Amazon’s Arbitration Clauses Highlights Need for Contract Management

Amazon, like many large companies, utilized a provision in its terms of service requiring customers to resolve disputes in private arbitration rather than the traditional court system.

Amazon recently and abruptly changed its terms of service to allow customers to file lawsuits instead of being forced into arbitration. Specifically, Amazon’s conditions of use page, which was updated May 3, now states that “any dispute or claim relating in any way to your use of any Amazon service will be adjudicated in the state or federal courts in King County, Washington, and you consent to exclusive jurisdiction and venue in these courts.”

The company changed its terms following more than 75,000 individual arbitration demands being filed by plaintiffs’ firms on behalf of Echo device users. According to Amazon’s policies, and as reported by The Wall Street Journal, the company was responsible for tens of millions of dollars in filing fees associated with the arbitration proceedings. Call it the law of unintended consequences.

While Amazon made the change without comment, it’s reasonable to conclude that it perceived the potential costs associated with class action arbitrations to be higher than those it might (and almost certainly will) face with class-action lawsuits.

These developments are significant and interesting from a litigation perspective. Arbitration clauses in terms of service such as the one Amazon previously used became commonplace following the 2018 U.S. Supreme Court decision in Epic Systems Corp. v. Lewis in which the Court, in a 5-4 decision, reinforced the enforceability of agreements to arbitrate.

The situation also highlights important issues and risks concerning commercial contracts. Because Amazon has a standard terms of service agreement that its customers must agree to and that lives on the cloud, updating its agreement to arbitrate provision was likely a simple process. But for many companies, which may have hundreds if not thousands of unique commercial contracts to manage, the process of implementing a global change is not so simple. In some cases, companies don’t even have a handle on how many contracts they have in place.

The way to avoid the headaches and costs associated with an ad-hoc approach is to build a structured contract management system.

The Importance of Commercial Contract Management

Contract management begins with what we call a structured intake process and continues through the entire contract lifecycle. With an effective process in place, it means that your company’s contracts will be located in a centralized location, organized, secure, and can be reported on easily. Because your people tasked with managing contracts need to be able to (i) locate files quickly, (ii) understand a contract’s status and purpose, and (iii) make updates as appropriate, an ad-hoc approach leads to waste and inefficiency, whereas a structured and systemized process minimizes risks and increases business performance.

Contract management involves understanding every aspect of a contract’s lifecycle. A Gartner report stated that contract lifecycle management “is evolving from an operational record-keeping system to an enterprise-level core system addressing business risk, costs, and the pursuit of revenue maximization.” One of the benefits of contract lifecycle management is that it allows businesses to extract meaningful insights, called “management information,” from their contracts.

Some of these benefits include:

First, because management information allows legal departments to continually iterate and improve contracting processes, it can transform perceptions about legal within a company from a department that slows things down to one that is integral to the speedy execution of contracts.

Second, a focus on management information leads to greater engagement across a business with commercial contract review. Accurate and consistent after-the-fact reporting leads business people to be more thoughtful and strategic about what information goes into the front-end of contract review.

Third, after analyzing the reporting made possible by commercial contract management information, other units within a business often adopt similar data gathering and reporting practices, which allow them to improve their own, non-legal processes. As Peter Drucker wrote in his book The Practice of Management, “What gets measured gets managed.” Better information empowers better decision-making across a business.

Fourth, management information helps to improve contracting velocity, which helps a business to improve performance. Earnings, profits, and shareholder value can all be positively impacted when a business can more efficiently move important contracts through a structured system of review.

Finally, in-house legal professionals who embrace the power of management information within their organizations distinguish themselves as innovative leaders. It’s easy to get caught up in the day-to-day whirlwind of activity that consumes most corporate legal departments. Despite an immense need for more innovation that is grounded in data and analytics, many in-house lawyers don’t have the capacity or technological know-how necessary to push forward new initiatives on their own. By tapping an outside resource, such as Lexitas, that excels at establishing effective commercial contract management systems, an in-house lawyer can leverage the power of management information to make an important contribution to their company’s bottom line.

Get a Handle on Your Commercial Contracts

The Amazon arbitration story is a stark reminder of the importance of having a structured commercial contract management system in place. Is it time to take a fresh look at your businesses’ systems or lack thereof?

Many corporate legal departments rely on Lexitas to handle their contract work with higher quality, quicker response, better management information, and at a lower cost than in-house resources. It is our people and processes that set us apart.

●     People: We thoroughly vet attorneys, paralegals, and other professionals who work in our Commercial Contracts group. Our dedicated team members specialize in the review and negotiation of contracts and develop and expertise for particular document types. What might take them 20 minutes could take an inexperienced attorney twice as long to complete. And because our people excel at what they do, this allows your people to operate at their highest and best use as well, rather than getting bogged down by commercial contracts.

●     Process: We review your current commercial contract process, suggest process improvements, and completely document the final process so the work is done the way you want it, every time. From intake to allocation to the creation of playbooks, the process is what allows contracts to flow through your system efficiently and effectively.

Contact us to learn more about ways we help our clients improve their contract processes and free up their in-house teams to get more done.