The Arizona Supreme Court’s opinion in Wells Fargo Bank v. Arizona Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474 (2002), and its progeny have substantially impacted commercial litigation by expanding the implied covenant of good faith and fair dealing (“implied covenant”). In contrast to a written, agreed upon term, Arizona law implies this covenant in every contract.

However, rather than eviscerating parties’ right to negotiate and enter into contracts on express terms, as some naysayers originally prophesied, its largest impact may be more economic than substantive.

Implied covenant claims are exceedingly prevalent in commercial litigation. Indeed, they are present more often than not. Due to the expansion of the implied covenant in Wells Fargo and its progeny, these claims are less likely to be resolved by early motions—resulting in longer, and often more expensive litigation. Without question, this result has only fanned the popularity of these claims.

Wells Fargo arose from a Tri-party Agreement between the Mercado Developers (a partnership headed by Arizona’s former Governor, J. Fife Symington, III) (“Symington”), First Interstate Bank (Wells Fargo’s predecessor) (the “Bank”), and various union pension funds (the “Funds”). The Bank agreed to provide temporary construction financing if Symington was able to secure permanent financing from another lender. The Funds agreed to be that lender.

The Funds took out the Bank’s construction loan and Symington eventually defaulted on the permanent loan. The Funds ultimately claimed, among other things, that the Bank breached the implied covenant by failing to disclose Symington’s deteriorating financial condition to the Funds.

Although the Bank was not expressly required to make such disclosures to the Funds, the Supreme Court found that a jury might reasonably conclude that the Bank’s actions were inconsistent with the Funds’ “justified expectations” under the Tri-party Agreement.

As a result of Wells Fargo and its progeny, a party may breach the implied covenant without actually breaching an express term of the contract. Courts must make a factual determination whether a party acted in a manner inconsistent with the other party’s reasonable or justified expectations. However, these factual questions typically require the parties to undertake costly and time consuming discovery, and make it very challenging for either party to prevail on an implied covenant claim in the early stages of litigation. Therefore, the unintended consequence of the Wells Fargo decision is often longer, more costly litigation.

Landmark Litigation Article Arizona Business Magazine September-October 2011

http://dioguardiflynn.com/wp-content/uploads/2011/09/Moolenaar_2011906.pdf

The ruling was issued in a case where the City of Phoenix agreed to rebate half of its future sales tax revenues from the “CityNorth” retail project, up to $97.4 million, in exchange for the developer building parking spaces and dedicating part of those parking spaces exclusively to drivers participating in commuting programs. The decision hinged on the presumption that the value of the dedicated parking spaces did not come close in value to the $97.4 million in tax benefits. (Note that, had a present value calculation been performed for the $97.4 million in payments over 45 years, it is not clear that the trade off in value would have been unequal, especially given the uncertainty of the timing and amounts of those payments.)

The ruling arguably prohibits any Arizona governmental entity from giving tax breaks to a private enterprise in exchange for locating a new business enterprise, or expanding an existing facility, in Arizona, unless the government entity receives direct consideration of roughly equal or greater value. New tax revenues expected to be generated from the expanded economic activity do not qualify as direct consideration to the government under the court’s ruling.

Arizona is struggling to attract new businesses and jobs to the state. We will have to be all the more creative and thoughtful if we are to be successful without the ability to offer the incentives being liberally offered by other states.

Binding arbitration is typically the result of a contractual agreement between the parties providing that any disputes between the parties will be resolved in binding arbitration. Under the Federal Arbitration Act (“FAA”) and its state law counterparts, such agreements are presumptively valid and enforceable. Generally speaking, if you sign a contract that contains an arbitration provision, you will be bound by that agreement and forced to resolve any disputes through arbitration. In other words, by entering into an agreement containing an arbitration provision, you are waiving your right to address any disputes through traditional litigation in a court of law.

The most commonly cited benefits of binding arbitration mirror the most commonly cited negatives associated with litigation: faster resolution and reduced expense. There is no denying that traditional litigation takes too long and is very expensive. Arbitration is substantially faster than litigation in the overwhelming majority of cases (often less than 6 months with no mechanism for appeal compared to 1.5 to 2 years through trial in traditional litigation, with the possibility of several additional years if the case goes to appeal). Arbitration can also be substantially less expensive than traditional litigation, although not in every case. Depending on the arbitration agreement and the rules of the organization conducting the arbitration, discovery is likely to be substantially limited, which significantly reduces both the cost and invasiveness of traditional litigation.

Despite the benefits of arbitration, there are still many cases in which it is not the best option. First, arbitration of claims involving larger amounts often requires payment of substantial upfront fees. While court fees are typically a flat fee of a few hundred dollars, a large dollar case in front of AAA, for example, can require the payment of $15,000 – $20,000 in administrative fees to AAA prior to any award by the arbitrator. Moreover, the benefits associated with limited discovery are only beneficial in cases in which the parties are able to obtain the necessary evidence to prove their case. Discovery is often considered critical in litigation, and the significant limitations on discovery in arbitration may prevent a party from obtaining critical evidence. Finally, in our experience, there are fewer opportunities for dispositive motions, and dispositive motions are less likely to be granted, in the arbitration context. In those circumstances in which a client is likely to have strong legal defenses and a reasonable probability of success on a dispositive motion, the client may well be better off in traditional litigation with an opportunity for appeal if the decision at the trial court level goes the other way.

The attorneys at Dioguardi Flynn have extensive experience in both arbitration and litigation, and can assist clients in determining which approach is in their best interests in their specific situation.

The attorneys at Dioguardi Flynn LLP have extensive experience in litigating a wide array of civil/commercial litigation matters in the State and Federal Courts of Arizona and throughout the country. They have gained substantial experience over the years addressing the needs of their Internet-based clients as well, including claims involving the Digital Millennium Copyright Act (“DMCA”). Please contact John at 480-951-8803 (jflynn@dioguardiflynn.com) or Peter at 480-951-8806 (pmoolenaar@dioguardiflynn.com) if you would like to discuss obtaining legal advice and representation.

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Now the Arizona Supreme Court has another request before it to review the Act being pushed by a host of business and immigrant support organizations. Although it hasn’t accepted the appeal, the Arizona Supreme Court has requested the Obama administration’s Solicitor General to submit a brief outlining the federal government’s views on the Act. Although the federal government isn’t a party to this current appeal, the Supreme Court requested the administration provide its input before the appellate court decides whether to accept the appeal and hear the case since immigration laws and enforcement have typically been a matter solely within the authority and purview of the federal government. The Arizona Solicitor General has already submitted a brief which asserts the Arizona Supreme Court shouldn’t accept and hear the appeal. The state asserts the federal Immigration Reform and Control Act of 1986 expressly authorized states to impose sanctions through “licensing and similar laws”.

It will be interesting to see if, and what the administration files in response to the Arizona Supreme Court’s request. The Arizona law was signed into effect by then Arizona governor, Janet Napolitano, the current Secretary of the Department of Homeland Security. Also, during the campaign, then-candidate Obama repeatedly asserted that the enactment of various separate state immigration laws “underscored” the importance of the federal government establishing “comprehensive immigration reform”. Campaigning is one thing — the realities of the office are altogether another. Since taking office, President Obama has spent his time on a host of domestic policy issues and is now saddled with the healthcare reform debate. Federal immigration reform hasn’t surfaced as a priority, although the talking heads expect the issue to arrive front and center in 2010.

The fact the Arizona Supreme Court has requested the Obama administration weigh-in on this issue as it decides whether to accept the pending appeal certainly seems to indicate Arizona’s highest state court is poised to take a hard look at the law. Since a host of states have copied Arizona’s law to enact their own state immigration enforcement legislation, it seems likely the federal government will take up this issue in the coming year. It would not be surprising to see the Arizona Supreme Court accept the appeal and render a decision on the enforceability of Arizona’s law before any new federal legislation is passed. Given the political make-up and geographic location of Arizona, don’t be shocked if Arizona took another run at instituting Arizona legislation addressing immigration enforcement if the current Arizona law is struck down as unconstitutional. Any such state effort might run in to a road block if President Obama picks up the mantle of federal immigration reform in 2010. Of course, campaigning is one thing — enacting comprehensive federal legislative reform is entirely another topic altogether.

Whether Arizona’s employers are seeking to comply with the current Arizona law or understand the anticipated federal developments in 2010, the attorneys at Dioguardi Flynn LLP can assist to best ensure Arizona’s employers don’t find themselves with Sheriff Joe, County Attorney Thomas or their brethren knocking on the door.