Arbitration, if properly managed by the parties in their arbitration clause and by the parties and the arbitrator once the dispute gets into arbitration, can be less expensive and more time efficient than litigation. It also allows the parties to select an arbitrator who is knowledgeable about the healthcare industry, avoids the risks inherent in jury trials, and provides for confidentiality. The parties can design practically any kind of reasonable process they want, subject to legal requirements such as due process and fairness. Truth be told, if parties wind up with a bad arbitration experience, they probably drafted a bad arbitration clause.
The use of arbitration clauses, and the importance of including the right provisions in those clauses, is important now and will become even more so as the healthcare industry continues its rapid pace of change. This article considers several key provisions in an arbitration clause that a transactional lawyer needs to have in mind when drafting dispute resolution provisions in order to avoid major problems down the road. This article will identify those key provisions, with examples of how clients fared when their disputes got into arbitration in light of the differences in their arbitration clauses.
The first step is to start with a basic arbitration clause, which can be found on the websites of leading arbitration institutions.
The following is a classic and solid example:
Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in [insert the desired place of arbitration] before [one/three] arbitrator(s). The substantive law of the [State of ____] shall govern, and in accordance with the [Federal Arbitration Act/State Arbitration Act]. The arbitration shall be administered by [JAMS/AAA/another administrator] pursuant to its [specify the Rules, e.g., Comprehensive Arbitration Rules and Procedures]. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction.1
This clause (1) provides that the arbitrator will make determinations as to arbitrability and eliminates the risk of having to detour back and forth to the courts just to get started; (2) designates the number of arbitrators; (3) requires selection of the applicable substantive law and procedural rules; (4) requires designation of an administering organization; (5) confirms broad enforcement jurisdiction; and (6) allows access to a court for provisional remedies without waiving arbitration.
In the context of healthcare industry transactions, what can counsel do to tailor a general arbitration provision such as this to provide for an efficient and fair dispute resolution process?
Clearly Specify How the Arbitration Will be Managed
Select an arbitration institution that has a panel of arbitrators, preferably full-time arbitrators, who are knowledgeable about and have a track record of handling healthcare disputes. While so-called “self-administered” arbitrations (arbitrations administered directly by the parties with an arbitrator without using an arbitration institution) can save administrative fees, they put arbitrators in the unenviable position of becoming case managers, which can become problematic when issues arise, such as motions to disqualify an arbitrator or fee disputes. The institution one selects will generally determine the rules that will control the arbitration, so it is important to review the rules of the institutions being considered. Select one institution rather than offering an option.
Example of a problem: The arbitration clause provided that “any and all disputes, claims or controversies arising out of or relating to this agreement shall be resolved at the request of any party hereto by final and binding arbitration before either JAMS or, alternatively, the AAA.” The parties filed dueling demands, one with each institution, and spent weeks arguing about which institution has jurisdiction. The arbitral institution in which the second filed arbitration was pending declined to proceed unless ordered to do so by a court. The second-filing party is still threatening to take the matter to court. This resulted in delay, expense, and increased animosity between the parties, giving them yet something else about which to fight.
Specify an Arbitrator Selection Process to Ensure Knowledgeable, Neutral Arbitrators
There are three issues here: how many arbitrators, what qualifications should they have, and how to select them.
- Specify whether there will be one arbitrator or three. Or, alternatively, provide for three arbitrators only if the amount in controversy exceeds a certain threshold and the matter involves complex issues.
- Specify the qualifications of the arbitrators if subject matter expertise is important. But remember, the more specific the requirements, the smaller the arbitrator pool. Too small a pool may leave the parties with arbitrators who otherwise are not to their liking, or not readily available in the chosen venue. And while detailed prerequisites might be appropriate for the most common disputes likely to arise between the parties, different types of experience might be more suited for other disputes that occur. Depending on the nature of the transaction, it may be more important to have an experienced full-time arbitrator who knows how to run an efficient arbitration than someone with detailed subject matter expertise. A complex and/or contentious dispute needs a managerial arbitrator who will take responsibility for moving the dispute to resolution as efficiently as possible, while preserving the parties’ due process rights to a fair and effective prehearing and hearing process. One is well-advised to look for an arbitrator with some amount of healthcare experience but also one that is a full-time and well-credentialed arbitrator.2 An arbitration hearing is not the time to be educating an arbitrator on the healthcare industry and its complex regulatory structure.
- For arbitration panels, use a strike and rank procedure for all three arbitrators, rather than designating party-appointed arbitrators who are then required to select a chair. This promotes maximum transparency and neutrality and avoids disagreements that prolong the selection process. Some counsel prefer a process that allows each party to select one arbitrator because the party likes the “security” of knowing that it will have an arbitrator of its preference. Party-appointed arbitrators, however, may appear less neutral in the eyes of the other party, giving rise to concerns about neutrality and transparency throughout the arbitration. Party-appointed arbitrators also risk creating friction within the panel. If party-appointed arbitrators are going to be used, be sure to designate the process to be followed for selecting a chair; if the arbitrators are tasked with that responsibility, set time limits and identify the process that will be followed if they cannot agree.
Example of a problem: An arbitration clause specified an arbitration institution’s procedural rules but did not call for administration by that institution, so the arbitration was self-administered. The two party-appointed arbitrators were required to select a chair, but could not agree, and there was no provision for what would occur in that instance. In the absence of an institutional administrator to assist in selection, the party-appointed arbitrators each identified their top choice for chair, who was chosen by whether the next day’s Dow Jones average ended with an odd or even number, per the compromise reached by counsel. While the parties agreed to this method, the drawing of lots is certainly a less than satisfying means of choosing the person who will preside over an arbitration.
Limit or Expand the Authority of the Arbitrators, Including Remedies, to Fit the Transaction
Check the applicable law, the Federal Arbitration Act (FAA) or the applicable state arbitration act, and rules to understand the scope of an arbitrator’s powers.3 The JAMS rules, for example, provide that the arbitrator “may grant any remedy or relief that is just and equitable and within the scope of the Parties' agreement, including, but not limited to, specific performance of a contract or any other equitable or legal remedy.”4 The arbitrator’s authority should be as broad as reasonably possible to ensure appropriate resolution of the issues identified as being subject to arbitration, and to avoid a ping pong game of bouncing between court and arbitration if the arbitrator’s authority is too narrowly circumscribed. Parties should also consider whether to include a provision regarding the award of attorney fees and costs to a prevailing party. Under the so-called American rule,5 unless specifically provided for in a statute or the parties’ agreement, each party bears its own fees and costs. In drafting an arbitration clause, some parties also choose to prohibit arbitrators from awarding punitive damages.
Example of a problem: Under some state arbitration statutes, the arbitrator may issue third-party discovery subpoenas, and the federal circuit courts are divided on the issue of whether the FAA permits third-party discovery subpoenas.6 Failure to specify the governing statute has often led the parties to spend time and fees arguing over whether third-party discovery subpoenas were contemplated by the arbitration clause.
Specify Choice of Law and Venue
The transaction documents presumably provide the law governing the transaction, but that need not determine the venue of an arbitration should a dispute arise. For instance, Delaware law may have been selected to govern the merger or acquisition, but if all of the parties and their witnesses are in California, Texas, or France, Delaware is not a convenient venue for an arbitration. For contracting entities with locations in multiple states, consider having venue provisions tied to the locale of particular transactions or facilities, if that is where the witnesses are likely to be. Choice of law and venue disputes can be complicated to resolve.7
Also, think about whether the FAA or state arbitration acts will govern the proceedings. For example, while parties generally are not able to expand the bases for vacating arbitration awards beyond the grounds set forth in the FAA, under state law arbitration clauses may broaden the scope of judicial review to include mistakes of law or legal reasoning. However, this comes at the cost of efficiency and finality.
Example of a problem: The parties provided that “An Award is subject to challenge on the grounds that the Arbitrators exceeded their powers by making a mistake of law or legal reasoning. The Court shall have jurisdiction to review, and shall review, all challenged findings of law and legal reasoning based upon a de novo review."
This clause resulted in a year-long judicial proceeding following the arbitration. Arbitration finality, “get it decided and move on,” is of value to businesses that need finality and clarity about their contract disputes, and can be sacrificed by adding on extra judicial review.
Consider What Discovery Will Be Permitted
Both the JAMS and AAA rules8 provide for pre-hearing exchanges of information and, in the case of JAMS, specifically provide for at least one deposition per side. Neither of those institution’s rules specifically address interrogatories or requests for admission. Under the institutional rules, arbitrators have broad discretion to manage the discovery process, and parties are well served working with the arbitrator to determine the scope and staging of discovery best suited for a particular case, including the number, timing and sequence of depositions and various forms of written discovery.
Example of a problem: The arbitration agreement provided that discovery would be conducted under the terms of the state’s code of civil procedure. Discovery is generally the single biggest cost in litigation, and this type of clause effectively permits almost unfettered discovery by the parties, negating the cost and efficiency benefits that arbitration provides. Moreover, without agreement of the parties, an arbitrator is extremely limited in his or her power to control the discovery – and thus the cost and duration of the arbitration process – where such a clause is present.
Design a Hearing Procedure that Matches the Needs of the Dispute
Arbitration provides contracting parties with the benefit of being able to design the arbitration process in a way that best fits their needs. But there is a risk that too much detail can be counterproductive. What works best for a dispute over the terms of a merger and acquisition may be very different from the process that is best suited for a reimbursement dispute. The best choice may be to select the arbitral organization and rely on its rules. The selected arbitrator can then work with counsel to fashion a process that fits the dispute. For example, for reimbursement claims, a process that uses spreadsheets grouped by issues, provides for the use of use sampling (using representative samples of claims in lieu of having to introduce all claims in a case involving hundreds of claims), or focuses in an initial phase on high dollar claims may be the most effective means of having the dispute heard in a timely and efficient manner. The best means of presenting the evidence, especially where numerous claims are involved and expert testimony is likely, is something that can be developed through conferences with the arbitrator. Likewise, a dispute arising out of a merger and acquisition or joint venture may benefit from a session at which the lawyers and experts participate in a discussion, but in an information-exchange format rather than an adversarial cross-examination format.
Example of a problem: Counsel refused to agree to present evidence through spreadsheets or sampling in a reimbursement arbitration involving more than 200 claims. As a result, a claims consultant spent many days testifying to the math involved in each claim, and often discovered calculation errors. This could have been handled through a more efficient process, but the arbitration clause did not provide for it, and by the time the dispute reached arbitration the parties were not willing to agree on anything.
Carefully Craft Any Multi-Step Dispute Resolution
Consider whether to include in the arbitration clause a requirement that the parties first have meetings of senior decision-makers in an effort to negotiate a resolution before proceeding to arbitration. If such provisions are included, be sure to specify by position or category which officials will be involved, and set a deadline for those communications to take place. Consider also providing that the parties agree that they are open to participating in a mediation at some point in the process. While some clauses require mediation before an arbitration may proceed, in complicated matters a mediation may be more productive if there is some discovery and/or exchange of information beforehand.
Example of a problem: The arbitration provision stated that “No arbitration shall be commenced until representatives from each party have negotiated in good faith in an effort to resolve the dispute.” Following the filing of the arbitration demand, the proceedings were delayed by a dispute over how much negotiation had to take place to fulfill the precondition and whether the conduct of the parties fell short of the “good faith” efforts that were required. This issue had to be briefed by the parties, causing extra expense and delay that could have been avoided with more careful drafting.
Specify the Type of Award That the Arbitrator Must Issue
Although historically many arbitration awards contained nothing more than the “bottom line,” it is more typical now for parties to expect and arbitrators to issue reasoned awards. This allows the parties to understand how a decision was reached, and is essential if the parties are to include errors of law as a basis for vacating an award. It also provides parties the benefit of guidance in the case of future disputes on similar issues, even if the award is not officially binding precedent. Some arbitration clauses call for findings of fact and conclusion of law similar to what might be issued in a judicial proceeding. However, this format requirement can make the issuance of an award more time consuming and cumbersome (and thus more costly to the parties) without providing the parties any more benefit than they would receive with a reasoned award.
Example of a problem: Following an arbitration hearing, one party requested an award that simply identified the prevailing party and stated the amount of damages awarded. The other party wanted a fully reasoned award. Each party claimed that its position had been agreed upon by counsel at the time they agreed to arbitrate. Fortunately the arbitration clause specified the applicable rules (in this case the JAMS Comprehensive Arbitration Rules) and Rule 24(h)9 resolved the issue (“Unless all Parties agree otherwise, the Award shall also contain a concise written statement of the reasons for the Award.”), avoiding a prolonged battle.
Healthcare transactions arise in the context of a complex business and regulatory environment. Arbitration offers an ideal process for resolving disputes, allowing parties to avoid the court system and juries, select arbitrators who are knowledgeable about healthcare law, keep the proceedings confidential to protect sensitive personal health and proprietary business information, and reach a resolution more cost-effectively and more efficiently than in court, allowing the parties to keep their focus on their business rather than litigation. The arbitration clause is the map that will control the who-what-where-when-and-how of the arbitration process. By paying attention to the requirements discussed above, counsel can ensure that their clients receive the arbitration process they want and need