Arbitration and Litigation -- Both Risky Business

Arbitration has long been looked to as an alternative method of resolving a legal dispute because of the notion that it is more time and cost efficient than litigating a matter in our severely back-logged court system.  While in some cases arbitration is contractually mandatory and claimants have no choice but to arbitrate, in other instances arbitration is voluntary and some advantages include the claimant’s choice of arbitor and the possibility of an expedited decision.  Despite these advantages, claimants must take heed of the decision to arbitrate as cautionary tales of this alternative avenue for litigation have arisen as a result of 3 recent highly publicized arbitration proceedings.

In May 2014, an 8-year arbitration over a patent license agreement between Amkor Technology (“Amkor”) and Tessera Technologies (“Tessera”) resulted in Tessera being awarded $145 million in addition to a $64 million award Amkor already paid in relation to a prior ruling.  Not only was this arbitration drawn out longer than expected resulting in delays and high costs, this award greatly exceeded Amkor’s worst-case estimates of possible exposure. 

Similarly in the following cases, neither corporation could reasonably foresee the substantial arbitral awards that would eventually be lodged against them.  In a contractual distribution agreement between Starbucks Corporation (“Starbucks”) and Kraft Foods Group (“Kraft”) where Kraft contracted with Starbucks to distribute its coffee products in various grocery outlets, Starbucks was found to be in breach and was hit with an arbitral award of $2.76 billion, inclusive of $527 million in interest and legal fees in late 2013. While Starbucks is often depicted as a global giant and some may believe it had the funds to absorb this award, in reality, this award effectively wiped out 2 years of Starbucks’ profit margin.  Also in the latter half of 2013, jeweler Tiffany & Co. (“Tiffany”) was hit with a $449.5 million award, inclusive of interest and attorney fees, in arbitration with Swatch SA “Swatch” over a partnership development dispute involving the creation of a line of watches for Tiffany.  The award against Tiffany far exceeded its entire 2012 fiscal year.

The impact of these arbitral awards merely serves as a reminder that arbitration is not always the less risky or less costly alternative to litigation. In the Tiffany-Swatch arbitration, costs totaled $1.2 million and Swatch alone incurred nearly $13.3 million in attorney’s fees.  It’s anyone’s guess whether this dispute would have resulted in an equal or lesser amount of fees and costs had it gone through the court system, but one thing is certain, arbitration and litigation are both risky business.   As these cautionary tales of high arbitral awards resonate through the business world, perhaps it is time for in-house counsel and corporations to look to alternative litigation finance as a means to share the risk.