Craig's Corner For Counsel: Class Arbitration And Shareholder Disputes

This month we dig into alternative dispute resolution (ADR), including class arbitration of shareholder disputes, with an interview with Thomas H. Oehmke, the author of the four-volume Commercial Arbitration 3rd. Oehmke has served 33 years in private practice as outside corporate counsel, litigator, mediator and arbitrator. Living in Northport, Michigan, and Key Largo, Florida, he claims to be a "recovering attorney," allowing him to be selective about his law work while serving as an expert witness in arbitration-related litigation. With his spouse, attorney Joan M. Brovins (litigator and former general counsel at a national steel company), he has published more than a dozen law books, including revising five volumes of Williston on Contracts 4th. The couple also updates Commercial Arbitration 3rd three times per year. Tom recently shared some insights with The Metropolitan Corporate Counsel .

Craig Miller: Tom, how did corporate counsel meet up with class arbitration?

Tom Oehmke: Class arbitration snuck up on the corporate community. Before 2003, "class arbitration" was an oxymoron. Then, the U.S. Supreme Court decided Bazzle , pulling a rabbit out of the hat. The Supreme Court ruled that the Federal Arbitration Act (FAA) did not foreclose class arbitration: unless specifically prohibited, a future disputes arbitration clause allows class arbitration. It is the arbitrator - not the judge - who, as the gatekeeper, applies state law to determine if class arbitration is prohibited.

Craig Miller: How did corporate counsel react?

Tom Oehmke: Some corporate counsel were relieved because they could contain costs and legal fees better in arbitration than in the free-wheeling litigation environment. Other corporate counsel quickly rewrote arbitration clauses for future consumer disputes to prohibit class arbitration. "Better the devil we know, than the devil we don't know," they thought. Some state legislatures weighed in on class arbitration, while some appellate counsel argued a prohibition of class arbitration was unconscionable. Opt-out remains the general rule: class arbitration is permitted unless prohibited.

Craig Miller: So how do you assess the corporate attitude toward class arbitration?

Tom Oehmke: Litigation is uncertain. Progress is at a turtle's pace. Discovery is a costly adventure. Outcomes can depend on the judge drawn and the jurors selected. Arbitration is more expeditious, though not necessarily less expensive. A key advantage is that corporate counsel can massage that process. Adding step-by-step ADR procedures - negotiation and mediation before arbitration - can prompt dispute resolution.

Craig Miller: How can class arbitration affect shareholder disputes?

Tom Oehmke: Shareholder derivative actions may be next for arbitration. For publicly traded companies, the SEC historically has snubbed shareholder arbitration. But the SEC is taking a fresh look. If listed companies in the future can require arbitration of shareholder disputes, then corporate concerns about privacy, speed and economy might drive listed corporations to amend their articles of incorporation and bylaws. They could require all disputes involving shareholders, officers and directors to be resolved through ADR. While this is a possibility for most private corporations, listed companies may find ADR advantageous in resolving shareholder disputes.

Thanks to Thomas H. Oehmke, author of Commercial Arbitration 3rd, available at west.thomson.com.

Published August 1, 2007.