Arbitration Versus Litigation: The Pros and
Cons of Employee Arbitration Agreements
by Donald Prophete
In this age of large jury verdicts based on seemingly tame facts, many employers ponder the question of whether to implement arbitration agreements in their workplace.
Unlike litigation through a state or federal lawsuit, arbitration is a simplified form of litigation in which the parties jointly hire an experienced neutral arbitrator to act as judge and jury. Typically, the arbitrator holds a hearing, in which the arbitrator
hears testimony, receives evidence, hears arguments from both sides, and uses some form of either federal or state rules of evidence.
The United States Supreme Court, in its recent decision in Circuit City v. Adams, 121 S.Ct. 1302 (2001), confirmed that arbitration agreements, which require employees to arbitrate statutory discrimination claims, are enforceable under the Federal Arbitration Act (FAA).
Many management attorneys favor binding mandatory arbitration as a cost-effective avenue to resolve employment-related disputes. By contrast, plaintiff’s attorneys normally have a bias against
arbitration, instead preferring a judicial forum where the case will be decided by a (presumably)
sympathetic jury of the plaintiff’s peers. While binding arbitration is generally preferable from a management perspective, there are also significant drawbacks that may arise on a case-by-case basis.
1. The “Pros”
a. Arbitrator’s Expertise
An arbitrator is more likely to critically review the relevant evidence than a jury sympathetic to the plaintiff.
b. Lower Damages
Arbitrators are generally less likely than juries to award exorbitant compensatory or punitive damages.
c. Cost Savings
Discovery is normally more informal in the arbitration setting, yielding considerable cost savings in the discovery stage.
d. Swift Resolution of Claims
Arbitration may result in overall cost savings by shortening the litigation process, as opposed to trial.
2. The “Cons”
a. Limited Appellate Review
The FAA allows judicial review only where the complaining party can establish corruption, fraud or misconduct that has prejudiced that party. Thus, while an employer always has the right to appeal an outlandish jury award, a similarly flawed arbitral award normally will not be appealable.
b. No Summary Judgment
Unlike federal court, Arbitrators will rarely, if ever, dismiss a case at the pre-hearing stage. Thus, the employer may pay more in costs and expenses by having to participate in an arbitration hearing in a suspect case.
c. Relaxed Evidence Rules
Arbitrators frequently allow evidence to be heard that would be excluded in a trial. It is often impossible for an arbitrator to ignore inflammatory or otherwise suspicious information that would not be heard by a jury in a court proceeding.
d. Increased Claims
Another theory is that arbitration encourages claims by employees who might otherwise be disinclined to file a lawsuit due to cost and time concerns.
e. Costs of the Hearing
Unlike federal and state courts, arbitrators are required to pay for the arbitrator’s time by the hour. It is not unusual for the arbitration related costs to exceed $30,000.
Whether an employer should implement such an arbitration policy depends largely on the goals of the employer. Contrary to common perception, arbitration agreements do not necessarily lower an employer’s overall legal costs or exposure to frivolous plaintiffs’ lawsuits. In fact, an arbitration policy may have the unintended consequence of actually raising an employer’s legal costs and the frequency of litigation filed against the employer. However, if the employer wishes to limit its exposure to runaway jury awards, then an arbitration policy may be a good idea, as arbitrators are much less likely to award multi-million dollar punitive damages awards than juries.
Donald S. Prophete is Member, Board of Directors, Ogletree Deakins Nash Smoak & Stewart, PC.
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E | don.prophete@ogletreedeakins.com