As every corporate counsel knows, the defense of employment-related lawsuits is a significant expense for employers which, many times, cannot be avoided. At the same time, it is an expense that offers little return on investment for the employer (perhaps it can be argued, though, that it is money well spent to deter claims that might be made by other employees). Despite the efforts of at least some courts to try to resolve these cases through early mediation (New Jersey's court-ordered mediation program, unfortunately, is largely unsuccessful in this area) or to move them faster through the system (but on average no quicker than two years), claims of employment discrimination and other alleged wrongdoing in the workplace, ranging from wage and hour violations to failure to comply with family and medical leave requirements to whistle blowing, too often languish far too long.
The subject of arbitration of employment-related claims has been advocated by some management-side employment counsel for years now as a means of reducing litigation expenses and limiting a company's exposure to large damage awards. Others in the management-side bar do not embrace arbitration because of a variety of well-based concerns, including being subjected to the decision of an Arbitrator without any meaningful opportunity to appeal an ill-conceived ruling or the impact of an arbitration program on class actions. In any event, there is little published empirical evidence demonstrating whether the assumption that cost and exposure are actually limited proves to be true in a garden-variety, single employee dispute. Somewhat surprisingly, at least one rather recent study of cases in the United States District Court for the Southern District of New York (largely in the securities industry), suggests that there is little cost benefit to employers in arbitration. Certainly, in those instances where an arbitration program is challenged (as has been the case involving Circuit City, a leader in promoting the arbitration of employment-related claims), there can be a significant added layer of cost. The premise of this article, however, which is largely based on anecdotal evidence, is that an arbitration program, while not a solution for all employers, properly implemented and administered, can indeed achieve the twin objectives of cost containment and limiting exposure in many cases.
Selling The Program
Keeping in mind that there is an exception to every rule, there are fundamental truths that experience with the arbitration of employment disputes teaches. Initially, when implementing an arbitration program, every effort must be made not only to compel the arbitration of employment-related claims (i.e., draft it in a manner to withstand a challenge to its enforceability), but to encourage employees that the arbitration route, rather than litigation in court, is better for them. Among other things, that means creating a user friendly program, one that is well communicated and easily understood. Arbitration must be marketed as an employee benefit. For example, the message to employees should be that when they have a problem in the workplace, they don't have to go to court to get it resolved. Rather, the Company, as the last step in its conflict resolution process, has provided the employee with the opportunity - at company expense - to have a binding outcome to the problem without the delay that invariably occurs in court. This may mean fewer challenges to the arbitration program itself.
While that marketing approach certainly may not deter experienced plaintiffs' employment lawyers from challenging an arbitration program, there are scores of lawyers, many not well versed in employment law, whose first reaction is not to fight arbitration but to accept it because they believe that arbitration will mean less time will have to be invested by them - which will also result in less time having to be spent by the employer's counsel (and in the traditional billing method, time equates to money). In such a case, the employee's lawyer is also frequently less likely to be aggressive about discovery. Immediately, that produces a cost savings, and frequently, not an insignificant one.
Discovery, for better or worse, is an area of litigation most prone to unnecessary expense, and arbitration can be quite helpful in reducing cost in this area. Typically, in employment lawsuits, the bulk of discoverable information is in the hands of the employer. Many times, employees' lawyers make remarkably overly broad demands for such information and the parties squabble over what should be produced. Courts do not always manage the discovery process well, and an overly zealous, disagreeable employee's counsel can dramatically add to the cost of a litigation. By design, arbitration should limit the opportunity for what all too often turns out to be an expensive - and unnecessary - sideshow.
Of course, the parties should have an opportunity to exchange and request relevant documents and obtain answers to a reasonable number of written questions. Depositions, if necessary, may also be taken. Counsel for both the company and the employee must recognize, however, that unlike what frequently occurs in litigation in the courts, they need not seek to unearth every piece of remotely relevant evidence (i.e., it may not be necessary to subpoena the employee's podiatrist to see how his medical records bear on the employee's claim for emotional distress damages). That alone reduces the cost of litigation and should focus the parties on what really matters. And, of course, with less discovery, the parties can get to the hearing sooner, and have their dispute resolved more rapidly by the Arbitrator. Moreover, if disputes arise during the discovery process, then they can be resolved by an Arbitrator far more quickly than by an overburdened judge. Judges, also, are frequently less accessible than arbitrators when it comes to resolving discovery disputes.
Arbitration programs may limit the number of interrogatories or even their scope. For example, the program can provide that interrogatories are limited to identifying witnesses with knowledge of certain matters relevant to the dispute. This type of limitation should withstand challenge because the local rules of the United States District Court for the Southern District of New York provide for exactly that. And, as experienced management-side lawyers know, there is little to be accomplished by propounding more than such basic interrogatories. On the other hand, there can be a significant expense to the employer's having to answer multi-part and voluminous interrogatories (particularly when the case is not in federal court and therefore subject to the interrogatory restrictions of the Federal Rules of Civil Procedure). Thus, the cost of written discovery, in most cases, can be reduced when a matter is in arbitration.
Costs savings can be achieved with depositions as well. By rule, an arbitration program can permit each side one deposition, for example, with the additional depositions to be permitted by the Arbitrator only upon a showing of good cause. The length of depositions can also be curtailed, as the same is now true under the Federal Rules of Civil Procedure. Arbitration, by definition, should produce efficiencies and would almost be unseemly for one side or the other to engage in several day-long depositions.
The same is true for other discovery. As mentioned above, too often, it seems that third-party discovery can go off on fishing expeditions. In an arbitration, however, subpoenas must be issued by the Arbitrator, which necessitates self-restraint on the part of the counsel seeking the discovery or he or she will lose credibility with the Arbitrator before ever getting to the hearing.
Yet another cost savings resulting from arbitration is the length of the discovery period itself. In a case alleging discrimination or whistle blowing filed in the Superior Court of New Jersey, the discovery period will exceed a year. In arbitration, however, the discovery period is likely to be much shorter. Indeed, the very same case can be concluded in arbitration before the discovery period would have expired had it been litigated in court.
Other Cost Savings
In a case proceeding in court, a seasoned employer's counsel is working toward the filing of a summary judgment motion. If the motion is successful, then the employer need not face the unknown of a jury. In arbitration, the unknown of the jury becomes the unknown of the Arbitrator (except that something is usually known about the Arbitrator and more can be found out). In any event, a well-drafted arbitration program can include a summary disposition procedure, which allows the employer to avoid a hearing with witnesses. Thus, an employer maintains the ability in arbitration to avoid a hearing in an entirely baseless case.
Further, in the case without a viable summary judgment motion, it can be tried to conclusion much more quickly in an arbitration forum. By way of example, last year, we defended a disability discrimination claim in which there was a dispute over what the decision-maker knew about the terminated employee's alleged disability (diabetes) and what he had to say about it. As a result, unless the case settled, it would have to be tried because of the existence of a genuine issue of material fact. Discovery involved initial disclosures made by both parties, limited interrogatories, and the deposition of the claimant, which was completed in one day (the employee's counsel elected not to take a deposition). The parties submitted short pre-hearing briefs in advance of a hearing that lasted little more than one day. And the hearing would have been completed in one day but for the Arbitrator's accommodating a non-party witness's request to testify after hours (something else that would not happen in court). Within a short time of the close of the record, the parties submitted proposed findings of fact and conclusions of law, and the Arbitrator issued his opinion in favor of the employer. From start to finish, the entire case lasted six months. There is no doubt that litigating that case in court would have taken substantially more time, and the employer would have spent a great deal more to prevail. Such a case illustrates exactly when arbitration works.
There are other cost savings associated with the hearing itself by proceeding through arbitration. Obviously, there is no need to spend money on jury research. The briefing of in limine motions is largely unnecessary because arbitrators are less inclined to strictly adhere to the evidence rules and are more able to filter out irrelevant or inflammatory testimony. Additionally, when in court, the parties are preparing for a trial date that may not be real, and too often, the courts cannot predict with accuracy when a trial will actually start. In arbitration, however, the Arbitrator and the parties select the dates for the hearing, and as a result, there is no need to prepare more than one time for the hearing. Beyond that, days spent trying the case are typically more productive than days spent in court. The Arbitrator has one case on a given day; a judge, on the other hand, may be juggling multiple cases, and therefore, a day in court tends to be shorter for the parties, which naturally means that less is accomplished and the trial in court will be longer than the hearing before the Arbitrator.
While it has the potential to reduce litigation cost and exposure, arbitration is not for all. Employers with a history of limited litigation may want to leave well enough alone. In that circumstance, rolling out an arbitration program advising the employee population how to bring claims against the company may produce unintended and undesirable consequences.
And there are other issues that should be recognized as well. Arbitrators' experiences and biases impact upon their decisions. They also make mistakes, and, at times, "split the baby," giving something to each side. When they do, there is little that either side can do, as there are virtually no avenues of appeal.
On balance, though, for those employers seeking to address the problems identified at the beginning of this article - ever-increasing litigation costs and the exhaustion of corporate resources devoted to time-consuming lawsuits - arbitration should be embraced.
Published March 1, 2004.