trial-it is, in essence, a hearing/trial before an arbitrator instead of a judge. In arbitration the arbitrator's decision is final whereas a judge's decision can be appealed. An arbitrator is like a private judge hired by both parties to make a decision.

Jane's contract itself provided a clause for arbitration, inserted by The Company perhaps with the thinking that an arbitrator is quicker and less expensive than a civil trial. In a case such as this, you need an attorney who understands that arbitration needs to be dealt with as if it were litigation and who approaches your case as if you are going to trial because, essentially, you are.

Although it's a rare case where the defending party gets a large settlement they didn't anticipate, in other ways this case is not all that unique. What happened here was that the president of The Company was so focused on what he wanted and what he thought was the law that he didn't consider the situation objectively. He thought they were in control and calling the shots. Frankly, Jane thought he was in control too. But by hiring an experienced attorney, Jane got a fresh set of eyes and was able to look at the situation objectively. Arbitration, like litigation, is all about thorough planning and preparation.