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Arbitration and what it means for document preservation

In arbitration, the balance generally tips in favor of efficiency over comprehensiveness

Before inking the contract, you did everything a general counsel should do: You got a good handle on the relationship between your company and the other party, you consulted with outside counsel about traditional and alternative dispute resolution mechanisms, and you asked the appropriate division manager within your company what disputes might crop up during the project. Concerned about keeping your legal spend in check, you opted for an arbitration clause with a pre-arbitration mechanism requiring senior executives on both sides to meet and negotiate in good faith before proceeding to arbitration. According to your outside counsel, yours was the gold standard in dispute resolution provisions: effective, efficient, and sure to avoid the time-consuming, unpredictable and distracting vicissitudes of litigation.   

When a dispute eventually arose, you were on the ball. You alerted outside counsel, you promptly interviewed your division manager and key line staff, you brought your CEO up to speed, and you retained outside counsel. When your CEO and CFO asked you to review the dispute resolution process, you said that while it would not be without pain, it would at least be efficient and cost-effective. You then helped your CEO prepare for face-to-face negotiations with his counterpart, and you even had a cordial chat with the general counsel from the other side about the benefits of arbitration, including the freedom to dispense with the distracting and expensive chore of litigation holds. When pre-arbitration negotiations did not yield a settlement, you were disappointed but at least comfortable that the arbitration process would move along swiftly and cost-effectively.

Imagine your shock, then, when your outside counsel informs you that the other side just filed a request with the arbitral panel to sanction your company for destroying emails. They argue that while substantive issues could play out under the more relaxed arbitration discovery standards, the email preservation rules that have become so engrained in litigation are fully applicable in arbitration. Your off-the-cuff comment that no litigation hold was put in place, together with independent proof your adversary obtained from a former low-level employee confirming the likely destruction of certain emails, was now being used to justify an adverse inference against your company in arbitration. Suddenly, instead of looking forward to a relatively straightforward resolution to the dispute, you are dreading the prospect of having to explain to your CEO that your case has crash-landed before the first hearing has been held. How did this happen? You assumed incorrectly that arbitration provides a protective bubble that insulates the parties from the requirements of e-document preservation.

This three-part series will provide a legal foundation and offer practical advice about the competing regimes of document preservation and arbitral efficiency. This article, part one, sets the stage and provides a basic doctrinal overview of arbitration and document preservation. Part two will examine the inherent tension between the two regimes. And part three will offer some practical guidelines on how to resolve this tension so as to avoid the scenario outlined above.

First, arbitration. It’s no wonder arbitration, with its promise of efficiency and fairness, has become such a popular forum for dispute resolution. Parties to an arbitration generally can expect a streamlined process aimed at resolving disputes on the merits quickly, fairly, expertly, and with finality. Less obvious benefits include confidentiality (at least through award confirmation), a level of industry expertise among arbitrators, and, for the most part, a less theatrical presentation by plaintiff’s counsel. All of this translates into a lower risk profile: Your company won’t be in the papers, and there won’t be a jury to be swayed by a trial lawyer’s emotional pitch.

Generally speaking, arbitrations also offer relief from the heavy discovery burdens associated with litigation. While arbitrators have discretion to permit some discovery, most approach the issues wondering, “Do you really need those documents, counselor?” In contrast, for most judges, the instinctive question is, “What’s the big deal counselor; why not turn over the documents?” Whereas the litigator fully expects the judge to err on the side of disclosure, in arbitration, the balance generally tips in favor of efficiency over comprehensiveness.

Now let’s switch gears and consider the rules governing e-document preservation. Although not every court has gone as far as Judge Scheindlin in her landmark Zubulake decisions, major decisions from across the country are remarkably prescriptive. Courts have issued sanctions because they found that a litigation hold was too narrow, that it was improperly supervised, or that it was implemented too late. Most jurisdictions have followed Zubulake’s lead in holding that mere negligence by the spoliator can lead to sanctions and that the duty to preserve can attach at the slightest whiff of a brewing dispute. And in the Southern District of New York, at least until FRCP 37 is amended, a party that destroyed e-documents can only avoid sanctions by proving that the documents weren’t critical.  

Of course, the Zubulake standards appeal to basic fairness: A party should not be able to avoid liability by destroying evidence of its wrongdoing or succeed on a meritless claim by deleting evidence that supports a defense. But in the balance between fairness and efficiency, Zubulake represents one extreme: a complete embrace of excruciating fairness, with little or no regard for the cost (whither FRCP 1?).

Arbitration, of course, strikes a different balance — one that parties are sometimes more than willing to reject as soon as they recognize that things aren’t moving in their favor. Efficiency and expertise sound all good and well until you realize that you aren’t going to get that one email you are sure will prove your case. Once parties recognize that gaining efficiency might mean sacrificing a tactical edge, spoliation motions in arbitration become inevitable. In practice, arbitration panels have struggled to respond to parties who claim that their opponents have improperly destroyed electronic evidence during an arbitration. How these claims have played out, and what can be done about it, will be the subject of the next two installments in this series.

Contributing Author

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Michael R. Gordon

Michael R. Gordon is a partner in Manatt, Phelps & Phillips’ Litigation Practice. He is based in the firm’s New York office.

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Contributing Author

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Andrew Case

Andrew Case in an associate in Manatt, Phelps & Phillips’ Litigation Practice. He is based in the firm’s New York office.

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