By now, you've heard of Legalzoom. Bob Shapiro, one of O.J. Simpson's former attorneys, co-founded the business which provides an array of legal services to individuals and business owners. Legalzoom has had its share of press, even from Consumer Reports. It's funny how Shapiro touts Legalzoom's mantra that it "puts the law on your side." Well, the law certainly isnt't on "your side" when it comes to a Legalzoom user enforcing their legal rights against Legalzoom. A recent case involving Legalzoom provides a good opportunity to revisit arbitration agreements, which are found in all types of agreements including employment agreements, employee handbooks, purchase orders, and sales acknowledgments.
One of the most popular services Legalzoom offers is will preparation. When someone uses those services they enter into a contract that includes an arbitration provision which says in part:
In the unlikely event that LegalZoom's Customer Care Center is unable to resolve your complaint to your satisfaction (or if LegalZoom has not been able to resolve a dispute it has with you after attempting to do so informally), we each agree to resolve those disputes through binding arbitration or in small claims court rather than in a court of general jurisdiction . . .
When it comes to wills, beneficiaries have a stake in the game. And often beneficiaries sue the attorney who drafted a will that impacts their hoped-for inheritance. One such beneficiary sued Legalzoom, but was thrown out of a Connecticut court because of the arbitration provision, which the Court enforced against the beneficiary because the arbitration agreement specifically mentioned that it bound beneficiaries.
Arbitration isn't necessarily a losing proposition. But we've found that some cases when arbitrated do not have the same success as in court. You lose the right to a jury trial when you sign an arbitration agreement. The arbitrator gets paid for his work by the parties, and arbitration contracts are a gravy train for arbitration companies like the American Arbitration Association, National Arbitration and Mediation or JAMS because the contract chooses the company the parties must use as the arbitrator. Judge Richad Posner wrote about this potential bias in his essay on Judicial Behavior and commented that repeat business could influence an arbitrator's decision. Some research says that consumers typically lose their cases because the arbitration companies are so corporate-friendly. The New York Times ran a series last fall focusing on this issue. You can read those articles here, here and here.
Don't get me wrong. Arbitration has many positives: potential cost-savings, faster resolution than the courts, and some control over who decides your case. We explain to our clients the pros and cons of including an arbitration clause in their agreements, and often include them. But, while arbitration is here to stay, the tide may be turning slightly against enforcing arbitration agreements as courts, especially recently in New Jersey (read about that here), start to reign in the use of arbitration agreements.
LESSON LEARNED: Knowledge is Key: Know what you are giving up when you agree to arbitration, and for businesses, know what you are getting when you include an arbitration provision in your contracts.