[EDRM Editor’s Note: The opinions and positions are those of Michael Berman.]
In Digital Forensics Corporation, LLC v. King Machine, Inc., __ So.3d __, 2025 WL 63935 (Ala. Sup. Ct. Jan. 10, 2025), the issue was whether an electronic discovery services vendor, DFC, could compel its former client to arbitrate a breach of contract claim. The Supreme Court of Alabama held that arbitration was compelled.
Plaintiffs sued DFC. They alleged that they had hired DFC to perform electronic discovery services. Specifically, it was alleged that DFC was engaged to comply with a court order on discovery that was “very thorough and require[d] a complicated process for searching, retrieving, and storing for further search of the data on electronic devices.”[1]
Plaintiffs alleged that, before retaining DFC, they “examined the Defendant’s website, where the Defendant holds itself out as a computer forensics and e-discovery expert.”
In the Complaint, plaintiffs recite a number of alleged representations by defendant, DFC. Id. at *2, passim. Plaintiffs further allege – – and I emphasize in fairness that, at this point, these are unproven allegations – – that these were misrepresentations by DFC.
Plaintiffs alleged that: “Ultimately, Plaintiffs continued to work with DFC, but DFC was not able to put the data and documents into a format that could be transferred, used and searched by opposing counsel as required by the ESI Discovery Order and the instructions contained therein….” Eventually, plaintiffs had DFC transfer the data to another vendor. Id. at *2. They allege that, after starting over, they were able to produce the data to opposing counsel through the new vendor, Epiq Systems, Inc.
The claim was for $50,291.93, plus $15,000.00 for court ordered sanctions, and attorneys fees and expenses of $107,430.44.
DFC moved to “dismiss the case and compel the Plaintiffs to submit to the Complaint Resolution Process outlined in their contract or, in the alternative, dismiss the case pursuant to the forum-selection clause set forth in the Jurisdiction provision of the contract.” Id. at *4.
The contractual clause is quoted in full at page *4 of the court’s opinion. In brief summary, it required prompt communication of any grievance, time to cure, an internal complaint escalation process, mediation, and: “If mediation is unsuccessful, the dispute shall be submitted to binding arbitration pursuant to the commercial rules set by the American Arbitration Association.”
Plaintiffs argued that the arbitration clause was fraudulently induced and unenforceable. Id. at *5. The court wrote that the supporting factual allegations “were substantially similar to those allegations included in the complaint and quoted above.” Plaintiffs wrote that: “Based on the representations of [DFC’s] expertise, it did not appear that these [alternative dispute resolution] issues would arise or that the [ADR] clauses would ever come into effect.”
After court-ordered mediation, the parties reported that they were unable to reach a settlement.
Thus, the plaintiffs’ fraud-in-the inducement claim is directed toward the agreement as a whole and not solely at the arbitration provision itself. Therefore, the plaintiffs’ “allegations of fraud in the inducement do not provide a basis for avoiding arbitration.”
Digital Forensics Corporation, LLC v. King Machine, Inc., __ So.3d __, 2025 WL 63935, at *6 (Ala. Sup. Ct. Jan. 10, 2025).
The trial court denied the motion to compel arbitration. The Supreme Court of Alabama reversed. Id. at *7. In part, it wrote:
In this case, the plaintiffs argued that DFC induced King Machine to execute the agreement to retain DFC, and the arbitration provision included therein, by misrepresenting its ability to perform the electronic-discovery services in the manner required by the discovery order in the litigation in the Etowah Circuit Court. Thus, the plaintiffs’ fraud-in-the inducement claim is directed toward the agreement as a whole and not solely at the arbitration provision itself. Therefore, the plaintiffs’ “allegations of fraud in the inducement do not provide a basis for avoiding arbitration.”
Id. at *6.
For information about vendor selection see The Sedona Conference, “Guidance for the Selection of Electronic Discovery Providers,” 18 Sed. Conf. J. 55 (2017).
Although it is many years old, Sedona provides information as well as forms and checklists. “Basic contract provisions like liability, indemnity, confidentiality, insurance, and many other terms should be considered and agreed to by the parties.” Id. at 116-17. “Organizations may want to work with their procurement department regarding appropriate terms and conditions.” Id. at 117.
Regularly scheduled meetings, and key performance indicators (KPI’s) may be topics of discussion. Id. There should be “a clearly defined escalation process” to provide for quick remedies. Id.
My first question to any vendor or expert is to determine if there is a conflict of interest. Sedona explains why.
Conflict of interests should be checked, defined, and provisions included in the contract. Id. at 102-04. Sedona recommends “that any service agreement to be ultimately executed by the parties contain a clause memorializing the parties’ agreement concerning conflicts.
This is especially important in light of the fact that Providers are not bound to the rules of ethics that preclude attorneys from representing parties who are adverse to their clients.” Id. at 104 (emphasis added).
Notes
[1] Appellees’ Reply Brief, 2024 WL 4483520, at *1. Appellees argued that: “The Order on Electronic Discovery Protocol (directing e-discovery and the procedures) and the Questionnaire filled out by King Machine’s attorneys describing the services needed, were part of the contract. Indeed, they were the very essence of the overall agreement.” Id. at *2. The underlying lawsuit “was ultimately resolved and was dismissed on August 17, 2021.” Id. at *3.
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