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The use of litigation alternatives, including arbitration, to resolve employment-related disputes is on the rise. Mandatory arbitration can serve as an appealing means of resolving workplace disputes. A February 2004 study of corporate general counsels revealed that 59.3% of the respondents thought arbitration was less expensive than litigation, and 78% thought arbitration was a faster way to resolve disputes. Todd B. Carver, “ADR-A Competitive Imperative for Business,” 59 J. Disp. Resol. 67, 71 (August-October 2004). Employers should not lose sight of the fact, however, that litigation-with all of its expense, delays and headaches-is sometimes the best way to reach a desired result. Agreements to arbitrate that are entered into after a dispute has arisen are generally not challenged for the simple reason that if any party objects to the process, it may refuse to arbitrate. Predispute arbitration agreements, by contrast, are a very different species, especially if the arbitration agreement concerns civil rights issues that often arise in the employment context. The employer may ask potential employees to sign such an agreement as part of the job application process, or may present the agreement before the employee begins working or after the employment relationship has commenced. Regardless of the timing, certain issues concerning enforceability may arise specifically because the agreement precedes the dispute since, at that point, courts may view the employer and employee as having unequal bargaining power. Before requiring its employees to sign an arbitration agreement, an employer should carefully weigh all of the risks against the potential benefits, while recognizing that each employment situation is unique. In a survey of Fortune-ranked companies, the No. 1 reason cited for using arbitration was a contractual requirement to do so. American Arbitration Association (AAA), “Dispute-Wise Management: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts” (2003). An executive summary is available at http://www.adr.org/upload/livesite/DWExecSumm.pdf . While employers also cited other issues such as a perceived savings of time and money (see the AAA study), the fact that all of these reasons ranked below a contractual obligation to arbitrate reveals that companies may be binding themselves to arbitration without fully evaluating whether the process will prove more beneficial than litigation. The advantages and disadvantages of any dispute resolution program vary depending on the employer’s field of business, the nature and frequency of employment-related claims asserted against the company, corporate culture and other factors. This brief overview of compulsory predispute arbitration agreements should serve as a starting point for employers and their attorneys to decide whether a mandatory arbitration agreement is the most effective way for an individual employer to manage employment-related disputes. It’s important to recognize from the outset that there are pros and cons to mandatory arbitration provisions in employment dispute resolution. While it is difficult to address the advantages and disadvantages of mandatory arbitration agreements hypothetically, since the utility of such an agreement depends heavily on its design and implementation, as well as the needs of each employer, nonetheless all compulsory predispute arbitration agreements implicate certain issues that employers should consider. Finding the right arbitrator Arbitrators are often perceived as more equitable and less influenced by sympathy for the plaintiff than a jury would be. In addition, certain types of disputes may be best decided by a finder of fact with experience in a particular industry, rather than a judge or jury who have only the length of the trial to gain an understanding of the setting in which the dispute arose. Robert E. Shapiro, “I Hate Arbitration (Most of the Time),” 30 Litigation 36, 38 (Winter 2004) (identifying the securities and reinsurance industries as settings where the same pattern of claims arises over and over, thus creating a need for someone with industry expertise to make the decision). This raises concerns, however, about the “repeat player” problem. Employers are more likely than an individual plaintiff-employee to require an arbitrator’s services on a repeat basis. An employer, therefore, may have the opportunity to develop knowledge about the tendencies of particular arbitrators, and an arbitrator may have a greater interest in securing a positive result for an employer, who could serve as a repeat customer, than an employee. Ideally, the parties should have a neutral arbitrator appointed by a respected arbitration organization, such as the AAA. Employers often pay all arbitration costs to prevent a plaintiff-employee from arguing that the arbitration agreement deprives the employee of an opportunity to pursue his or her substantive statutory rights. This cautionary measure, however, raises concerns that the arbitrator may express bias for the employer. Courts generally reject this argument, however, finding that fee splitting is not necessary “to ensure arbitral neutrality and the appearance of arbitral neutrality.” Shankle v. B-G Maint. Mgmt. of Colorado Inc., 163 F.3d 1230, 1235 (10th Cir. 1999) (citing Cole v. Burns Int’l Sec. Services, 105 F.3d 1465, 1485 (D.C. Cir. 1997)). Professional and ethical standards further guarantee arbitrator neutrality. Id. One perceived benefit of arbitration is its lower cost. The allocation of arbitration expenses significantly affects the potential savings, however, since arbitrators’ fees routinely exceed $1,000 per day. Some courts have refused to enforce arbitration agreements that require the employee to pay a portion. Agreements that require arbitration of disputes involving statute-based rights are typically upheld on the premise that the employee can still vindicate his or her substantive rights, merely in a different forum. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The plaintiffs’ bar has argued, sometimes successfully, that requiring employees to share the cost of arbitration hampers these rights, since several federal employment statutes allow a prevailing employee to collect attorney fees and costs. See, e.g., Cole, 105 F.3d at 1480. Courts respond to these concerns with one of two approaches: a per se unenforceability rule and a case-by-case analysis. The per se unenforceability rule flatly rejects arbitration agreements that require the employee to contribute to the cost, finding such a requirement interferes with the employee’s vindication of his or her statutory rights. See, e.g., Floss v. Ryan’s Family Steak Houses Inc., 211 F. 3d 306, 314 (6th Cir. 2000); Cole, 105 F. 3d at 1480. The U.S. Supreme Court, however, has strongly signaled that a per se rule is inappropriate; rather, courts should apply a case-by-case approach to determine whether an employee’s statutory rights are actually hindered by the cost of arbitration. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79 (2000). Employing the Green Tree approach, one court found that the plaintiffs failed to provide sufficient evidence, such as income statements, to support their claim that enforcing the fee-shifting provision would preclude them from enforcing their federal statutory rights. Bellevue Drug Co. v. Advance PCS, 2004 WL 1924964, at 9 (E.D. Pa. Aug. 20, 2004). The safest approach to this problem is for the employer to bear all costs related to the arbitration. Employers that wish to pass some of the cost along to the employee must prepare for potential challenges. Prohibiting class actions When an arbitration provision is silent regarding the availability of classwide arbitration, the arbitrator decides whether arbitration may be conducted on a class basis. Don Zupanec, “Class Arbitration: Who Decides?,” 18 No. 8 Fed. Litigator 9 (Aug. 2003) (discussing Green Tree Fin. Corp. v. Bazzle, 123 S. Ct. 2402 (2003)). It is unclear, however, whether a contractual prohibition against class arbitration is enforceable. This uncertainty poses a real risk for employers because the doctrine of collateral estoppel generally does not apply in arbitration. Thus, employers face the risk that multiple teams of claimants may initiate arbitration proceedings in different jurisdictions, with each demanding class arbitration, until one group of claimants finds a receptive arbitrator. Despite the current legal uncertainty, employers considering arbitration should reduce the chance of employees pursuing class arbitration with an arbitration agreement that clearly and unambiguously prohibits class arbitration. This may deter claimants from seeking class arbitration and give the respondent grounds for vacating a class certification if the arbitrator ignores the prohibition and permits class arbitration. 9 U.S.C. 10(a)(4). Regardless, it is unclear whether an arbitration provision barring class arbitration constitutes an unconscionable limitation of the employee’s rights, thereby making the agreement unenforceable. Furthermore, arbitration agreements have no effect on the power of the Equal Employment Opportunity Commission to seek broad equitable and classwide relief. E.E.O.C. v. Waffle House Inc., 122 S. Ct. 754 (2002); Gilmer, 500 U.S. at 32. Appellate rights For better or worse, arbitration awards are subject to very limited judicial review. Certainty of resolution may be an important component of arbitration, since many of the perceived benefits of arbitration-reduced cost, faster resolution and simplicity-evaporate when a party attempts to appeal the arbitrator’s finding. Parties generally may not appeal based on a mistake of law by the arbitrator. Under the Federal Arbitration Act, grounds for vacating an award generally go to process, rather than substance, unless there has been a manifest disregard of the law. Shapiro, supra, at 42. An arbitral award may be set aside if the arbitrator was corrupt or biased or participated in fraud or misconduct; exceeded his or her power; expressed manifest disregard of the law or failed to follow required procedures; made an award contrary to public policy; made an award that was completely irrational, arbitrary or capricious; or refused to postpone a hearing or receive evidence upon a showing of good cause. See 9 U.S.C. 10. Even when the parties have grounds for an appeal, anyone who challenges an arbitration award must go before a trial judge, many of whom hold a strong prejudice toward leaving arbitration awards standing. A study analyzing a database of 152 employment arbitration rulings that were reviewed in 278 federal and state court decisions between 1977 and 2003 revealed that the courts vacated only 8% of awards when they applied the narrow standards allowed under the Federal Arbitration Act. Michael H. LeRoy and Peter Feuille, “The Revolving Door of Justice: Arbitration Agreements that Expand Court Review of an Award,” 19 Ohio St. J. on Disp. Resol. 861, 861 (2004). An employer who considers requiring employees to arbitrate employment-related disputes should be prepared to accept the results of these arbitrations. Arbitration implicates complex issues to be considered before a useful, enforceable agreement may be drafted. First, employers should review their needs with regard to resolving employment-related disputes and consider whether arbitration meets those needs. Next, the employer should review the procedural concessions, such as paying the cost of the arbitration, that increase the likelihood of judicial enforcement and decide which concessions it is willing to make, weighed against how much it can afford to risk relying on a potentially unenforceable arbitration agreement. Finally, the employer should review the agreement from the employees’ perspective. Many of the benefits that make arbitration attractive to employers also make it attractive to employees, who further benefit from the elements that make arbitration less appealing to employers, such as the decreased likelihood of preliminary dismissal and the limited availability of appeal rights if the arbitrator incorrectly applies the law. Only after carefully analyzing these facets can an employer make an educated decision about whether a compulsory predispute arbitration agreement is the best course for managing its employment-related disputes. Pavneet Singh Uppal is a partner in the litigation and dispute resolution department in the Phoenix office of Bryan Cave. Caroline Larsen is an associate at the firm.

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