Employers Should
Consider Mandatory Arbitration Agreements
California employers
who do not have arbitration agreements in place should again evaluate
whether arbitration is right for them. A recent pro-arbitration case from
the California Court of Appeal (Jones v. Humanscale
Corp., No. G034387 (Cal.4th App. Dist. June 17, 2005) calls attention
to how an arbitration agreement can work favorably for an employer.
Benefits of Arbitration
Arbitration
has many benefits. Employment litigation is expensive and cases can take
years to resolve. Arbitration resolves disputes more quickly and keeps expenses
down. Arbitration is a simpler, less complicated process. Arbitration can
also minimize hostility between the parties.
Arbitrators
can be selected because they have a particular area of expertise. Jurors
will most often not have that specific knowledge. In addition, arbitration
reduces the load on an already overburdened court system.
In
one United States
Supreme Court case, Circuit City Stores, Inc. v. Adams, 121 S.Ct.) 1302 (2001), the high court talked about the Areal benefits to the enforcement of arbitration
provisions.@ Justice Kennedy wrote AArbitration
agreements allow parties to avoid the costs of litigation, a benefit that
may be of particular importance in employment litigation, which often
involves smaller sums of money than disputes concerning commercial
contracts."
Study Shows General Satisfaction with The
Arbitration Process
A
recent Harris poll finds widespread satisfaction in arbitration. The
independent survey showed that when comparing arbitration to litigation:
- 74% of respondents
found arbitration to be faster
- 63% of respondents
found arbitration to be simpler
- 51% of respondents
found arbitration to be less expensive
- 66% percent of
respondents said they would likely use arbitration again
According
to Lisa Rickard, president of the U.S. Chamber of Commerce Institute for
Legal Reform, which sponsored the survey, "The results of this study
are clear: Americans overwhelmingly prefer arbitration to the stressful,
draining, and costly experience of litigation. While the average lawsuit in
America
takes three years to reach trial or settlement, arbitration can save time
and reduce costs, while providing confidentiality and flexibility."
She added, "As the cost of the U.S. tort system approaches an
astounding $300 billion per year, we must explore ways to make our civil
justice system more efficient and more effective. Alternatives to
litigation, such as arbitration, are proven means to improve our legal
system."
Arbitration Must Meet Minimum Standards of Fairness
The
California Supreme Court in Armendariz
v. Foundation Health Psychcare Services, Inc.
(2000) 24 Cal.4th 83 provided guidance for mandatory employment arbitration
agreements in California.
The court allowed such agreements provided they meet certain restrictions
ensuring minimum standards of fairness. Armendariz
held that an arbitration agreement is enforceable unless both procedurally and
substantively unconscionable. The minimum requirements are:
- The arbitration
agreements must be reciprocal. The agreement must require the employer
as well as the employee to arbitrate their disputes.
- The agreement may
not limit the remedies or damages that otherwise would be available to
an employee in court. Employers cannot prohibit employees from
receiving available remedies such as punitive damages or attorney=s
fees.
- The agreement must
permit adequate discovery, including access to essential documents and
witnesses. There must be a fair and simple method for the employee to
get information necessary to his or her claim, as determined by the
arbitrator.
- The arbitration
agreement cannot require the employee to pay any type of expense the
employee would not be required to pay if he or she went to court.
- Arbitrators must
be neutral and provide a written arbitration decision that will allow
for judicial review if necessary.
- The arbitration
agreement must not be “overly harsh” or “one-sided.”
Recent Case Shows Value of Agreements
In
Jones, a California employee signed
an employment agreement with his employer, a New
Jersey based manufacturer and distributor of ergonomics
products that is incorporated in New
York. The agreement contained a mandatory
arbitration provision. Part of the agreement also contained a covenant not
to compete - - prohibiting the employee from selling to the employer's
customers for two years after leaving employment. The agreement stated that
it would be construed under New
Jersey law and if any part of it was rendered
unenforceable the arbitrator could modify the provisions to make them
enforceable.
The
employee was terminated. A few months later, the employer filed a formal
demand for arbitration claiming that the former employee was selling to the
employer's customers in violation of the agreement.
The
employer prevailed in the arbitration. The former employee was ordered to
pay $17,500 in damages and half of the arbitrator's fees, about $12,000.
The
former employee then challenged the arbitration arguing that the award was
illegal under California
law on two grounds: (1) the covenant not to compete contained in the
agreement was unlawful and rendered the entire agreement unenforceable and
(2) he should not have been required to pay for half of the arbitrator's
fees.
The
court upheld the arbitrator's award. The court noted that public policy in
California supports the use of private arbitration and that trial courts
are not to disturb an arbitration decision unless there is clear evidence
that the arbitrator exceeded his or her authority under the agreement.
"Substantial deference" is given to the arbitrator's
determination. Here, the court determined that the arbitrator's decision
was not "palpably erroneous."
The
covenant not to compete language in the agreement was not clearly
prohibited under applicable law since it could have been construed as
necessary to protect trade secrets, such as customer lists.
In
addition, while the court of appeal found that it was wrong under Armendariz for the arbitrator to require the
employee to pay for half of the fees, this error
did not call for vacating the entire arbitration award. Instead, the court
found that only the part of the arbitrator's decision requiring the
splitting of fees should be reversed and the rest should be allowed to
stand.
Tips for Employers
Employers
considering arbitration agreements or with agreements already in place
should:
- Ensure that the
agreement complies with Armendariz.
The benefits of the arbitration agreement will be reduced if the
employer has to spend time in court litigating the validity of the
arbitration agreement.
- Ensure that all
arbitration agreements are bilateral, not one-sided. Don't simply
require the employee to arbitrate all claims arising out of his/her
employment. Require the employer to arbitrate claims that affect the
employer – such as trade secret claims.
- Have legal counsel
carefully draft or review the arbitration agreement.
|
