Arbitration in Entertainment Contracts: Worth fighting about?

Charlie Sheen‘s lawyers are fighting hard to have their case against the producers of Two and a half men heard in Court, rather than arbitration.  Yesterday, the producers secured a victory on this front, with the Court ordering claims to arbitration under Sheen's contract.  This post will explain some of the advantages and disadvantages of arbitration, and my thoughts on why Sheen  and Warner Bros. are fighting so hard over this issue.

WHAT IS ARBITRATION?

Arbitration is a  form of “alternative dispute resolution” where the parties to a dispute refer it to an agreed neutral person or panel, by whose decision they agree to be bound.

Arbitration clauses are common in entertainment industry contracts for a number of reasons.

WHY ARBITRATE

Speed

First, arbitration of disputes is often a faster, more streamlined process than resort to the Courts and the legal procedure that goes with that territory.

Cost Savings

Arbitration can also be less expensive than traditional litigation.  This is so in part, because of the faster arrival at a resolution, and partly because there tend to be fewer formalities and discovery procedures in arbitration cases.

Informal

Because arbitration operates outside the government-operated court system, it tends to be less formal. There is less paperwork,  and  frequently less focus on form, and greater emphasis on the substance of the disputed matters.

This is not to say that some arbitration proceedings aren’t formal, only that it’s often within the parties’ discretion to decide (at the time of contracting) on a less rigid procedural approach.

Flexible

Arbitration can be custom-tailored to the parties’ needs and desires.  Since the arbitration clause is part of a contract between the parties, its terms can be negotiated.

One key point is the decision WHO will be the arbitrator.  In many cases, the parties agree that arbitration will be submitted to a particular organization for resolution, and that the organization (such as the American Arbitration Association, JAMS, IFTA, or California Lawyers For The Arts Dispute Resolution Services) will appoint the arbitrator when and if a dispute arises.  Other arbitration clauses provide for the parties to select the arbitrator, either by mutual agreement or some other procedure.

The rules by which the arbitration will be conducted can also be negotiated. For example,  the American Arbitration Association has different sets of rules for different circumstances, such as commercial, labor, employment, etc.

Procedural rules are flexible in arbitration.  Sometimes, the parties can set forth their own system of procedure, for example, establishing whether the usual rules of evidence  will apply, or setting up time frames in which to plead, respond and hold hearings on the matter.

Many arbitration clauses address the scope, extent and timetable for the discovery process.  Sometimes limits are placed on which forms of discovery may be used, and sometimes discovery is waived entirely, in favor of a simple exchange of documents and evidence, shortly before the hearing.

Confidentiality

One of the strongest selling points for arbitration in entertainment contracts is that the proceedings, documents exchanged, and even the result can be kept confidential.  If the parties don’t wish to have the terms of their contract made public, arbitration is usually a good way to go.

This, I suspect, is the reason that the producers of Two And A Half Men have fought for enforcement of the arbitration clause in Charlie Sheen’s contract.

DISADVANTAGES

Although arbitration looks pretty good for many situations, the fact that  Charlie Sheen’s lawyers are fighting hard to keep their claims in Court is proof enough that this form of dispute has its drawbacks.

Unpredictable

One such drawback is that outcomes in arbitration can be very unpredictable.  Although this is true of jury verdicts as well, in Court, there are procedural safeguards and limitations on the fact-finder’s authority that don’t exist in most arbitration cases.

Need not follow the law

Another drawback is that in arbitration, the arbitrator may not be required to adhere to the law.   While many arbitrators are lawyers and/or retired judges, and thus may be inclined to follow the legal principles they learned in school, not all arbitrators have this background.

No Written Opinion

Arbitration awards may not result in a written opinion.  While this may seem unimportant, parties may find themselves disagreeing later on the reason for or application of an arbitrator’s award.  Additionally, since no written opinion exists, an arbitration award has little or no significance as precedent for the parties or others to follow in future situations.

Flexibility

The flexibility and customizable nature of arbitration can have its drawbacks too.

The process can often move very quickly.  A fast-track approach to resolving disputes isn’t always the best way to arrive at a fair or equitable outcome.  The parties may simply need some time to live with the problem, learn the other sides’ viewpoint(s), and develop the support for their own positions.

Since discovery can be restricted in arbitration cases, the parties may be handicapped by the limitation on access to information about their adversaries’ claims, evidence and arguments.  In some cases, important evidence may not be brought to the attention of a party until the hearing, at which time it’s too late to prepare an appropriate rebuttal or find witnesses to counter such evidence.

Another drawback is that selection of the arbitrator may be difficult, especially if the parties can’t agree on the issue.  This can result in an increase in the acrimony between the players, and reduce the likelihood of settlement.

Finally, the confidentiality of arbitration proceedings and documents can be a blessing as well as a curse.  Sometimes, public airing of an issue, and of parties’ negotiating posture, deal terms or whatever, can be useful.  In fact, sometimes, the mere threat of such a public airing is enough to motivate parties  to settle.

This, I think, is at least a part of the reason that Charlie Sheen’s entertainment lawyers have fought for his claims to be heard in open court.

CONCLUSION

If keeping the terms of a contract confidential is an important factor for you, consider incorporating an arbitration clause.  Such provisions are very common in entertainment industry contracts, but this important method of dispute resolution isn’t without its down-sides. Consult your entertainment lawyer to fully consider whether arbitration should be part of your deal.