Phased ADR Clauses, Redux

by Andrew Flake

Having discussed phased dispute resolution, a process in our contracts that moves from more informal modes of discussion to binding ones, like arbitration, let’s add some caveats. These provisions are not off-the-rack suits, to be draped over any, or every contract, or a magic conflict sponge, soaking up every puddle of discord. They need to be tailored, and they can themselves, especially if not stitched with care, give rise to additional litigation.

What are some of the ways this can happen? I’d categorize them as questions of condition precedent, i.e., whether they are binding at all; questions of access to the courts; questions of activation or triggering; and questions of tactical use or delay.

Let’s look at each of these categories, and to assist, we’ll take a clause that Judge Orrick in the Norther District of California considered in an ongoing patent dispute between Siemens affiliates and one of its licensors, Synopsis, Inc. The patent licensing agreement encouraged certain senior representatives to have a discussion and then

If the parties are not able to reach an amicable settlement pursuant to Section 10.4.1 they shall try to agree on an appropriate alternative dispute resolution (ADR) proceeding (for example mediation, conciliation, expert determination, dispute board, adjudication). If they do not reach agreement on the appropriate ADR proceeding within fourteen (14) days after failure of the settlement negotiations or if the dispute is not settled through ADR proceeding within a period of two (2) months after initiation of the ADR proceeding either party may initiate [a New York-seated arbitration under ICC rules)

Are the early steps required? Some clauses encourage ADR alternatives, and others require them. In the Siemens case, looking to the phrasing “if the dispute is not settled…then either party may initiate,” the court determined it was mandatory. Because the parties were in the process of, but had not completed, their settlement negotiations, the judge refused to stay the pending litigation. Other courts, based on other precedent, have been stricter, looking to whether the clause explicitly says it is “mandatory” or uses the term “condition precedent.” Including those terms is certainly a means to make the steps required, if that is the parties’ objective. Another means is to create requirements that are definite: specific means, specific procedures, and specific deadlines (in the Siemens agreement, the 14-day or 2-month timeframes). The point is to be aware of the condition precedent concept.

If it is not satisfied, a court may find, as the Northern District did, and the First and Eleventh Circuit have in cases the opinion cites, that the FAA does not yet even apply, permitting litigation to move forward. Also, as with any condition precedent, it can also be waived, so if such a clause exists, make sure to invoke it at the earliest opportunity.

I see these clauses come up not infrequently in arbitrations, and for an arbitrator, it is important to establish, if there is a condition precedent, that the parties understand it has been satisfied. The consequences of not doing can be extreme: vacatur of an otherwise confirmable award. See, e.g., White v. Kampner, 229 Conn. 465, 479, 641 A.2d 1381, 1387 (1994) (vacating award for Plaintiff because required two negotiating sessions had not occurred).

The Proverbial, and Actual, Petard

Activation or Triggering: The other side of this coin is when a party wants to move forward with arbitration but cannot, because some other requirement in the clause has not been activated. This is frequently a notice, demand, or written request. Look carefully at not only the steps in the clause, but how they must be noticed, and whether other requirements exist, and comply strictly with them. In the Connecticut case I cited, in which an arbitration award was vacated, complying would have been as easy as scheduling two negotiation sessions. Where such requirements exist, as lawyers moving toward arbitration, we should make sure to document our effort, confirming that the other side does not object to proceeding.

Whether other relief is available. There are obviously times when fast action is critical. A TRO or preliminary injunction may required, and rapid resort to the courts or to emergency arbitral relief is essential. In those instances, we don’t want the condition precedent argument to take precedence, so it would be wise to consider a limited carve-out.

Tactical use of clauses or delay. Here’s another issues of timing: Can a clause be crafted with too much detail, and so many involved pre-arbitration steps, that it gives an opponent a means of slowing down a dispute process? Absolutely. As with all of these clauses, think through the kinds of disputes that will occur. Now, if what is going on is bad faith, that’s something different; I think any court would be likely to reject an attempt at invoking a condition precedent in a way that appears unfairly tactical or in bad faith. But let’s not be hoist by our own petard, creating a phased process that is too lengthy or too cumbersome to be practical.

I still really like the phased approach, don’t get me wrong. We just have to be thoughtful in how we approach them, and the circumstances in which we do approach them are often far from straightforward.

[The case is Synopsys, Inc. v. Siemens Indus. Software Inc., 20-CV-04151-WHO, 2021 WL 1238309, at *1 (N.D. Cal. Apr. 2, 2021). The two Court of Appeals cases cited by the District Court in the Siemens-Synopsis dispute are Kemiron Atl., Inc. v. Aguakem Int’l, Inc., 290 F.3d 1287, 1291 (11th Cir. 2002) and HIM Portland, LLC v. DeVito Builders, Inc., 317 F.3d 41 (1st Cir. 2003).]

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