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Arbitration of brewer and wholesaler disputes: The good, the bad and the ugly

"Modern Brewery Age" January 2005

Historically, when two parties became embroiled in a dispute which they were unable to resolve by themselves they had only one alternative -- take the other side to court. Over the years, however, as a result of growing dissatisfaction with the legal process, alternative means of dispute resolution have arisen; arbitration has blossomed into the most widely utilized among such alternatives. Although slow to gain wide acceptance, over the last sev eral decades arbitration has become a preferred and favored method of dispute resolution in many industries. The impetus for this move ment is the widespread belief that arbitration is a faster and more cost effective means of resolving disputes. Is that historical perspective accurate though? And even if it is, are there any reasons to avoid arbitration? The goal of this article is to provide answers to these questions.

The Wheels of Justice Turn Slowly, and are Expensive

Anyone that has been involved in litigation knows that it is an expensive and generally slow process. It is not unusual for even simple cases to drag on for years in the courts. Needless to say, complex cases are assured a long and expensive life. In a simple arbitration case, there is no question that arbitration will be quicker. As demonstrated below, the more com plex the case, however, the less the difference becomes. So, should brewers and distributors eschew federal and state court litigation and jump on the arbitration bandwagon? The answer is that while the concept of arbitration is a good one, there are many practical and legal pitfalls which more often than not weigh against arbitration. As a result, it is imperative for any distributor that is offered an agreement containing a mandatory arbitration clause to give long and serious consideration as to whether they should accept the arbitration clause. Once the distributor accepts the clause, with limited exceptions, it is final. Even if the distributor subsequently changes its mind and desires to sue in state or federal court, it is bound to arbitrate.

The Right to Appeal

Arbitration is not necessarily a bad thing, but bad things can occur as a result of arbitration. Bad things can also occur as a result of lawsuits, however, there is one major distinction; you can almost always appeal a bad decision of a judge but you are almost always stuck with a bad deci sion of an arbitrator. Let's face it, there are many judges out there who are little more than politi cal hacks and who are ill equipped to handle the important job to which they have either been elected or appointed One of the most frustrat ing things that litigation lawyers have to deal with is the lack of sophistication, ability or inter est of many judges. Obviously, this is even more frustrating to a client who is on the adverse side of a bad decision. There is always recourse, however, because in every jurisdiction in the United States, a party has the absolute right to appeal the decision of a trial judge to at least one appellate court where, typically, a panel of judges will review the facts and law to see if the trial judge got it right.

In arbitration it is an entirely different story. First, generally speaking, arbitrators are not bound by rules of evidence or even rules of law. Typically, arbitrators are free to admit any mat ter into evidence as they deem fit in their sole discretion and are only bound to do "substantial justice." In other words, they are typically not bound to apply specific law. Moreover, even in those instances where they are either bound to apply specific law or they determine in their dis cretion to apply specific law there is no review process to assure that they applied the law correctly. That is because the typical grounds for appealing an arbitrator's award is limited to situations where the award was based on fraud, corruption, misconduct, demonstrated bias in favor or against a party or where the award violates a strong public policy.

The bottom line is that once you get your award, there is little likelihood that you are going to overturn it.

Are Cost Savings Illusory?

So, let's say that you are the gambling type and are willing to take a risk that if push comes to shove you will get a "good" arbitrator, one that understands the case, is willing to apply the appropriate law and has the ability to apply the facts to the law and come up with an appropri ate decision. You determine that you are willing to arbitrate disputes and you sign an agreement containing a clause that provides for the arbitra tion of all disputes before a well known, nation al arbitration association, using a panel of three arbitrators. "Great," you say, "three arbitrators, less risk of a bad decision with three instead of one". And, of course, you are right It doesn't occur to you at the time, however, that you have to pay the fees of the three arbitrators, who, if they are worth their salt, will not come cheaply.

Sure enough, a dispute arises and you decide to file for arbitration. You are a little sur prised at the amount of the filing fee which is 10 times more than you had to pay to start a similar lawsuit (arbitration filing fees typically vary according to the amount of damages you are seeking) but you pay and file. Shortly thereafter you receive a proposed list of arbitra tors from the arbitration association which sets forth the arbitrators qualifications and their hourly and per diem rates. Now you think to yourself that at $2,000.00 to 3,500.00 a day per man you should become an arbitrator. Still, you say to yourself, the fees are being split and maybe I can recover my costs as part of the award (which is possible, although generally only in situations where the arbitrators believe there has been egregious conduct by one side). So, you pick your arbitrators and dream of the money that you are going to shortly recover from the other side.

Next, you are surprised when your attorney tells you that the panel has granted your adver sary's request to conduct discovery (which has become the rule rather than the exception that it used to be). You learn that you have to produce a laundry list of documents and also produce sev eral witnesses for depositions. "Don't worry," your lawyer tells you, "we are also demanding documents and we're going to take their deposi tions as well" (can you say Cha Ching!).

You muddle through the discovery process, trying to figure out what is different between the last lawsuit that you were engaged in and this arbitration and you realize that so far the only difference has been that your filing fee was sub stantially higher for the arbitration and you had to pay the panel of arbitrators to rule on the discov ery motions that have been made. "Gee," you think, "that last Judge I had wasn't the sharpest tool in the shed, but at least he was free!"

Now you are gearing up for trial. Your attorney has to draft a pre-trial brief, assemble sets of exhibits and prepare all witnesses for their testimony. Again, you are thinking, what is the difference between this and a trial in state or federal court? Then you get hit with another difference, a bill for your portion of the advance costs for the hearing. This bill includes the fee for renting the room in which the hearing will be conducted and the fees for all three arbitrators for each day for which the hearing has been scheduled. Stunned at the amount that you have to shell out you tell your lawyer that you don't want to pay until the hear ings are concluded -- after all you don't get paid in advance for the beer that you sell. Guess what? If you don't pay in advance, you don't get to have a hearing! Now you are really missing Judge "Not Too Smart but Free! "

You have no choice so you pay the ransom and get to have your day in ... somebody's conference room. Here you realize the final difference between arbitrators and judges. Arbitrators are in no rush to get matters concluded. They are paid well for their services and tend to allow almost anything into evidence with the admonition that "We'll take it for what it's worth." On the other hand, judges are famous for trying to clear their generally over-booked calendars. They do this in the first instance by trying to force settlements -- which may or may not be a good thing for you depending on the circumstances -- and then by moving trials along quickly, excluding inadmissible evidence and limiting testimony.

The point of all of this is that in many cases the cost of arbitrating a case maybe equal to or greater than litigating in court Whether arbitration is quicker than litigating in court is generally a function of location. In some courts you will get a trial date about as quickly as you can get an arbitration date -- particularly where you have a multi-party arbitration panel that has to deal with their separate schedules. In some jurisdictions, however, arbitration will undoubtedly be significantly faster.

Limit Arbitration to Simple Matters; Customize Your Agreement to Arbitrate

Since arbitrations are generally a function of the agreement of the parties (i.e. in order to compel arbitration there must be an agreement to arbi trate) the parties are free to fashion rules, condi tions, or instructions for the arbitrators that the parties want followed. Perhaps most importantly, the parties have the ability to limit and identify those matters which are subject to arbitration and those that are not Most arbitration clauses con tain very broad grants of authority to the arbitra tors e.g. to determine all disputes that arise under the agreement It need not be that way, however. For instance, you maybe willing to arbitrate issues relating to the "nuts and bolts" of the busi ness such as payment, delivery, discounts, rebates, stale beer, dunnage, P.O.S. etc. but should specif ically exclude more complex issues such as ter mination, discriminatory pricing etc. Many other issues may be agreed upon as well. For instance, the parties can pre-select the identity of the arb i trators or specify requirements such as industry experience. The parties may also specify the number of arbitrators. They may designate a pro fessional arbitration association or business to administer the hearings, or the parties may elect a more informal and less costly process. Parties are generally free to assert what law they wish to apply, however, as a result of a decision rendered in a lawsuit in which this firm successfully resist ed the application of foreign law, there are restrict ions on the ability of a brewer to exclude the application of beer franchise statutes promulgated under the Twenty-First Amendment. Parties may also elect to have the arbitration be non-binding.

Conclusion

Arbitration can be a useful process in certain situations. When dealing with simple issues that arise daily between a brewer and a wholesaler, arbitration can be a quick and cost-effec tive way to handle such issues; particularly where care has been taken to craft a limited and specific arbitration clause. However, in those situations that involve more complex issues and where the results are more essential to the continued success and viability of the wholesaler we would not recommend arbitration as a preferred method for dispute resolution. As always, the bottom line is that when presented with an agreement by a supplier, the wholesaler must be diligent. Have the agreement reviewed by counsel experienced in the industry and make the same educated decisions regarding any arbitration provision that you would with respect to provisions related to product, price and territory. In the long run, it may be the arbitration provision that proves to be the most important.