A “Momentous” Supreme Court Term

The United States Supreme Court was back in action on Monday, October 2, 2017, and is now moving into what Justice Ruth Bader Ginsburg says is going to be a “momentous” upcoming term. This will be the first full term for Justice Neil M. Gorsuch, who replaced Justice Scalia, providing an extended look at his jurisprudence. The upcoming term also promises to showcase cases touching several hot button issues. Here is a quick overview of some of the notable cases coming before the Supreme Court.1

Gill v. Whitford, No. 16-1161, which is being argued before the Supreme Court on Tuesday, October 3, 2017, could have important impacts in how elections are conducted. In this case, the Supreme Court is being asked to rule that extreme political gerrymandering violates the U.S. Constitution. The Supreme Court has never struck down a voting map on the ground that politics overly impacted how it was drawn, but Justice Kennedy has expressed uneasiness about this issue in the past. The decision in this case has the potential to not only reshape voting maps, but in so doing, shift the political landscape.

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Colorado Supreme Court upholds optional liquidated damages provisions

This week the Colorado Supreme Court answered a lingering question about liquidated damages provisions; namely, are they enforceable if the non-breaching party can elect to pursue actual damages instead? The Court said yes. Ravenstar v. One Ski Hill Place, 2017 CO 83.

Liquidated damages are an amount the parties designate in their contract as a reasonable compensation for a specific breach of a contract. To be enforceable, courts typically require that liquidated damage provisions meet three elements: "1) the parties intended to liquidate damages; 2) the amount of liquidated damages, when viewed as of the time the contract was made, was a reasonable estimate of the presumed actual damages that the breach would cause, and 3) when viewed again as of the date of the contract, it was difficult to ascertain the amount of actual damages that would result from a breach.” Id. at ¶ 10 (quotation marks omitted).

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Electronic Communication in Modern Litigation

It goes without saying that use of electronically stored information constitutes a fundamental component of any modern, successful company, but state and federal courts have only recently adjusted their rules of discovery to reflect that. For example, the federal courts recently revised their Rule 37, which concerns sanctions for failing to preserve or produce documents relevant to a claim or defense. Previously, Federal Rule 37(e) permitted sanctions for a party’s failure to preserve electronic information only in “exceptional circumstances.” Now, Rule 37(e) places an affirmative duty on parties to take “reasonable steps to preserve” electronic information, and that duty begins the moment litigation is anticipated, not merely commenced. State courts often follow the federal judiciary’s example—whether by expressly revising their rules in accordance or simply as an example to guide decisions when their rules are silent on an issue (as Colorado’s rule is)—so these changes are significant regardless of forum.

For businesses and individuals, the added focus on electronic information both increases a party’s discovery obligations but also protects against destruction of evidence, thereby ensuring that litigation proceeds fairly and reaches a just result in light of all the facts. Gone are the days where “routine” or “automatic” system maintenance could destroy large swatches of evidence adverse to a party. In practice, a party could easily defend against its opposition’s requests for electronic information by hiding behind a wall of technological jargon designed to excuse (or confuse) the issue entirely. The old rule placed the burden on the requesting party to prove “exceptional circumstances”—an almost impossible standard to meet without smoking-gun evidence, especially in light of judges’ reluctance to wade into the “new world” of technology.

The revised rule, however, essentially flips the burden to rest on the party unable to produce electronic evidence. Now, it must explain what “reasonable steps” it put in place to preserve this information from the moment litigation was anticipated. Given the amorphous meaning of “anticipated,” companies now must be very careful not only to begin preserving electronic information once a dispute is foreseen, but they must also disable automatic system maintenance and inform employees about routine procedures that could delete or affect such information. In light of these rule changes, electronic discovery now takes a much larger role in any case, but it is a role commensurate with the already widespread use of technology in the modern, successful company

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Get out of my sandbox! Expulsion of a LLC Member under Wyo. Stat. 17-29-602

So, you have a bad apple as a member of your Wyoming limited liability company (LLC), how do you get rid of them? The best option is usually to reach an agreement for the company or a specific member to purchase the troublemaker’s membership interest. If, however, an amicable solution cannot be reached, the company may be able to expel the member pursuant to Wyo. Stat. 17-29-602. Section 602 governs the general circumstances when dissociation of a member occurs but also provides for expulsion of a member in the following circumstances: i) pursuant to the company’s operating agreement; ii) with unanimous consent of the other members; and iii) by judicial action.

Pursuant to Section 602, the easiest course of action is to expel the member under the company’s operating agreement but, unfortunately, few operating agreements address the expulsion of troublemakers. The next simplest course of action under Section 602 is to vote them out. However, this option is only available in very limited circumstances. Specifically, voting the bad apple out pursuant to the statute is available when it is either: unlawful to carry on the company’s activities as long as the troublemaker remains a member or there has been a transfer of all of the troublemaker’s transferable membership interest. Note: even if the troublemaker’s membership interest has been fully transferred, they cannot be expelled if the transfer was: a transfer for security purposes or due to a charging order in effect under Wyo. Stat. 17-29-503.

The company may be left with the most expensive and least desirable but still possible remedy of filing a lawsuit to expel the member. In order to expel the troublemaker by judicial action, the company (as opposed to an individual member) must bring the action and prove one of the following:

(A) the member has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) the member has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s fiduciary duties or obligations under Wyo. Stat. 17-29-409; or

(C) the member has engaged in, or is engaging in, conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

Beyond the expense and general litigation risk for the company, even if the member is judicially expelled, there are a couple of caveats that require careful consideration. First and foremost, expulsion of the troublemaker will successfully remove him from all management and other business operations BUT the troublemaker will continue to own his interest in the company as a “transferee interest” also known as an “economic interest”. See Wyo. Stat. 17-29-603. Accordingly, the former member will be entitled to certain financial information owned by the company and, perhaps more importantly, will continue to be entitled to his share of the profits, losses and distributions under the company’s operating agreement. So, effectively, the company may kick the offending member out of the sandbox but still have to pass him buckets of sand to build his castle. Secondly, if the company is member-managed, the troublemaker’s fiduciary duties as a member end with regard to matters arising and events occurring after his dissociation. Terminating fiduciary duties owed by the troublemaker may be too disadvantageous to the company for the company to expel him, particularly if the member begins competing with the company while still receiving distributions as an economic interest owner.

Expulsion of a member is, obviously, an aggressive course of action and must be thoroughly examined. The risk of litigation to the company and its other members must be studied even if expulsion occurs under the operating agreement or by unanimous vote. However, Section 602 does provide some options for a company to remove a problem member at least from the company’s management and business operations.

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Preliminary Considerations in Condemnation Actions

In condemnation actions in Colorado, the condemning party must take great care to satisfy legal prerequisites prior to initiating suit and, in most cases, moving for immediate possession of the subject property. By statute, immediate possession will only be granted upon a showing that: 1) a public agency with condemnation power has properly determined that it is necessary to acquire the landowner’s property; 2) the property is being acquired for a public use; 3) immediate possession is necessary; 4) the parties have failed to agree upon compensation; and 5) the probable market value of the property to allow the court to set the amount to be deposited with the Court as security the ultimate payment of compensation. C.R.S. §§ 38-1-105(6)(a) and 38-1-109. Good faith negotiation between the condemning entity and the landowner is also mandatory prior to an exercise of the power of eminent domain. C.R.S. § 38-1-102. In addition to these statutory requirements, fundamental constitutional rights to notice and due process also constrain any attempt to condemn and take possession of private land.

While these constitutional and statutory considerations have been in place for some time, Colorado courts are applying them with renewed vigor recently. One essential lesson from this increased attention on foundational legal prerequisites is the importance of the language within the documents describing the rights to be acquired. Whether a deed in fee simple or the varied access and utility easements frequently condemned, these legal documents must be carefully drafted to provide appropriate notice to the landowner of the rights being subjected to the power of eminent domain. Not only does this satisfy the constitutional guarantee of due process, but it also benefits the parties and the court. Without a clear definition of such rights, neither the property owner nor the condemning agency can accurately determine the value to be paid for these rights or their impact on any remaining property. Properly delineating the rights being acquired can save significant expense and frustration for the condemning entity, which will be paying just compensation for the property taken. Conversely, the landowner whose property rights will be impacted by the taking will have certainty and security in their property going forward, not to mention a much smoother, shorter, and less costly trial process. Thus, when fulfilling the statutory prerequisite mandating good-faith negation between the parties prior to commencement of a condemnation suit, both the condemning entity and the landowner should discuss and work collaboratively to craft specific title language for any condemnation.

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CLAIMANTS MAY SUE INDUSTRY FOR DAMAGES RESULTING FROM EARTHQUAKES

On June 30, 2015, the Oklahoma Supreme Court ruled in Sandra Ladra v. New Dominion LLC, Spess Oil Co. [and other unnamed companies], that Plaintiff could sue operators of wastewater injection wells in and around Lincoln County, Oklahoma, for personal injury damages resulting from injuries she suffered from an earthquake while in her Lincoln County home. Plaintiff claimed that the Defendants' high-pressure disposal wells were responsible for the earthquake. The Court rejected the argument that the Oklahoma Corporation Commission (Oil and Gas Conservation Division) had exclusive jurisdiction and held that allowing "district courts to have jurisdiction in these types of private matters does not exert inappropriate 'oversight and control' over the OCC," and that it "conforms to the long-held rule that district courts have exclusive jurisdiction over private tort actions when regulated oil and gas operations are at issue." The Oklahoma Court's ruling also supports a finding of district court jurisdiction in a similar class action suit brought by representative plaintiff Jennifer Lin Cooper against New Dominion LLC, Spess Oil Co., and other unnamed companies which was also filed in Lincoln County, Oklahoma, earlier this year. Since the Oklahoma Court’s June ruling, the OCC and some industry members have taken preventative and regulatory steps to avoid or mitigate seismic activity.

In Colorado there have been several seismic events related to oil and gas activities, particularly near Greeley and Trinidad. Since 2011, the Colorado Oil and Gas Conservation Commission has engaged in rule-making that has increased regulatory requirements with respect to hydraulic fracturing and disposal activities. The COGCC now has enhanced technical, bonding and insurance requirements as well as geophysical reporting and seismic monitoring. The COGCC has also taken steps to shut down injection wells utilizing a ‘stoplight system’ – if a seismic event is only a magnitude 1 to 2 on the Richter Scale, underground injections wells may receive a green light from the COGCC; if the seismic activity is rated at M2 but below M5, a modified operations amber light may be given; and, if the seismic activity is measured at M5 or more, underground well operations are suspended and red-lighted by the COGCC.

Like Oklahoma, it is the Colorado courts that have jurisdiction to address private claimants’ damages claims based on concussion-related damage or injury. Moreover, Colorado law imposes strict liability for concussion damage and proscribes the outsourcing of liability. Thus, Colorado provides claimants with broad, direct damages relief. For a further discussion, see Richards, Emery Gullickson, “Finding Fault: Induced Earthquake Liability and Regulation,” COLUMBIA JOURNAL OF ENVIRONMENTAL LAW, 1 April 2015.

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Changes in Colorado’s Rules of Civil Procedure Aimed at Frontloading Litigation to Decrease Costs

After testing new rules in a select number of Colorado districts over the past few years, on July 1, 2015, the Colorado Supreme Court adopted new rules intended to significantly change civil litigation, especially the discovery process. This initial stage of a lawsuit – depositions, document requests and production, and interrogatories – is costly in client time and legal fees. Responding to complaints about those escalating costs, the new rules focus on setting discovery parameters early in a case to proportionally reflect the monetary claim and controversy at issue. Above all, the rules seek to restrict discovery of documents or issues merely tangential to the real source of the dispute or, more cynically, to move past “scorched earth” litigation tactics. The Court hopes to do so by rewriting the case management process, abandoning default or presumptive orders in favor of open communication between counsel and the court to reach an order tailored to the specific needs of each individual case. Judges will also play a stronger role in managing the discovery process.

The new discovery rule (CRCP 16(b)) now requires parties to meet in person or by telephone to reach a proposed case management order that details the claims, defenses, description of the case, settlement efforts, amount in controversy, proportional discovery limits, discovery timing, expert witness considerations, treatment of electronic information, and all deadlines in advance of a firm trial date. Where agreement cannot be achieved, both parties must present their respective positions in advance of the mandatory court conference, which must occur 49 days after the case is at issue. The rule—like other similar rule new changes beyond the scope of this post—requires the court to “actively oversee” the process.

Of course, adverse parties will continue to have different views of what their case requires, and it is facile to expect agreement on case parameters before an in-depth investigation into the dispute has commenced. To this end, the success of the new rules will hinge on whether or not judges actively oversee and are willing to involve themselves in the discovery phase of cases on their dockets. Often, this is not a question of the bench’s desire to administer justice, but rather the practical requirements of managing caseloads that may leave little time for a judge to decide discovery disputes. Only time will tell if the rule’s new demands on the bench to routinely oversee discovery can and will be implemented.

To this end, the new rules afford counsel the opportunity to further clients’ goals by always endeavoring to keep good, open lines of communication with opposing counsel. Indeed, under the prior rules where the bench rarely involved itself in discovery unless absolutely necessary, conceding a small point rarely returned any benefit to the conciliatory party, removing any incentive to self-regulate the process and resulting in relatively unrestrained discovery where both sides “wanted it all.” Now, because the rules require the court to “actively oversee” the discovery process, if the opposition is unwilling to reciprocate and concede anything, the court will likely recognize which party is causing the friction and respond accordingly. Thus, under the new regime, it should be easier to establish trust and candor with the court, which could yield substantive benefits for a party in addition to saving money. Though discovery will always be contentious as each side will have a different view of the case and its requirements, Colorado’s new rules present a real opportunity to reach the merits more quickly and inexpensively.

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The U.S. Supreme Court Disagreed with 10th Circuit's Analysis in a Refusal-to-Hire Case Focused on the Wearing of a Religious Headscarf

On June 1, 2015, in an 8-1 decision, the U.S. Supreme Court ruled against Abercrombie & Fitch and for a Muslim job applicant, Elauf, who had been rejected for employment because her headscarf would conflict with the store's "Look Policy" which prohibited the wearing of caps on the sales floor. E.E.O.C. v. Abercrombie & Fitch Stores, Inc., No. 14-86, 2015 WL 2464053. The evidence showed that the store's interviewer believed Elauf wore her headscarf because of her faith. The EEOC sued Abercrombie on Elauf's behalf for violation of Title VII. The U.S. District Court granted summary judgment for Elauf and awarded $20,000 in damages. The U.S. Court of Appeals for the 10th Circuit reversed, awarded Abercrombie summary judgment instead, and held that employer liability under Title VII ordinarily requires the job applicant to first prove that the employer had actual knowledge of her need for an "accommodation." 731 F.3d 1106, 1131 (2013).

Writing for the Court, Justice Scalia noted at the outset that the case was a “really easy” one. Scalia wrote Title VII proscribes two employment-practice categories described as "the 'disparate treatment' (or 'intentional discrimination') provision and the 'disparate impact' provision," and that the "word 'religion' is defined to “'includ[e] all aspects of religious observance and practice, as well as belief, unless an employer demonstrates that he is unable to reasonably accommodate to' a 'religious observance or practice without undue hardship on the conduct of the employer's business.'” 42 U.S.C. § 2000e–2(a) and § 2000e(j). 2015 WL 2464053, at *2-3. The Court rejected the argument that a Title VII plaintiff must show that the an employer had “actual knowledge” of the applicant's need for an accommodation and that, instead, the plaintiff "need only show that his need for an accommodation was a motivating factor in the employer's decision….[T]he intentional discrimination provision prohibits certain motives, regardless of the state of the actor's knowledge. Motive and knowledge are separate concepts. An employer who has actual knowledge of the need for an accommodation does not violate Title VII by refusing to hire an applicant if avoiding that accommodation is not his motive. Conversely, an employer who acts with the motive of avoiding accommodation may violate Title VII even if he has no more than an unsubstantiated suspicion that accommodation would be needed. Thus, the rule for disparate-treatment claims based on a failure to accommodate a religious practice is straightforward: An employer may not make an applicant's religious practice, confirmed or otherwise, a factor in employment decisions." 2015 WL 2464053, at *3 (emphasis added). The Court rejected Abercrombie's argument that the store's neutral policy cannot constitute “intentional discrimination” because "Title VII does not demand mere neutrality with regard to religious practices…. Rather, it gives them favored treatment, affirmatively obligating employers not 'to fail or refuse to hire or discharge any individual ... because of such individual's' 'religious observance and practice.' An employer is surely entitled to have, for example, a no-headwear policy as an ordinary matter. But when an applicant requires an accommodation as an 'aspec[t] of religious ... practice,' it is no response that the subsequent 'fail[ure] ... to hire' was due to an otherwise-neutral policy." 2015 WL 2464053, at *4 (emphasis added). Finding that the 10th Circuit had misconstrued Title VII, the case was remanded for further consideration.

Justice Alito concurred in the result but disagreed with the Court's "knowledge" analysis. Justice Thomas (a former EEOC Chairman) concurred in part and dissented: "I would hold that Abercrombie's conduct did not constitute 'intentional discrimination.' Abercrombie refused to create an exception to its neutral Look Policy…. To be sure, the effects of Abercrombie's neutral Look Policy, absent an accommodation, fall more harshly on those who wear headscarves as an aspect of their faith. But that is a classic case of an alleged disparate impact" and not "disparate treatment because Elauf received the same treatment from Abercrombie as any other applicant who appeared unable to comply with the company's Look Policy." 2015 WL 2464053, at *8.

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The 10th Circuit Rebuffs Environmental Groups' Challenges to Keystone XL Pipeline Permit and Verification Letters

On May 29, 2015, the U.S. Court of Appeals for the 10th Circuit upheld the entry of judgment for defendant and rejected National Environmental Policy Act (NEPA) and Clean Water Act (CWA) challenges to the validity of Army Corps of Engineers' Nationwide Permit 12 (NWP 12) for the Gulf Coast Pipeline (the southern segment of the Keystone XL Pipeline) and to the verification letters issued by the Corps. Sierra Club, Inc., et al. v. Bostick, No. 14-6099, 2015 WL 3422924. Writing for the Court, Circuit Judge Bacharach (Oklahoma) held that the environmental groups had waived their NEPA claims that the Corps failed to consider the risk of oil spills and the cumulative impacts of pipelines before first issuing NWP 12 because the groups failed to raise those issues below, and (i) the risk of pipeline oil spills is not so "obvious" as to avoid waiver, (ii) the Corps' knowledge of the risk of pipeline oil spills and responsibility deferral to the Pipeline and Hazardous Materials Safety Administration (PHMSA) did not apply to avoid waiver, and (iii) the groups' cumulative-impacts objections did not adequately challenge the rationality of agency action. The Court further rejected arguments that the Corps should have prepared a new NEPA analysis for the entire Gulf Coast Pipeline before issuing Permit verification letters, holding that the issuance of verification letters did not constitute "major federal action" but mere verification that permittees may proceed under a nationwide permit, and "the Corps had no obligation to assess the environmental impacts of the entire Gulf Coast Pipeline." The environmental groups' challenges under § 404(e) of the CWA (dredge-and-fill activities) were also rejected by the Court, stating, the "environmental groups have not shown that the permit authorizes linear projects with more-than-minimal impacts, and the Corps has permissibly interpreted the statute to allow partial deferral of its minimal-impacts analysis."

Notably, NWP 12 was issued after TransCanada decided to divide the Keystone XL Pipeline into two parts after the original comment period had closed for NWP 12. The Court recognized that nationwide permits are inherently broad, encompassing a variety of activities, some of which may or may not be predicted by the permitting agency. Here, the "Corps made an environmental assessment of the predictable uses of Permit 12, but recognized the futility of predicting every conceivable use for every conceivable type of utility line anywhere in the United States. The Corps need not conduct a new NEPA analysis every time someone conceives a new use for a national permit." The Court also concluded that the record showed that the agency engineers had adequately considered cumulative impacts at proposed crossings.

In his concurring opinion, Circuit Judge Baldock (New Mexico) concurred but found "this case to be prudentially moot" due to changed circumstances.

In her concurring opinion, Circuit Judge McHugh (Utah) wrote separately concerning the Corps' problematic, overly broad definition of "pipeline" and its obligations under NEPA, finding that the Corps improperly conflated its obligations under NEPA with its obligations under § 404(e) of the CWA. "The Corps may not limit its NEPA analysis to the consideration of the environmental effects of the discharge of dredged and fill material into jurisdictional waters, as would be appropriate under § 404(e) of the CWA. Rather, for NEPA purposes, the Corps is required to consider the direct, indirect, and cumulative effects reasonably foreseeable as a result of its permitting decision. This includes the environmental effects caused by the operation of the installations authorized by the Corps' permitting decision. And this understanding of the Corps' NEPA responsibilities has been universally adopted." 2015 WL 3422924, at *18 (citations omitted). Judge McHugh nevertheless "would affirm the district court because I conclude that Sierra Club's argument that the Corps improperly deferred portions of its NEPA analysis to the verification stage was not made to the agency during the reissuance process and is therefore waived…. The Corps has been issuing and reissuing NWP 12 for decades, with no party objecting to the deferral practice." 2015 WL 3422924, at *21.

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Case Management and Rejection of “Lone Pine Orders” in Colorado

On April 27, 2015, the U.S. Supreme Court denied a petition for writ of certiorari to review a Colorado rancher's attempt to prevent oil development and related access on his ranch. Petitioner Stull Ranches had requested that the high court review and reverse a 2014 decision of the 10th U.S. Circuit Court of Appeals decided in favor of the federal mineral lessee, Entek GRB, which allowed Entek reasonable surface access to drill for oil and to use a road to access another unitized Entek well.

The federal mineral rights at issue had been reserved by and for the federal government pursuant to the Stock-Raising Homestead Act of 1916 [Pub.L. No. 64–290, 39 Stat. 862 (codified at 43 U.S.C. §§ 291–301)] and, pursuant thereto, the land-grant surface successor acquired its real property interests subject to the government's reservation of mineral rights and interests, which includes: "(1) the right to enter and use so much of the surface as might be 'reasonably incident' to the exploration and removal of mineral deposits, and (2) the right to enact future laws and regulations regarding the 'disposal' of the mineral estate." Entek GRB, LLC v. Stull Ranches, LLC, 763 F.3d 1252, 1254 (10th Cir. 2014), cert. denied sub nom. Stull Ranches, LCC v. Entek GRB, LCC, No. 14-1007, 2015 WL 730880 (U.S. Apr. 27, 2015). According to the 10th Circuit, this "second right … sweeps broadly when it places the minerals at the government's 'disposal,' signifying not just the government's power to 'bestow[ ]' or 'assign[ ]' the minerals, but also a power to 'manage[ ],' 'make use of,' and 'deal with [them] as [it] pleases.'" Id. (Citation omitted.) The legal framework for disposition is that provided by the 1920 Mineral Leasing Act [Pub.L. No. 66–146, 41 Stat. 437 (codified in scattered sections of 30 U.S.C.)] as amended, which entitles the federal lessee the reasonable right to access and explore the mineral estate, a statutory right to unitize, and a reasonable right to access unitized wells and minerals.

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Baseball Arbitration

Now that Spring Training is in full swing, let’s talk some baseball! Okay, not that kind of baseball, but another topic in our series on arbitration - “baseball arbitration.”

Some parties are reluctant to submit disputes to arbitration because they worry about “split the difference” awards. Arbitrators are generally selected, directly or indirectly, and paid by the parties. This leads to a perception that arbitrators have an interest in rendering decisions that will maximize the chances that they will be chosen again in future disputes by “splitting the difference” between the parties to avoid offending either side. For parties who are reluctant to submit disputes to arbitration for these reasons or for parties who may want more control over how a compromise is reached, “Final Offer Arbitration,” also known as “baseball arbitration,” is an option worth exploring.

Final Offer Arbitration requires an arbitrator to view all of the unresolved issues as a package and select one party’s package over the other party’s package. It is known as “baseball arbitration” because each side submits a figure or proposed remedy and the arbitrator is required to select one offer or the other. The arbitrator cannot formulate a compromise or choose the midpoint between the two.

The idea behind Final Offer Arbitration is that each party, conscious of the risk that an unreasonable proposal will have little chance of acceptance by the arbitrator, will make concessions in order to submit what it believes is the most reasonable offer. If one of the two proposals is too extreme, the other side essentially wins by default. The two sides are more likely to bargain in good faith in hopes of reaching a settlement if they fear that the arbitrator may view the other side’s offer as more reasonable. Unlike conventional arbitration where parties may take aggressive positions designed to influence the arbitrator’s compromise, Final Offer Arbitration has the advantage of incentivizing the parties to move toward the middle. If the final offers are close, it may not matter that much which of the two proposals the arbitrator chooses. If the offers are far apart but one side has submitted a ridiculous offer, the arbitrator’s decision is relatively easy. The disadvantage in removing an arbitrator’s flexibility is, of course, that if both offers are far apart and equally ludicrous, the arbitrator’s hands are tied.

Final Offer Arbitration has advantages, but there are a number of issues that should be carefully considered before electing this route. The provisions of the arbitration agreement should be tailored to the nature of potential disputes and the parties’ desires. The arbitration agreement should clearly spell out, among other matters, when and how offers may be made, the deadline for modifying offers, when the offers are shown to the arbitrator, and the type of relief that may be included in an offer. The parties may provide, for example, that at any time prior to the close of the arbitration hearing, the parties may exchange revised written proposals or demands, which shall supersede all prior proposals. Or they may provide that final offers must be submitted within a certain number of days before the arbitration hearing commences. In some instances, the process of submitting the offers moves the parties so close together that the dispute is settled before the hearing or before the arbitrator makes a decision. There are also variations the parties might want to explore, such as “night baseball” arbitration, which requires the arbitrator to make a decision without the benefit of seeing the parties’ proposals and then to make the award to the party whose proposal is closest to that of the arbitrator. Another variation is to have Final Offer Arbitrations on an issue-by-issue or claim-by- claim basis.

Final Offer Arbitration works well where the parties are only seeking monetary relief or where the dispute involves pricing or valuation disputes. It can also be used for non-monetary awards in the nature of specific performance, declaratory relief or injunctive relief, but in such cases extra scrutiny should be exercised when drafting the arbitration agreement. Parties should always consult with experienced counsel when drafting Final Offer Arbitration agreements and before signing such agreements to make sure the arbitration agreement will achieve the intended results and benefits. Properly drafted, Final Offer Arbitration provides a powerful incentive for the parties to move toward the middle and expeditiously resolve their disputes.
For more on arbitration, see our earlier posts.

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Arbitration Pitfalls – Broad or Narrow Scope

Arbitration Series - Part 3 of 3:  When drafting an arbitration provision, careful attention should be given to the language describing the scope of disputes to be arbitrated. Unless the parties intend to arbitrate all disputes that may touch on or collaterally relate to the contract, the arbitration clause should contain express language specifically identifying and narrowly describing the scope of disputes to be arbitrated. In determining whether a given dispute falls within the scope of a contractual arbitration provision, courts first determine whether the arbitration clause is broad or narrow. Chelsea Family Pharmacy, PLLC v. Medco Heath Solutions, Inc., 567 F.3d 1191, 1196 (10th Cir. 2009). “Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause, and collateral matters will generally be beyond its purview. “ Id., at 1262. In contrast, where an arbitration clause is broad, “there arises a presumption of arbitrability and arbitration of even a collateral matter . . .if the claim alleged implicates issues of contract construction or the parties' rights and obligations under it.” Id. The precise wording of an arbitration clause does matter and should be carefully considered.

“Arising Out Of” “Relating To” or “Connected With:” The arbitration clauses recommended by the American Arbitration Association (“AAA”) call for arbitration of “any controversy or claim arising out of or relating to this contract, or the breach thereof.” Such language has universally been construed to be a broad arbitration clause. C & L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411, 415 (2001); Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Getzelman v. Trustwave Holdings, Inc., No. 13-cv-02987-CMA, 2014 WL 3809736 *3 (D.Colo. Aug. 1, 2013). The use of such terms as “related to” or “connected with” extends the scope of the arbitration provision beyond claims under the contract. Julian v. Julian, No. 4137-VGP, 2009 WL 2937121 at *5 (Del. April 23, 2009) (“related to” language “explicitly extends the scope of the arbitration provision ‘beyond the four corners of’” the agreement); Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000) (arbitration clause encompassing “all disputes or controversies arising under or in connection with this Agreement” constituted “a broad arbitration clause as it covers not only those issues arising under the employment contract, but even those issues with any connection to the contract.”). Similarly, contracts that call for arbitration of “any dispute between the parties” without limiting language have also been construed to be broad arbitration clauses. Qwest Corp. v. New Access Communications, LLC, No. 03-N-1278, 2004 U.S. Dist. LEXIS 28523, * 3 (D. Colo. Mar. 31, 2004) (arbitration clause covering “any claim, controversy or dispute between the parties” with no restriction found to be broad)

Disputes “Under” or “Arising Under” the Agreement: Courts have split over the interpretation of arbitration clauses limiting arbitration to disputes “under” or “arising under” an agreement. Some courts construe such clauses to be relatively narrow. See Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 924 (9th Cir. 2011) (“arising under” language signals a narrow arbitration clause); Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983) (phrase “arising under” deemed relatively narrow); Carro Rivera v. Parade of Toys, Inc., 950 F. Supp. 449, 453 (D.P.R. 1996) (because tort claims did not relate to contract interpretation and performance, they did not “arise under” the agreement); B.C. Rogers Poultry, Inc. v. Wedgeworth, 911 So.2d 483, 488 (Miss. 2005) (arbitration of disputes “arising under this agreement” is narrow and focused only on those disputes actually “under” the agreement). Many other courts, however, have found clauses requiring arbitration of any dispute “arising under” the agreement to constitute a broad arbitration clause. Cook v. PenSa, Inc., No. 13-CV-03282-RM-KMT, 2014 WL 3809409 *13-14 (D. Colo. Aug. 1, 2014) (determining that “the Tenth Circuit would follow the majority of federal circuits and give the phrase ‘arising under’ a broad construction based on strong federal policy in favor of arbitration.”); Viaero Wireless v. Nokia Solutions Network U.S. LLC, No. 13-CV-00866-RM-CBS, 2013 WL 5366402, at *5 (D. Colo. Sept. 25, 2013) (unpublished) (noting that “arbitration provision extends to ‘any dispute under this Agreement . . . ,’ and therefore, the presumption in favor of arbitration extends to peripheral matters relating to the parties' obligations”); Dialysis Access Center, LLC v. RMS Lifeline, Inc.,638 F.3d 367, 382 (1st Cir. 2011) (giving broad construction to provision requiring arbitration of “any dispute that may arise under this [Master Service] Agreement”); Consol. Brokers Ins. Servs., Inc. v. Pan-Am. Assur. Co., Inc., 427 F. Supp. 2d 1074, 1083 (D. Kan. 2006) (finding arbitration clause, which encompassed “[a]ny dispute arising between the parties under this Contract,” to be “a broad provision”).

Drafting Narrow Arbitration Clauses: Given the strong presumption in favor of arbitration, unless the parties intend to arbitrate all disputes related to their contract, including collateral and peripheral matters that may merely implicate issues of contract construction or the parties' rights and obligations under it, extreme care should be taken to limit the arbitration clause to specific, narrowly defined types of disputes. The parties should include express language identifying with specificity the type of disputes they agree to arbitrate. The parties also may want to recite their intention that the arbitration clause is intended to be narrow, that the agreement to arbitrate only covers those categories of disputes specifically listed, and the parties do not intend to arbitrate statutory, tort or other claims that merely touch on or collaterally relate to the agreement.

In addition, where the parties intend to arbitrate only a limited category of disputes but want those disputes, but only those disputes, to be resolved under an arbitration organization’s arbitration rules, those rules should be carefully reviewed, specifically identified in the contract, and express language should be included in the arbitration clause excluding the application and operation of any arbitration rule that would otherwise extend the scope of arbitrable disputes beyond what the parties intend. Arbitration rules adopted by an arbitration association such as the AAA, for example, typically provide that: (1) the parties shall be deemed to have made such rules a part of their arbitration agreement whenever they have provided for arbitration under such rules; (2) the arbitrator shall have the power to determine disputes over the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim; and (3) the arbitrator shall have the power to determine the validity of a contract of which an arbitration clause forms a part, and that such arbitration clause shall be treated as an agreement independent of the other terms of a contract. See, e.g., AAA Commercial Arbitration Rules R-1 and R-7. While courts recognize that arbitration is purely a matter of contract, any ambiguities will be construed in favor of arbitration. Parties should draft their arbitration clauses accordingly.

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Arbitration Pitfalls – Failing to Specify Duration

Arbitration Series - Part 2 of 3:  Arbitration clauses are often contained in purchase and sales agreements, underwriting agreements, earn-in agreements, and other contracts covering specific transactions or limited to a specific performance period. See prior post. Parties may have intended the arbitration clause to only cover disputes concerning the performance or interpretation of the contract. However, parties who incorporate broad arbitration clauses in their contracts, such as clauses calling for arbitration of any dispute “arising out of,” “related to” or “connected with” the agreement, may be forced to arbitrate post-contract disputes they did not intend to arbitrate.

Federal courts have held an arbitration clause in a contract is presumed to survive the expiration of the contract. Newmont U.S.A. Ltd. v. Insurance Co. of North America, 615 F.3d 1268 (10th Cir. 2010); Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775 (10th Cir. 1998). The Tenth Circuit governing most of the Rocky Mountain states has held that this presumption in favor of continuing arbitrability will only disappear in two situations:

     1) if the parties expressly or clearly imply an intent to repudiate post-expiration arbitrability, or
     2) if the dispute cannot be said to arise under the previous contract.

In Riley, the Tenth Circuit held that to “arise under” a contract means the dispute involves rights which “to some degree” have vested or accrued during the life of the contract and merely ripened after termination, or the dispute relates to events which have occurred “at least in part” while the agreement was still in effect. 157 F.3d at 781.

Given the strong presumption in favor of arbitration, any implied intent to repudiate post-expiration arbitrability must be clear. Several courts, for example, have found the presumption in favor of arbitration applies even though only certain provisions in the contract survive closing or termination of the contract and the arbitration clause is not listed as one of the provisions that survive. In Huffman v. Hilltop Companies, LLC., 747 F.3d 391 (6th Cir. 2014), for example, the court held an arbitration clause covering any claim arising out of or related to an agreement was broad and gave rise to the presumption of arbitrability, even though the arbitration clause was not listed among those provision that survived the termination of the contract. The court ruled the strong presumption in favor of arbitration applied absent an indication that the parties clearly intended for the survival clause to serve as an exhaustive list of the provisions that would survive expiration of the agreement. See also, W. Liberty Foods, L.L.C. v. Moroni Feed Co., 753 F.Supp.2d 881, 885 (S.D.Iowa 2010) (holding that an arbitration clause did not expire despite the fact that it was not listed in the contract's survival clause). These courts have reasoned that if the parties had intended to extinguish the arbitration provision upon the termination of the agreement they could have done so expressly.

When parties negotiate the terms of an arbitration clause, they should consider whether they want to arbitrate disputes between them after the contract is completed or terminates. If the parties intend to limit arbitration to disputes that arise during contract performance, they should pay careful attention to the language of their arbitration clause and include express language narrowly describe the scope of disputes that will be subject to arbitration and specifying any durational limitation on their agreement to arbitrate.

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Arbitration Pitfalls – Failing to Specify Who Decides Arbitrability

Arbitration Series - Part 1 of 3:  Agreements to arbitrate are often viewed favorably during contract negotiations as way to avoid litigation and minimize costs and expense should a dispute arise between the parties. Frequently, however, arbitration may be just as expensive and lead to uncertainties and consequences never contemplated. A party should carefully consider and understand the terms of any arbitration clause and avoid rubber stamping general arbitration clauses, such as those calling for the arbitration of any dispute arising under or relating to the contract under the Rules of the American Arbitration Association (“AAA”). One threshold issue the parties should clearly understand and address is who will have jurisdiction to resolve disputes about whether a given claim falls within the scope of the parties’ arbitration agreement.

The U.S. Supreme Court has ruled that the question of whether a particular dispute is arbitrable is presumptively a question for the court to decide absent “clear and unmistakable” evidence that the parties agreed that the arbitrator would decide this question. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995). Following this decision, arbitration associations amended their arbitration rules to provide that the arbitrator has jurisdiction to decide whether a given dispute is arbitrable. Rule R-7 of the AAA Commercial Arbitration Rules, for example, provides that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or the arbitrability of any claim or counterclaims.” All the various sets of arbitration rules promulgated by the AAA now contain a similar rule. A line of cases from federal district and circuit courts subsequently developed (now the majority view) holding that when the parties use a broadly worded arbitration clause incorporating a set of arbitration rules which confers upon the arbitrator the power to determine his own jurisdiction, they “clearly and unmistakably” agree to arbitrate whether a given dispute is arbitrable. Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Contec Corp. v. Remote Solution, Co., Ltd, 398 F.3d 205, 208 (2d Cir. 2005). Thus, where a dispute, whether sounding in tort, equity, contract or statute has any arguable connection to the agreement, the arbitrator instead of the courts may have the power to determine if the dispute is arbitrable.

It is important to recognize that arbitrators are usually private practitioners engaged in the business of providing legal services for a fee. They may face significant financial and competitive pressures to earn more money and handle more cases. That is true for many arbitrators suitable for commercial disputes, but is not the case for the judiciary. Most parties would expect that a judge's compensation does not depend on how that judge decides an issue, but they may not appreciate that conferring the power on an arbitrator to determine whether a given dispute is arbitrable or not could have such an effect.

Where parties only intend to arbitrate certain types of disputes but want to have those specific disputes, and only those disputes, resolved by an established arbitration organization and under its established arbitration rules, it is critical that the parties carefully define and narrow what disputes are arbitrable. Unless parties want to arbitrate whether a given dispute is in fact arbitrable, they should also specifically address in the body of the arbitration clause itself the question of who will determine whether a given dispute falls within the scope of their arbitration agreement. The same applies if the parties intend an arbitrator to decide whether a given dispute is arbitrable. Failure to do so may lead to complicated and expensive disputes concerning the scope of the arbitration clause or lead to results the parties never focused on or intended.

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Federal Judge Strikes Down County Ordinance Banning Hydraulic Fracturing

On January 19, 2015, in a 199-page summary judgment opinion in SWEPI, LP v. Mora County, New Mexico (CIV 14-0035 JB/SCY), New Mexico U.S. District Court Judge James Browning declared that a 2013 Mora County ordinance banning corporate oil and gas drilling and hydraulic fracturing unconstitutional and in violation of the corporate-plaintiff developer's property rights and the Supremacy Clause under the U.S. Constitution. The law, titled the Mora County Community Water Rights and Local Self-Government Ordinance, banned such activity within a substantially rural county approximately 100 miles northeast of Santa Fe. The Plaintiff is a subsidiary of Royal Dutch Shell PLC.

Although subject to review by the Tenth Circuit U.S. Court of Appeals, this federal court's decision is a setback for local control activists. Judge Browning found that the Ordinance expressly attempted to circumvent corporate rights protected by federal law. In fact, the Ordinance declared that companies "shall not have the rights of 'persons' afforded by the United States and New Mexico Constitutions," including First Amendment rights and due process. Judge Browning noted that the "Defendants' argument that corporations should not be granted constitutional rights, or that corporate rights should be subservient to people's rights, are arguments that are best made before the Supreme Court -- the only court that can overrule Supreme Court precedent -- rather than a district court." Although the federal court did not find Plaintiff's "takings" claim to be ripe because Plaintiff had not sought just compensation through a state inverse condemnation action, Judge Browning further found the Ordinance violative of, and impliedly preempted by state law since it would create waste and prohibit activity that New Mexico law allows.
Although state courts in New York and Pennsylvania have ruled in favor of some level of local government control over oil and gas development, decisions rejecting similar oil and gas activity bans were issued in 2014 by Boulder District Court Judge D.D. Mallard, which are now at issue in the Colorado Court of Appeals.

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