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Why Arbitration Agreements Are No Panacea for Employers
Jean Holloway, Faegre & Benson LLP

Since the decision of the United States Supreme Court in Gilmer v Interstate Johnson Co. in 1991, employers have been free to compel applicants, employees, and former employees to arbitrate any dispute over employment-related actions. While there has been some disagreement about the requirements necessary to create an enforceable arbitration agreement or policy, courts will generally enforce an agreement if the employer followed certain guidelines – despite strenuous arguments by employees that arbitration agreements are coercive and that arbitration strongly favors employers.

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).