May 3, 2016

Rethinking Conventional Wisdom, Part 1

 Mandatory Arbitration Clauses Are Always A Good Thing For Businesses, Right?
One of the things we do here at the Law Offices of P. Andrew Torrez is tailor our legal advice to the specific circumstances of each individual client.  We represent plaintiffs and defendants, big firms and small start-ups, and good business advice for one is not necessarily good for another.  Put simply:  be wary of anyone who suggests one-size-fits-all legal advice. One such example is the conventional wisdom that employers should have mandatory arbitration clauses in their employment contracts.There are typically three arguments that lawyers deploy in favor of this conclusion.  First, employee arbitration clauses are often thought to favor the employer by taking potentially sensitive cases away from a jury (because “everyone knows” that juries are “more sympathetic to employees”).  As one commentator put it, arbitration can reduce the likelihood of an “irrational award” because arbitrators “tend to be more conservative than juries.”

Second, arbitration clauses can favor the employer where the employee is required to share in some (or all) of the costs of the arbitration by discouraging plaintiffs who would otherwise have been able to secure plaintiffs’ counsel on a contingent fee basis.  This is the straightforward big-guy-versus-little-guy dynamic that is, unfortunately, common in our legal system.  I would also note that courts continue to grapple with this issue, and many courts have determined that if an arbitration clause would unduly burden a plaintiff from exercising his or her legal rights, that arbitration clause is invalid and the plaintiff is free to litigate in court instead.  See, e.g., Ball v. SFX Broadcasting, Inc., 165 F. Supp. 2d 320, 238-40 (N.D.N.Y. 2001) (discussing cases).

Third, arbitration is often said to be more efficient, speedy, and cost-effective than litigation, largely because arbitration proceedings have less formal discovery rules, reducing the cost of reviewing and producing large numbers of documents.

Each of these three arguments is indeed mostly true – but not necessarily, and, I would argue, not one-size-fits-every employer.

First, employers care about more than just a juror’s potential bias; they also care about competence and continuity.  In Maryland, for example, most civil cases are not “specially assigned” to one particular judge, meaning that three different judges might hear an initial motion to dismiss, a post-discovery motion for summary judgment, and the case at trial.  Additionally, arbitrators are generally former judges, and either side may have reasons for wanting to present his or her case to a more sophisticated arbitrator.  If an employee has a complicated theory of damages – let’s say, due to multiple contracts that concern that employee’s base, commissions, and special compensation – then the employee might prefer a sophisticated arbitrator, where the employer might prefer to take its chances before a jury.  Moreover, some employers may have cultivated good will within a community, and that specific reputation might outweigh more generalized liberal/conservative guesstimates about individual jurors.

Second, not all plaintiffs are going to be deterred by the arbitration process.  In particular, if a start-up company has employed a high-level C-suite executive, that executive may have more familiarity with the arbitration process and may be perfectly capable of paying the up-front arbitration fees.  As many employers know, being a business doesn’t necessarily make you the “big guy” in our legal system.

Third, and perhaps most importantly, the “less formal” discovery process in arbitration isn’t always quicker and less expensive than going to trial.  Increasingly, major arbitration services such as the American Arbitration Association have adopted rules that permit the arbitrator to order “such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute,” (AAA Empl. Rule 9) or similar; see, e.g., AAA Commercial Rule R-22(b).

These kinds of rules permit the arbitrator(s) to order as much discovery as they deem appropriate.  Furthermore, because most arbitrators are retired judges, these rules can and often do result in a discovery process in arbitration that is just as complex and time-consuming as litigation, replete with productions of mountains of documents, hundred-page privilege logs, motions to compel, sanctions, in camera review of contested documents, and so on.  Moreover, because (as we’ll see in Part 2) one of the very few grounds for overturning an arbitration award is that the arbitrator “refused to hear evidence pertinent” to the case, arbitrators are often less willing than a trial judge to sustain a party’s objection to the production of documents on the grounds of undue burden or expense.  Paradoxically, the supposedly “streamlined” arbitration discovery process actually may result in a litigant being able to seek more discovery than he or she would have otherwise been able to procure in court!

So far, we’ve challenged some of the perceived advantages of arbitration, but we’ve yet to discuss the major disadvantage of the arbitration process – and it’s a doozy.  But that will have to wait until Part 2….