The Pitfalls for Mandatory Arbitration for Employment Cases

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The Pitfalls for Mandatory Arbitration for Employment Cases

For the past decade, employers have increasingly embraced mandatory arbitration to resolve employment cases.  The conventional wisdom was that an arbitrator would take the decision regarding an employee’s claims against the employer out of the hands of jurors who were viewed as hostile to the employer’s interests.  In addition, on the surface, arbitration seemed to offer the benefits of reduced litigation costs by limiting discovery such as depositions and interrogatories, and providing a shorter timeframe to obtain resolution of the employment dispute.  Finally, arbitration limited the ability of appellate review to the rare circumstance where the arbitrator engaged in fraud.

The High Cost of Arbitration

 


Despite the above, the touted benefits of arbitration have proven to be illusory in light of the fact that a great deal of employment cases do not settle.  In addition, the cost of arbitration has proven to be far more expensive than employers initially assumed because under California law the employer is required to pay all of the costs associated with the arbitration.  This includes the fees for the arbitrator, who is often an expensive retired judge or lawyer.

This firm recently defended a disability discrimination case at arbitration.  For a two-week arbitration, the client was presented with a $103,000 bill for the arbitrator’s fees!  This fee was in addition to the cost of discovery which included requests for production of documents, interrogatories, and more than ten depositions.

As a general rule, arbitration organizations only allow enough discovery for the parties to prepare their respective cases for the arbitration hearing.  However, in employment cases, which may involve a large number of potential witnesses, arbitrators are increasingly permitting parties to take greater numbers of depositions, thereby curtailing the perceived benefits of abbreviated discovery in arbitration.  Moreover, any discovery disputes that cannot be resolved between the parties are subject to something akin to law and motion practice, wherein the parties brief the arbitrator with points and authorities regarding the nature of the controversy and their respective positions.  Generally, arbitrators will charge an hourly fee to read and analyze the submissions, and render a decision on the discovery controversy.  Once again, the employer is obligated to bear the entire cost of the arbitrator’s fee in order to resolve the discovery dispute.



Procedural Concerns


The arbitration forum rewards the inexperienced trial attorney.  It also rewards the attorney who is either unfamiliar with, or unprepared to address, the often complex and daunting rules of evidence that are common in a jury trial.  Selecting a favorable jury, determining what evidence to include and exclude, and honing the content and delivery of the opening statement and closing argument is a complicated process that often determines the outcome of a case.  The unseasoned attorney who is not familiar with the strategy and process of jury selection, the complex interplay of evidence to be introduced and excluded, and the methods for persuading a jury, avoids these substantial hurdles to victory by engaging in the arbitration process.  Unlike a trial judge in state or federal court, arbitrators regularly allow evidence in that would be excluded in a jury trial such as hearsay, documents that would be inadmissible, and witness testimony that should be excluded.  The rationale is that it provides a more relaxed environment and the arbitrator will not be prejudiced by what would otherwise be inadmissible evidence in a jury trial.


Another major difference between a jury trial and arbitration is that impeaching a witness in a jury trial is much more powerful than it is in arbitration.  In trial, jurors are expected to follow their oath to be fair and impartial, wait until all of the evidence has been introduced before making a decision, and avoid any influences outside the evidence produced at trial.  Having taken this oath, jurors then justifiably demand that the witnesses presented by the parties, particularly the plaintiff who is asking for money, testify truthfully.  The consequence for a plaintiff who does not respect the oath to testify truthfully is often fatal.  For example, this practitioner has had a number of trials where a plaintiff, even in a liability situation, has fabricated testimony under oath regarding his damages.  As a result, the juries rendered defense verdicts and not only denied the plaintiff all claimed damages, but also refused to find liability.  Impeachment is a powerful tool for an employer defending its case before a jury.  On the other hand, maybe because of experience with numerous untruthful witnesses throughout their careers, retired judge and attorney arbitrators often give much less importance to the fact that a plaintiff has fabricated testimony under oath.


The intimidation value of a jury trial can also be used by employers when negotiating a settlement.  Plaintiff’s counsel who has little or no trial experience is likely to be intimidated by the prospect of going to trial and will be much more willing to settle the case on a reasonable basis.  On the other hand, an inexperienced attorney who knows that the arbitrator is likely to refrain from enforcing strict evidentiary rules and allow otherwise inadmissible evidence into the arbitration ‒ and generally be far more forgiving than a jury for serious miscues ‒ is much more likely to stick to an unreasonable settlement demand.



Arbitrators Award Plaintiffs Nominal Damages Where a Jury Might Not


Another important disadvantage for employers in arbitration is that arbitrators are generally known to “split the baby.”  The experience of this practitioner in defending numerous employers in jury trials involving race, sex, harassment and wrongful termination, is that jurors will not hesitate to deny compensation to an employee who has a meritless case, particularly when the plaintiff employee has been untruthful in a material aspect of the case.  While this practitioner believes that arbitrators strive to be fair and impartial, there is a natural inclination to give both parties some benefits.  Specifically, in a weak plaintiff’s case, arbitrators tend to provide what they believe to be nominal awards rather than render a defense verdict which would have been likely if the case was tried before a jury.  Given the choice of alienating a plaintiffs’ firm by rendering a defense verdict, arbitrators will often supply an award that effectively “splits the baby” between the plaintiff’s demand in closing arguments and the defendant’s suggested amount.



Nominal Damages Result in Cost-Shifting of Fees to the Employer


Discrimination cases under the DFEH or EEOC present a serious drawback for an employer in a case where an arbitrator “splits the baby.”  This is because a prevailing plaintiff’s counsel is then entitled to an award of attorney’s fees. The fees are awarded in a post-arbitration motion unless the parties agree to stipulate to the amount of fees.  Unlike a defense verdict in a jury trial where fees are completely denied plaintiff’s counsel, with even a nominal award, the arbitrator must award all the attorney’s fees relating to the discrimination claim without consideration of proportionality.  In other words, if the arbitrator awards a nominal sum of $25,000 and $30,000 after a two to three week arbitration, a plaintiff’s attorney presenting a $500,000 fee has an excellent chance of obtaining the entire amount, or a fee close to that sum.



Conclusion


Arbitration has not proven to be the panacea for employment cases originally envisioned.  Employers still face the costs of discovery and the time expenditure in preparing for arbitration, while at the same time paying all of the arbitrator’s fees.  The employer also loses an important playing card in the form of an “intimidation factor” for plaintiff’s attorneys who are inexperienced in the complexity and pressure of conducting a trial by jury.  Finally, the powerful tool of impeachment to drive a reasonable settlement or obtaining a defense verdict at trial is often lost at arbitration, and the arbitrator might still be inclined to award the plaintiff a nominal sum.  In light of the above, employers should carefully consider whether their employment policies and procedures that require binding arbitration to resolve employment disputes are truly in their best interest.