The real questions that remain are whether arbitration agreements are in the best interests of the employer – and when and if an employer should invoke them. While originally a darling of the employment defense bar, arbitration has proven to be no panacea for employers. Most defense counsel now advise employers to be very cautious about which cases, if any, they should seek to push into arbitration.
The Downside of Arbitration
There are several downsides to arbitration for employers.
First, arbitration agreements are often a turn-off for highly qualified applicants, and an employer may risk losing such applicants, or even current employees, if it insists that all employees sign arbitration agreements as a condition of employment. While this is less of a problem under current market conditions, it can be and has been a problem for employers when unemployment is low and competition for candidates is stiff.
Second, arbitration rarely turns out to be significantly less costly for an employer than a court proceeding. Usually, there is lengthy court wrangling over whether the arbitration agreement is enforceable. (Few arbitration agreements are so tightly written that the employee cannot make at least some reasonable claim that the arbitration agreement is not enforceable.) In addition, a trial court order compelling arbitration and dismissing claims over enforceability is appealable, meaning that an employer may be faced with yet another legal (and expensive) skirmish in the courts of appeal before the case ever reaches arbitration.
Assuming the matter does proceed to arbitration, the parties then must go through the expense of finding a suitable arbitrator (if one is not appointed under the agreement) and must pay the arbitrator. The selection process for arbitrators is often time consuming and expensive and can result in the elimination of the best candidates. If an employer seeks to avoid this problem by providing a pre-determined list of acceptable arbitrators, that decision itself may provide a basis for the employee to challenge the impartiality of the process.
Sometimes, the employer is saddled with the entire expense of the arbitrator (which can be as much as $300 per hour) for all pre-hearing, hearing, and post-hearing matters. If more than one arbitrator is involved, the expense increases dramatically, as does the length of time necessary to complete the hearing.
Moreover, arbitration hearings often end up being longer than a court trial. Unlike trial court judges, arbitrators have little incentive to streamline the hearing (either through controlling discovery, thoughtfully considering dispositive motions or controlling the evidence presented at the hearing), so that an arbitration hearing can take much longer than even a jury trial. This is particularly true given that, unlike court hearings, arbitration hearings can be heard in bits and pieces over the course of several months. The "start and stop" nature of some arbitration hearings can add significantly to the expense, as lawyers and witnesses must re-prepare for the hearing. Further, the rules of evidence only loosely apply, so that hordes of unnecessary or inflammatory (but irrelevant) information may be allowed into the hearing.
Arbitrators also are much less likely to grant summary judgment than courts due to a number of factors. The reasons have little to do with the merits of the case; rather, they relate to the arbitrator’s comfort level than arbitrators with, and resources to handle, summary judgment motions: Trial court judges generally are more knowledgeable about applicable law and feel more confident than arbitrators in summarily dismissing bad claims, particularly because losing plaintiffs can always appeal. Judges also are more comfortable with summary judgment procedures and usually have the resources (e.g., a law clerk) to better handle summary judgment motions.
Arbitrators are also at a disadvantage relative to courts in controlling unruly attorneys. Without the benefit of repeat experience with a particular lawyer, an arbitrator may be less likely to identify those attorneys who are engaging in bad behavior. Attorneys who are masters at behind-the-scenes borderline behavior, thereby skirting discovery obligations and/or frivolously multiplying the proceedings, are likely to benefit from an arbitrator’s lack of experience or confidence. These uncontrolled antics can unduly prolong an arbitration hearing, make it more costly, and sometimes prejudice the outcome of cases that an employer otherwise anticipates winning.
In addition, arbitration agreements do not protect employers from parallel or subsequent lawsuits by the EEOC. The Supreme Court held just last year that, even though an employee was plainly compelled to arbitrate his employment claims, the EEOC was not precluded from suing the employer for the full complement for relief (back pay, reinstatement) based on an EEOC charge filed by the employee. Further, courts have not yet decided whether arbitration agreements can be enforced in putative class actions. NASD and NYSE rules flatly prohibit arbitration under such circumstances, and the Supreme Court is expected to release an opinion on this issue in Green Tree Financial Corp. v. Bazzle (involving arbitration of class claims awarding $27 million to consumers) before the end of the current session on June 30, 2003.
Arbitration also does not automatically protect an employer from the publication of highly inflammatory allegations. While the media generally does not have access to arbitration filings or proceedings, plaintiff’s lawyers are free to tout their allegations and results to the media for publication. Like large jury verdicts, large arbitration awards will capture the attention of local or even national newspapers.
Finally, and worst of all, there is a tendency among arbitrators to "split-the-baby" – and their decisions can be virtually non-appealable. As the Supreme Court held recently in Major League Baseball Players Ass’n v. Garvey, "if an arbitrator is even arguably construing or applying the contract and acting within the scope of his authority, the fact that a court is convinced he committed serious error does not suffice to overturn his decision." Even if an arbitrator finds for an employee on a small matter and awards de minimis damages, the employee’s lawyer might still be able to recover a significant portion of his or her attorneys’ fees, which, given the length of the arbitration hearing, might be more than if the case had been tried in court. And, while it appears, at least anectodally, that arbitration awards are lower than those generally rendered on the same facts in court, the size of arbitration awards in all types of cases has been steadily increasing up to and including multi-million dollar awards.
Strategy for Arbitration Policies
When, if ever, should an employer choose to have an arbitration policy or to arbitrate claims?
As a guideline, employers who have few employment-related cases are generally as well or better off having no arbitration provision and simply settling "bad" cases before they have the opportunity to cause significant adverse publicity. Typically, most plaintiffs lawyers are "kind" enough to provide advance notice of the filing of such cases. By this method, employers still get the benefit arbitration agreements might provide for high exposure or high profile cases (e.g., reduced arbitration awards or private proceedings) without the risk of annoying good applicants or employees or of employees invoking an arbitration procedure in cases where the employer would prefer to go to court (e.g., where summary judgment is highly likely, highly inflammatory evidence would not be admitted by the court, or significant legal issues are subject to appeal).
Employers who benefit most from arbitration agreements are those who face frequent suits from their employees and those who have a well-established procedure that works for arbitrating those types of cases. Much of the frustration of the defense bar with arbitration stems from arbitration proceedings with three arbitrators and lax rules regarding discovery, dispositive motions, and the conduct of the hearing. It is one thing to receive an adverse verdict of $10,000 after three days of hearing by a single arbitrator; it is quite another to receive such a verdict after failed intervention by a three person panel in discovery disputes and dispositive motions that result in a hearing that takes 30 days over 9 months.
Therefore, employers who wish to adopt arbitration agreements either should choose a method that works or develop an internal arbitration procedure that carries most of the attributes of a court proceeding. In devising these arbitration agreements, however, employers need to be wary of adopting provisions that are overtly employer-friendly or which have the effect of discouraging employees from pursuing their statutory claims. Recently, for example, the Sixth Circuit Court of Appeals invalidated provisions of employers’ arbitration policies that provided for splitting costs and arbitrator fees or sought to cap the remedies the employee could recover. The Court determined that even $1,600 was too much to ask an employee making $50,000 per year to pay in costs and fees, and the employee had to be able to recover precisely what s/he could recover in court had the matter been brought there.
In devising such agreements, employers also should devise rules and procedures that they themselves are prepared to live by. Many courts conclude that, to be enforceable, the arbitration policy must be based on mutuality – i.e., the employee, as well as the employer, has the right to invoke arbitration. As such, the employer should carefully carve out from arbitration disputes that it wants to pursue in court (e.g., temporary restraining orders for breach of non-compete agreements), but otherwise devise precise and fair rules that produce a fair, cost-effective result.
Reviewing Cases
Those who choose to have arbitration agreements should carefully review each case after it is filed and, if they have the option, pursue arbitration only when several of the following factors are met:
- Summary judgment is highly unlikely
- The matter does not involve a class action
- The case is high exposure with highly inflammatory facts
- The judicial assignment or judicial forum may be extremely poor and unavoidable
- Senior management are likely to be key witnesses
- The case involves highly complex or technical facts which may be beyond the knowledge of most jurors and the employer is relatively certain that it will have an arbitrator with the requisite experience.
The most important of these factors is the first. Rarely should an employer pursue arbitration when it believes that it has a high probability of success on summary judgment, since the probability of obtaining summary judgment in arbitration is much less than in court. The others are factors that competent counsel usually can handle. In being selective, however, about which cases it seeks to put into arbitration, employers must be mindful that many courts require "mutuality of obligation" – i.e., that the employees also be able to invoke arbitration.
It is not yet decided whether employers can compel arbitration of class claims. The upside of arbitrating these claims is that it may scare inexperienced plaintiffs’ counsel away from pursuing these types of cases or even experienced counsel who are concerned about the potential for reduced class damages and reduced fee awards. They may also be concerned that an arbitrator would be less likely to grant class certification.
However, arbitration of class claims is still largely untested and many arbitrators have not had the same experience as federal and state trial court judges with all of the class management issues, including certification. Sometimes an employer’s best defense to a putative class action is a well-timed, targeted motion to deny class certification, which may be better handled by a judge experienced in these matters. Further, a judge may be more willing than an arbitrator to reconsider class certification previously granted. Given that arbitration has not lived up to its promises in individual cases (at least to the defense bar), employers should approach arbitration of class claims with trepidation.
Jean Holloway practices in complex employment and commercial litigation. She is current president of the Hennepin County Bar Association, Minnesota. She may be reached at jholloway@faegre.com.