© Tom Schmucker | Dreamstime.com

Many of our sales representative clients give very little consideration to the perceived “boiler-plate” clauses that appear near the end of their principals’ “standard” sales representative agreements. Their focus is on the granted territory, the commission rate, designation of house accounts and similar provisions which all reps deem of most importance. However, one such typical “boiler-plate” clause seeks from the representative an agreement to waive an important constitutional right — the right to a trial by jury in order to resolve any dispute between the representative and the principal. When present, such a clause typically requires the parties to submit their dispute to a process known as arbitration in lieu of court-based litigation in order to resolve the dispute.

Most principals and many sales representatives have a perception that arbitration is faster and cheaper and that they are more likely to obtain a fair resolution of their dispute from a skilled arbitrator rather than from a panel of jurors who are likely to be less sophisticated and more biased. Based thereon, principals often include in their standard sales representative agreement an arbitration provision. Once included in the agreement it is close to a certainty that any subsequent dispute will forcibly be resolved by arbitration instead of traditional court litigation. Rarely will a court refuse to enforce the parties’ agreement to arbitrate.

Choosing the Right Course

Is arbitration really faster and cheaper? In our experience the answer is not necessarily. A lawsuit in court is commenced with the filing of a complaint and payment of a court filing fee of a few hundred dollars. The matter will usually be set for trial in 12 to 18 months after filing. The parties use this time to assemble their evidence and learn of the opposition’s evidence through the use of discovery to simplify the issues for trial. Almost always this trial preparation work leads to a settlement of the dispute. Delays typically occur in those few cases where settlement is impossible, thereby requiring a trial before a jury or the judge to resolve the dispute.  Eventual conclusion will depend upon the court in which you find yourself. Many courts are loaded down with cases and cases might not be reached for trial at the first setting, possibly resulting in multiple reschedulings of the trial date. However, this is not always the case. For example in our home jurisdiction (Dallas, Texas) if you are in federal court and the parties have agreed to allow a magistrate judge to preside, your case will be set for trial on a date certain and can also be set within one year of filing. So how fast a court case can be resolved is dependent upon the court’s calendar in which the case is pending.

In contrast, an arbitration proceeding can cost a party substantially more to get the process initiated. For example, when you file your complaint with the American Arbitration Association, a leading organization in the arbitration field, you are required to pay a filing fee, the amount of which depends upon the amount in dispute. The filing fee alone can be several thousands of dollars. Thereafter you may be required to advance additional deposits to cover the arbitrator’s fees. Arbitrators typically bill their fees at hourly rates of several hundred dollars per hour. After the case is commenced, arbitration, like litigation, typically goes through a trial preparation phase designed to allow the parties to discover the other side’s evidence and simplify the issues. This phase in arbitration is somewhat streamlined as compared with court litigation but nevertheless it remains a necessary element of time consumption in order to prepare the case and often leads to settlement. For those cases that cannot be settled, arbitration almost always provides a date certain for resolution, usually within six to 12 months from the date the arbitration case is commenced.

Weighing the Expense

So for those few cases in which settlement is impossible, you may be able to get your case heard and resolved somewhat faster through arbitration, but maybe not at less expense. Remember that you still are incurring legal fees and expert costs whether in arbitration or litigation. Further, in exchange for such potential faster timeline, in arbitration you are required to give away certain advantages and protections offered by litigation.

First and foremost is that in a court case your dispute will be presented to a jury for resolution. The usual dispute initiated by a sales representative against its principal at its core almost always involves the claim that the rep was not paid for work performed, or was not paid the promised amount. Ordinary people sitting on a jury can easily grasp these issues and will be more likely to sympathize with the plight of the rep and be offended by the conduct of the principal. In contrast, an arbitrator will more than likely be an experienced commercial litigation lawyer.  As such, he/she may focus more on the technical legal aspects of the case; at times so much so that he or she loses sight of the main issues. Further, it seems to me that arbitrators are seeking a middle position that gives both sides some of what they seek while a jury is more inclined to do what they perceive as “right,” regardless of the consequences to the party which they perceive as having done “wrong” and further is more willing to award penalty damages in order to punish the wrongdoer.

Another significant disadvantage of arbitration is that you give up your right to appeal. In a court case if the judge or jury makes a mistake resulting in an incorrect decision, you can correct such by taking the matter to a higher court for review and reversal if necessary. No such right exists in the context of arbitration. The arbitrator’s decision is almost always final no matter how incorrectly decided and without even the possibility of having the decision reviewed by another authority.

Avoiding Arbitration Clauses

As a general rule when preparing sales rep agreements for our sales rep clients we never include an arbitration clause. We know that if a dispute arises, arbitration, while maybe a little faster, will almost always be just as expensive to prosecute if not more, and that it will not result in as just a final decision. Unfortunately, sometimes the principal insists on including the arbitration clause. In those situations revisions to the provision can be made to at least help to reduce the upfront cost associated with arbitration while at the same time increasing the chance for a more just conclusion. An experienced attorney can help you with such revisions. However, in my opinion even a revised arbitration clause is never as advantageous to the rep as resolution of subsequent disputes by jury trial.