“We will bring suit in every jurisdiction against you where we have distribution. We will sue all of your new affiliate companies which sought to replace us and the individuals employees who tortiously interfered with our distribution rights. Revoke your decision to end the relationship.”

This lawyer letter struck fear into the heart of the manufacturer. The distributor was its representative in many foreign countries. The manufacturer was afraid that litigation in all of these venues would bankrupt the company. Not only was the message intimidating, but so was the counsel. The company remembered being impressed with the letter writer when he appeared on a late night talk show representing a plaintiff in a notorious case.

The company considered for a moment that capitulation would be the more reasonable alternative. But the arbitration clause was used to turn the tables based on this threat.

The Background to the Decision to End the Relationship

The company’s decision to not renew the decades long distribution agreement was a sound business decision. The international distributor was barely following the words of the agreement and clearly was not following the spirit of the agreement. The company had requested the distributor attend the monthly sales reviews and submit annual marketing plans. The distributor sometimes attended and sometimes did not. The distributor was not reinvesting in its markets as suggested by the company. The distributor was favoring other brands over the brand of those of the company. The company could no longer tolerate this rejection of its brand plan.

The Procedural Potential of an Arbitration Clause

An arbitration clause is a creature of contract. It is an agreement to engage in dispute resolution in a particular way. It is sometime referred to as a special venue clause. It is enforceable as is any other contract and may be defeated by ordinary contract defenses. Certain statutes grant special rights for arbitrations. For example, the Federal Arbitration Act (the FAA) prevents the enforcement of state laws which are targeted to undermine the enforceability of an arbitration clause. The FAA allows a party to enjoin the maintenance of a litigation if the parties agreed to arbitrate in their contract. The FAA also allows a party to an arbitration to compel a dispute to arbitration. If the parties disagree whether the arbitration clause is applicable, the arbitration clause may state whether that decision is made by a court or an arbitrator. Sometimes, parties have multiple contracts with each other, one requiring arbitration and one that is silent. In that case, it is up to a court to determine whether both are arbitrable, so it is important to assess the totality of contracts among the parties and draft for the intended result.

Using the Arbitration Clause as a Sword and Shield

Armed with the arbitration clause, the company fought back against the threat of litigation in multiple jurisdictions. Courts generally favor enforcement of arbitration clauses as it reduces the docket and it was the expressed intent of the parties. Courts will not countenance the simultaneous disposition of a case through arbitration and a court proceeding, and many courts have procedural rules that are intended to thwart the resolution of the same dispute in more than one jurisdiction.

Before the threatening letter was sent, the company had no reason to seek arbitration. No provision of its distribution contract had been literally breached and it had incurred no damages. But the issuance of the threatening letter created a case and controversy. The letter triggered the issue of whether the arbitration clause had been repudiated by the threat of a multiplicity of lawsuits—the exact result that was intended to be eliminated by the arbitration clause. The company immediately commenced an arbitration to seek an injunction against threatened litigation and to claim breach of the arbitration clause and the wind-down provisions of the distribution agreement.

Undeterred, the distributor’s counsel then continued its threat against the individuals associated with the companies affiliated with the manufacturer that were intended to carry on the business of the distributor on behalf of the company. The distributor’s counsel wrote the individuals directly threatening them with tortious interference and offering to not file suit against them if they cooperated with the distributor.

But the arbitration acted as a shield against such conduct. Although the targeted individuals were not parties to the arbitration agreement, they would be witnesses in the arbitration. And the letters were intended to intimidate them. As managerial employees, the manufacturer’s counsel can also be said to be their counsel and the threatening letters should not have been directed to them. A sharp letter to the opposing counsel stopped that threat, and the employees could then avoid additional sleepless nights. The company’s counsel saved those letters for the arbitration panel as evidence of intent to intimidate witnesses.

Think about whether your client’s contracts should contain arbitration clauses and the scope of these clauses. The lawyer as a late night talk show guest did not ultimately do well with the case discussed on the show. Nor were the arbitrators in the company’s case impressed with the tactics in the arbitration. The rifle shot of arbitration defeated the shot gun approach of such litigation tactics.

Reprinted with permission from the March 20, 2025 issue of The Legal Intelligencer© 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.