Has Employment Arbitration Finally Come Of Age?

Friday, April 1, 2005 - 00:00

Companies have long understood the appeal of arbitrating employment disputes. Jurors often can identify with an employee complaining about his or her boss, and see the employer as an insensitive behemoth with deep pockets.The confidential and informal nature of mandatory arbitration can also protect an employer from embarrassing scrutiny that often arises from allegations that an employee has been exploited, even if such charges are later determined to be unfounded.Many employers who have seen these dynamics play out still have misgivings about arbitration.The common refrain from such skeptics is that arbitration presents yet another issue to litigate over, does not reduce costs, takes too long, and can result in poorly reasoned decisions.Many employers, however,have concluded that these obstacles can all be eliminated through a well-drafted mandatory arbitration agreement that is a basic term and condition of employment.

While it is true that mandatory employment arbitration has previously been hampered by conflicting court rulings, and outright hostility from the United States Equal Employment Opportunity Commission ("EEOC"), these hurdles have largely been eliminated.In 2001, the United States Supreme Court ruled in Circuit City v. Adams1that agreements to arbitrate employment disputes are not exempt from enforcement under the Federal Arbitration Act ("FAA").2 Moreover, although the EEOC has not formally rescinded a 1997 position statement3that firmly rejected the use of mandatory arbitration as being "contrary to the fundamental principles evidenced in [anti-discrimination] laws," the agency has softened its position.Citing widespread judicial acceptance of mandatory employment arbitration, the EEOC recently agreed to settle an action in which it challenged the legality of such arbitration agreements.4

As these judicial roadblocks to mandatory employment arbitration have been largely removed, employers seeking to implement an arbitration agreement can now focus on making sure that such programs provide an efficient alternative to litigation.This article provides a brief overview of how employers can create a program that is both workable and enforceable.

The Arbitrator

Arbitration undoubtedly has the additional expense of hiring an arbitrator.Courts are divided on the question of whether fee-splitting clauses essentially deprive the employee of a meaningful opportunity to "file suit."While some Federal Courts of Appeal have concluded that arbitration cannot cost the individual more than it would to go to court, others have looked to the person's ability to share the costs when evaluating such provisions.5 Given that cost-sharing is only an issue in the context of vindication of employees' statutory rights, arbitration agreements may provide for cost-sharing for non-statutory claims (e.g., breach of contract disputes) without running afoul of the law.6

While the expense of arbitration is not insignificant, anyone who has litigated a case to verdict knows all too well that traditional litigation can be incredibly inefficient and expensive.The cost of defending an employment case in court through trial often exceeds $200,000.The average cost of employment arbitration is $35,000.7The never-ending growth in civil dockets has been accompanied by increased wait times, with the average civil case pending for over two years.8 A properly structured arbitration program can reduce these delays and corresponding expenses.For example, the long-standing requirement of arbitration in the securities industry has been estimated to reduce the costs of litigation by two-thirds.9 At a minimum, an arbitration agreement can adopt the same types of rules that have permitted several federal district courts to develop "rocket dockets." These streamlined practices discourage "over-litigation."Such procedures can also include basic default guidelines, such as holding all conferences by telephone, and bifurcating liability from damages so that the need to provide discovery related to damages may be avoided altogether.Finally, a well-drafted arbitration agreement can specify a limited pool of independent arbitrators whose expertise in employment law10allows discovery disputes and dispositive motions to be resolved efficiently.Such expertise can also direct counsel as to whether expensive expert testimony is needed.

Limiting Discovery

One of the principal ways of reducing arbitration expenses is to control discovery.The tension between efficiency and the need to protect an employee's due process rights are obvious.If employees are unable to obtain discovery in cases that are often dependent on circumstantial evidence, they can readily argue that they have been deprived of due process.One practical solution to balance the need for discovery without sacrificing efficiency is to draft an agreement that provides for limited discovery, but permits the arbitrator to expand discovery upon a showing of need.For example, JAMS model employment rules provide that each party may take at least one deposition of an opposing party, but permit the arbitrator to grant a request for an additional deposition based upon reasonable need of the information, availability of other discovery, and the burden of the request. Such limitations can also be applied to the number of interrogatory and document requests.11 While these default limitations need to be discretionary in order to ensure due process, these presumptive limits provide a good starting point to reign in abusive discovery practices.

Limiting Claims SubjectTo Arbitration

Not all disputes need to be subject to arbitration.A primary advantage to mandatory arbitration is that it allows the employer to resolve claims that have significant potential liability in a confidential12forum outside the highly-charged environment of the jury room. Thus, the agreement should specify the nature of the claims to be covered, including express reference to specific statutory claims.For example, while claims involving termination, benefits, discrimination, wages and compensation may be subject to arbitration, complaints about performance evaluations or shift assignments should be excluded from arbitration.

Another option for keeping arbitration costs in check is to require employees to participate in other methods of alternative dispute resolution before proceeding with arbitration.Such programs typically require or encourage employees to participate in an assortment of informal dispute resolution procedures before filing for arbitration.These steps often include: (1) open door polices; (2) ombudsman; (3) peer review; and (4) mediation.13

Keep Arbitration AgreementsAnd Handbooks Separate

Including a mandatory arbitration agreement within a personnel handbook should be avoided.Such efforts to streamline the process needlessly provides two avenues of attack.First, "burying" the provision within hundreds of other terms and conditions of employment can result in a charge that the consent was not knowing and voluntary.Second, a well-drafted handbook typically reserves the right for the employer to modify its contents, and expressly provides that it is not a contract.Given that such a handbook does not bind the employer, any contract based thereon can be deemed "illusory."14 By keeping an arbitration agreement separate and apart from the company's handbook, an employer can continue to disclaim that the handbook created any contractual rights, while simultaneously providing for binding arbitration.

Obtaining ImmediateInjunctive Relief

One area in which arbitration may not be well suited is obtaining expedited injunctive relief.Temporary injunctive relief can typically be obtained from a court within hours.Such speed can be essential to a company seeking to stop a defecting employee from divulging trade secrets.Although arbitration provisions can be drafted to provide for such expedited relief, these provisions are typically cumbersome (e.g., requiring the pre-selection of a specific arbitrator) and may still require judicial intervention to enforce. Such relief can instead be more readily obtained by drafting an arbitration provision that specifically allows the employer to obtain temporary injunctive relief from a court in order to protect trade secrets.Most jurisdictions permit the issuance of a provisional temporary restraining order in "aid of arbitration" where "the award to which the applicant may be rendered ineffectual without such provisional relief."15

Pushing The Envelope

While employers can draft employment arbitration agreements that provide for more efficient and cost effective procedures, they must consider controlling case law within their jurisdiction.16 Such provisions include: (1) one-sided coverage that limits the applicability of the agreement to claims brought by the employee; (2) a strict one-year statute of limitations; (3) a bar on class-wide arbitration; and (4) a proscription of otherwise available statutory remedies.Such provisions must be carefully crafted.For example, cost-shifting can be provided for if it is modeled after Rule 68 of the Federal Rules of Civil Procedure.


Has mandatory employment arbitration come of age?Many employers have answered with a resounding yes.One thing is clear: as employment claims and jury verdicts continue to skyrocket, employers would be well advised to consider this alternative to traditional litigation.

1Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).

29 U.S.C. §§ 1-16 (2004).

3EEOC Notice No. 915.002, July 10, 1997.

4EEOC v. Luce, Forward, Hamilton & Scripps, 122 F.Supp.2d 1080 (C.D.Ca. 2000).

5 In the widely cited case ofCole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997), the D.C. Circuit concluded that Congressional intent would be undermined should plaintiffsbe required to incur additional expenses in seeking relief through arbitration .See also, Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999). Other circuits, however, have engaged in a case-by-case analysis of the plaintiff's own financial circumstances in making this determination . See, e.g., Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549, 556 n.5 (4th Cir. 2001).

6See e.g., Brown v. Wheat First Securities, Inc ., 257 F.3d 821 (D.C. Cir. 2001).

7 Estreicher, Saturns for Rickshaws, Why Predispute Employment Arbitration Should Be Preserved, Currents - The Newsletter of Dispute Resolution Law and Practice, Dec. 2001, at 16.

8 Kaswell, Arbitration of Employment Discrimination Claims,April 25, 1997, available at http:// www.sia.com/1997_comment_letters/pdf/nasd97-3.pdf.

9 Jones, To Arbitrate or Litigate?On Wall St., Oct. 1, 1997, available at 1997 WL 8814281.

10Both the American Arbitration Association and JAMS/Endispute, for example, have extensive panels of arbitrators who specialize in employment law.

11 While a limitation on interrogatories was adopted in the 1993amendments to the Federal Rules of Civil Procedure, there is generally no such limitation for document demands.

12 Although there is nothingper se that requires arbitration to be confidential, a well-drafted agreement should provide that the arbitrator's ruling remains confidential.Failure to do so may result in a refusal to seal any judgment that may be entered with a court. See e.g., C. Doe v. Roe Co ., Cal. Super. Ct. No. NO3-1473, June 4, 2004.

13The EEOC has developed an extensive mediation program that has gained wide-spread acceptance from many employers.Although the program is beyond the scope of this article, EEOC Commissioner Leslie Silverman will be presenting a seminar on this program at the law offices of Wiley, Rein & Fielding, in Washington, D.C., on May 11, 2005.

14See e.g., Cooper vs. MRM Investment, 367 F.3d 493 (6th Cir. 2004);Dumais v. American Golf Corp ., 299 F.3d1216 (10th Cir. 2002).

15See e.g ., New York CPLR § 7502(c).

16See e.g ., Ingle v. Circuit City Store, Inc., 328 F.3d 1165 (9th Cir. 2003).

Todd A. Bromberg is a Partner in WRF's Employment and Labor Practice.He litigates and counsels clients on a broad rangeof federal and state employment matters.He also has extensive experience developing Alternative Dispute Resolution programs that efficiently and effectively resolve employment disputes. He may be reached by telephone at (202) 719-7357.

Please email the author at tbromberg@wrf.com with questions about this article.