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Mandatory Arbitration, Quirky Question # 59

Quirky Question # 59:

We are a large company with substantial number of employees.  We have decided to compel our employees to arbitrate all of their employment claims, through the adoption of a mandatory arbitration policy.  Since we are writing the agreement that binds the employees, we have decided to include a provision barring any class action claims.  Any problems with this approach?

Dorsey’s Analysis:

The fundamental questions your company is evaluating – should your firm adopt a mandatory arbitration policy, and how should it be written – are important inquiries. Before you completely commit to the arbitration path, let me offer a few observations for your consideration. Then, if your company still wishes to implement a mandatory arbitration policy, I’ll offer a few suggestions on the contours of such a policy.

As you know, there are pros and cons to requiring your employees to arbitrate their employment claims with your company. The principal justification I hear expressed for the adoption of an arbitration policy is that mandatory arbitrations save companies money. Frankly, I’m not convinced that’s true.

I don’t dispute the notion that a case filed and resolved by an arbitrator following a hearing is likely to be less expensive than a case filed and resolved by a federal or state court judge following a trial. But the broad question of whether requiring your firm’s employees to arbitrate their claims would be less expensive for your firm should not be assessed on this type of single case comparison alone. I suggest that you consider whether your company, when assessing all of the potential claims and/or litigation, would spend less on employment lawsuits if you adopted a mandatory arbitration policy. There are a number of variables that cause me to question whether these policies truly result in a cost savings.

First, as you likely know, most civil cases that get filed in state or federal court, are resolved before trial. (I’ve seen different statistics on this question but nearly all of them are that fewer than five percent of filed cases actually are tried to verdict.) Many of them are resolved through a motion for summary judgment. Occasionally, they are resolved at an even earlier stage in the proceeding, through a motion to dismiss. The expenses associated with these dismissed cases are substantially less than cases that are tried to verdict.

In arbitrations, however, you rarely can persuade an arbitrator to dismiss a case early on. Even obtaining summary judgment is an unusual event in an arbitral forum. Some arbitrators won’t even allow parties to file such a motion. Other arbitrators permit such motions to be filed but grant them only infrequently. Given these facts, the more meaningful comparison is what will it cost your company to participate in an arbitration hearing 95 percent of the time. Juxtapose that figure to what it would cost your company to try in court fewer than 5 percent of the cases.

Second, a potentially significant part of litigation expenses are the fees associated with discovery. But, the federal and state courts have taken steps to rein in discovery expenses. For example, in the federal courts, as well as many state courts, lawyers need agreement from opposing counsel or judicial permission to take a deposition for more than seven hours. Moreover, if there are discovery abuses, these issues can be brought to a court’s attention. In contrast, arbitration is a far more undefined environment. Some arbitrators allow substantial discovery; others do not. Some arbitrators will simply use the federal or state rules of civil procedure when defining the appropriate scope of discovery, which means that there will be only a minimal cost savings in this area. (One practical recommendation for you, as a consequence, is to consider how your firm would like to define the scope of appropriate discovery in your arbitration policy. A corollary cautionary recommendation is that, although discovery can be expensive, you should not be too limiting in defining the scope of permissible discovery. Don’t write your policy in a way that precludes all depositions or so circumscribes your ability to obtain information from the plaintiff before the hearing that you are clueless as to what your employee, or former employee, will say when testifying.)

Third, keep in mind that you have to pay arbitrators. You don’t have to pay state or federal judges. Moreover, an arbitrator has a financial incentive to allow a broad inquiry. That is not true for judges, whose dockets typically are so congested that they work diligently to assist the parties to resolve the matters before trial, and sometimes (if those efforts fail) impose tight time limits on the actual trial itself.

A second common justification advanced by those advocating arbitration is that arbitration is a more expeditious dispute resolution procedure than civil litigation in state or federal courts. This is probably true. But, when viewed from a defense perspective, I’m not sure this is necessarily an advantage. Moreover, if defendants are eager to move a case along more quickly, there are many ways to expedite the process (short discovery periods, early motions, early deposition of plaintiff, etc.). Typically, however, defendants recognize that delay is not disadvantageous.

A third issue you may want to consider when evaluating the desirability of requiring arbitrations is the question of finality. There are pros and cons to assess on this point. If you mandate arbitration of employment claims and the claims are pursued through a hearing result, the case is over. (This is true except in the rarest of cases, beyond the scope of this Blog analysis, where arbitrators make errors that cause courts to step in post-arbitration.) In short, there is finality with the arbitrator’s determination. There likely will be times, however, when an arbitrator renders a decision you simply cannot believe. In this context, you will wondering how quickly you can file your appeal. Simply put, you can’t. As just stated, except in extraordinary situations, the arbitrator’s decision ends the case.

In a judicial forum, of course, if the jury gets it wrong, you have the right to file post-trial motions, in which you ask the court to rectify a jury’s “mistaken” analysis. If the judge doesn’t share your perception that the jury erred, you have the right to file an appeal. If the intermediate appellate court also is unconvinced by your arguments, you can petition for review by a higher court. In other words, you often will have three layers of appeal from an adverse decision. Before you decide that you are going to adopt a mandatory arbitration policy, consider what you are giving up.

A fourth general observation regarding arbitration is that the Rules of Civil Procedure (all 300-plus pages), whether for federal or state courts, have been thoughtfully developed over decades. They address a multitude of issues that can arise in civil litigation. Arbitration rules, in contrast, if defined at all, usually are set forth in a few brief pages. This leaves a great deal of room for interpretation, rather than providing the clarity and certainty associated with the well-defined rules of civil procedure. Further, the Rules of Evidence also provide parties with guidance on what evidence is (and is not) admissible. In the arbitration context, the evidentiary standards usually are far more lax. So, for example, an arbitrator may be far more inclined to admit evidence that is only marginally relevant, or is based on otherwise inadmissible hearsay, than his or her judicial counterparts. This can prolong a hearing, introduce extraneous issues, and, at times, be outcome determinative.

My last general observation is that arbitrations sometimes involve “compromise” resolutions. More than a few arbitrators adopt a “split-the-baby” approach. This may reflect the fact that the arbitrators are hoping that at some future point, they will be retained by the parties and their lawyers in connection with another dispute. Judges, in contrast, do not feel that financial pressure and generally are indifferent to the prospect of involvement in future disputes involving the same parties. Therefore, they may be a bit less inclined to reach a compromise resolution.

I hope I’ve raised a few general issues for you to evaluate regarding the adoption of a mandatory arbitration policy. Assuming, however, that your firm still wants to implement an arbitration policy, let me now address the specific question you posed regarding the prohibition of class actions in the policy.

Many courts recognize that employees do not truly “bargain” with respect to policies and procedures that employers adopt and impose upon them. Therefore, courts scrutinize these “contractual” obligations carefully. Although the courts have found that employer-imposed arbitration policies are enforceable, courts often evaluate whether the policies implemented by employers either impose obligations on employees that would not exist in the court system, or deprive employees of the rights they otherwise would have if the claims were being pursued in court. For example, when employees are required to pay a portion of the arbitration costs, courts often have rejected those arbitration policies since the employees would not be obligated to pay these costs to pursue a claim in federal or state court. Conversely, if the arbitration policies take away rights available in a judicial forum, such as the right to pursue claims on a class action basis, again courts are skeptical. Judicial skepticism, especially when applied to arbitration policies, often results in a repudiation of the arbitration agreement as “unfair,” or “unconscionable,” or an “adhesion” contract. In other words, courts hold these types of agreements unenforceable.

Here, you are contemplating prohibiting employees from pursuing class claims through your arbitration policy. Yet, if employees can meet the standards for class claims in a judicial forum, they would be able to pursue a class wide claim. Therefore, a court may well conclude that your arbitration policy deprives employees of rights to which they otherwise would be entitled and reject your policy on that basis. Given that risk, I recommend that you not include such a prohibition in your company’s arbitration policy. Inclusion of this type of provision risks invalidating the entire arbitration policy.

Dorsey & Whitney

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