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Quirky Question #248, Is arbitration really better than court?


My company is considering implementing a policy of mandatory arbitration of employment disputes.  Putting aside the legal considerations, is this practically a good idea?

Answer: By Joel O’Malley and David Murphy

Joe O'Malley

Joe O’Malley

David Murphy

David Murphy

I have been hearing this question more and more in recent years as defending against baseless lawsuits by employees becomes increasingly costly (okay, I admit they’re not all baseless) and arbitration becomes more popular.  Despite these general beliefs, employers do not always benefit from arbitration and should carefully weigh the pros and cons before committing to an agreement that may benefit the employee in a later context.

Generally, arbitration fosters less costly and contentious discovery (the phase when documents are exchanges and depositions occur), particularly if some constraints on allowable discovery are imposed. This benefit will be reduced, however, when an arbitrator allows discovery to be as broad as that allowed by a judge, or when the arbitration hearing is likely to be lengthy. If discovery constraints are imposed, arbitration usually will favor the employer because the employer generally has more of the facts, receives broader and more burdensome discovery requests in normal litigation, and has employees who must miss work to respond to discovery and deposition requests.

Another advantage is that parties may select their arbitrator, rather than simply being assigned a judge or jury, and therefore have some say in who will decide their dispute. Selecting the best arbitrator is not always an easy task, though; it can be difficult to find out much information to confidently predict an arbitrator’s likely leanings.

In arbitration, employers are not faced with potential run-away juries. Both parties have improved chances that the case will be decided on its merits, rather than on prejudicial or inflammatory evidence.

Finally, arbitration may provide greater privacy to the parties. Privacy may be particularly important when the allegations or evidence are considered sensitive. This privacy benefit should be tempered against the trend of parties starting to publicize arbitration demands and victories with the same regularity as they publicize court complaints and verdicts.

The major disadvantage to arbitration is that arbitration awards are virtually non-appealable. As a result, the parties are essentially stuck with errors of law or clearly erroneous factual findings. As the use of arbitration becomes more frequent, parties should benefit from arbitrators who are both impartial and well versed in employment law, which reduces the likelihood of such errors. Arbitration may be ill advised if novel claims or defenses are to be advanced. Further, arbitrators are more likely to “split the baby” when issuing a decision, rather than strictly follow the law. For example, an arbitrator may compromise strong cases for employers by ordering reinstatement without back pay. This results in a bad precedent for the employer, as well as the reinstatement of a disgruntled employee.

In addition, discovery in arbitration seems to be moving more liberal, with arbitration mirroring litigation in terms of pre-trial and trial practice. Moreover, because arbitrators are generally paid by the hour, they have a strong financial disincentive to streamline proceedings. As a result, there often is no reduced expense over going to court.

Because evidentiary rules are more relaxed in arbitration, undesirable and otherwise inadmissible evidence may be admitted. Arbitrators are less receptive to technical and procedural defenses (like statutes of limitations) and rarely dismiss claims on motions to dismiss or for summary judgment. Unlike judges, arbitrators have little incentive to clear their dockets. Thus, almost all cases are likely to advance to a hearing on the merits. Arbitrators also seem to be less likely to exercise control over attorney misbehavior than are judges, potentially increasing both expense and headache.

Finally, some experts assert that the easy access, inexpensiveness, and privacy of the arbitral forum may actually increase employees’ willingness to sue, and therefore increase the number of claims against the employer. There is no hard evidence yet to support this assertion.

Before determining whether an arbitration agreement would be appropriate or desirable, an employer must carefully examine itself, its workforce, and its legal situation. The decision to use an arbitration agreement should not be made lightly because the agreement will affect the legal rights of both employer and employee. Before implementing an arbitration policy, the employer must contemplate the effect such a provision might have on employee morale, recruitment, retention, labor relations, customer relations, and on the employer’s overall legal situation. All these factors should be considered, in consultation with legal counsel, before an arbitration policy is implemented.

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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