Big Risks and Disadvantages of Arbitration vs. Litigation
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Three recent high-profile arbitral awards highlight the risks of arbitration and demonstrate that, contrary to widespread belief, arbitration is often not cheaper, faster or more predictable than litigation. These three awards, as well as emerging trends in arbitral proceedings, call into question the common practice among corporations of including contractual provisions mandating arbitration in the event of any disputes.
In May of this year, in arbitration proceedings that have been pending for nearly eight years involving a patent license agreement between the technology companies Amkor Technology and Tessera Technologies, Tessera was awarded $145 million. And this was on top of $64 million Amkor had already paid to Tessera in connection with a prior, related ruling. These adverse awards far exceeded even Amkor’s publicly disclosed worst-case estimates of its possible exposure. The Amkor proceedings present a recent example of the delays, costs and unpredictability often associated with arbitration. But they are by no means a worst-case scenario. The dangers of arbitration hit two prominent retail corporations on a far greater scale.
Specifically, Starbucks Corporation and Tiffany & Co. were recently on the wrong side of decisions by arbitrators who imposed massive awards against each—awards that were expected by neither management nor by shareholders. Coffee giant Starbucks lost an arbitral award totaling $2.76 billion, including $527 million in interest and legal fees, to Kraft Foods Group Inc. in connection with a dispute related to the termination of an agreement that allowed Kraft to distribute Starbucks coffee in grocery stores. Even for a successful corporate stalwart like Starbucks, the size of the arbitral award was of enormous significance. Starbucks’ net profits for the years 2011 and 2012 were $1.2 billion and $1.4 billion, respectively. Thus, standing alone, the award wiped out two years’ worth of Starbucks’ profits.
And late last year, jeweler Tiffany lost $449.5 million, plus interest, costs and attorney fees, in an arbitral proceeding to Swatch SA concerning a failed partnership in which Swatch was to develop watches for Tiffany’s brand. Tiffany’s loss surpassed the profits it had earned during all of 2012.
As is commonly the case in arbitrations, neither Tiffany nor Starbucks apparently has the ability to effectively appeal the decisions, and in fact, Starbucks was forced to issue $750 million of additional debt to help raise money to satisfy the adverse award.
That risk-averse, well-represented corporations would willingly put such large sums of money in the hands of ultimately unaccountable arbitrators, whose decisions are almost always nonappealable, is surprising. The instinctive decision to do so should be revisited. This is particularly so given that the oft-touted benefits of arbitration—that it is cheaper, faster and more predictable than litigation—are routinely untrue in practice. In fact, the disputes that caught Starbucks, Tiffany and Amkor off guard each have taken years to resolve, caused each side to incur significant legal fees and yielded unpredictable results.
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