With the rise in popularity of binding arbitration of employment cases, courts have been called upon to decide upon the enforceability of pre-dispute arbitration agreements.æ While not always the case, most often it is the employer who seeks to enforce the arbitration agreement and the employee who resists.æ This is largely due to employers buying into the notion that an arbitrator is less likely than a jury to rule in favor of an employment plaintiff or to issue an inflated damage award B particularly where the plaintiff=s case is long on emotion and short on evidence.

However, as more and more employment cases go to arbitration, there is a growing body of anecdotal evidence to challenge this conventional wisdom.æ See Rosenthal, Scammed?, California Lawyer, Aug. 2001, at 40. Given the outcome of recent court decisions, there is ample reason for employers to question whether arbitration is in fact a preferable forum.

Perhaps the biggest drawback to arbitration is that the losing party has almost no recourse to challenge a bad outcome.æ The law is clear that legal and factual errors by an arbitrator, no matter how egregious, are virtually immune from judicial review. Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992). Depending on the language of the agreement, the arbitrator may even grant more relief than what a judge or jury could award. Advanced Micro Devices, Inc. v. Intel Corp., 9 Cal. 4th 362 (1997). Thus, while it is quite difficult to overturn a jury verdict, it is even harder to set aside an arbitrator=s award B no matter how baseless, erroneous or unfair it might be.

Faced with this uncertainty, many employers attempt to avoid these pitfalls by including a clause in the arbitration agreement allowing for court review to correct any legal and factual errors made by the arbitrator. However, the California Court of Appeal recently ruled that the inclusion of such a clause renders the entire agreement unenforceable under state law. Crowell v. Downey Community Hospital Foundation, 95 Cal. App. 4th 730 (2002) (2nd Dist., Div. 2).

The agreement in Crowell required the arbitrator Ato prepare written findings of fact and conclusions of law which >shall be supported by law and substantial evidence.=@ In addition, the agreement provided that upon petition of any party, A>a court shall have the authority to review the transcript of the arbitration proceedings and the arbitrator=s award and shall have the authority to vacate the arbitrator=s award, in whole or in part, on the basis that the award is not supported by substantial evidence or is based upon an error of law ....=@æ In a 2-1 decision written by Justice Kathryn Doi Todd, the court ruled that these provisions rendered the entire arbitration agreement unenforceable.æ

Relying primarily on Moncharsh and Code of Civil Procedure Sections 1286.2 and 1286.6 (specifying the exclusive bases for vacating and correcting an arbitration award), the court concluded that the parties cannot Aexpand the scope of judicial review of an arbitration award by agreement.@æ The court also cited to Old Republic Insurance Co. v. St. Paul Fire & Marine Insurance Co., 45 Cal. App. 4th 631 (1996), for the proposition that the parties cannot expand the Ajurisdiction@ of a trial court to review an arbitration award on the merits.

Justice Michael G. Nott dissented.æ He found nothing in the statutes or in Moncharsh which prohibit parties from agreeing upon the scope of judicial review of an arbitrator=s award. To the contrary, the court in Moncharsh specifically declined to decide this issue, and instead stated that the merits of an arbitration award are ordinarily immune from judicial review Ain the absence of some limiting clause in the arbitration agreement.@

Justice Nott also took note of several federal appellate decisions, including a Ninth Circuit case, which upheld provisions for expanded judicial review of an arbitrator=s factual findings and legal conclusions. See, e.g., LaPine Technology Corp. v. Kyocera Corp., 130 F.3d 884 (9th Cir. 1997); but see UHC Management Co. v. Computer Sciences Corp., 148 F.3d 992 (8th Cir. 1998) (reaching the opposite conclusion). Although these federal cases were decided under the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., Justice Nott found their reasoning Ainstructive@ in analyzing California law.

Justice Nott criticized the Crowell majority=s reliance on Old Republic, noting that the parties in that case did not agree to expand the trial court=s authority to review factual or legal errors by the arbitrator. Instead, the parties only purported to allow the appellate court to engage in such expanded review, thus impermissibly Asidestep[ping] the trial court.@ As Nott stated, AOld Republic concluded only that the parties could not confer jurisdiction on the Court of Appeal where none existed.@æ

Justice Nott also opined that Athe majority decision [in Crowell] will discourage people from agreeing to arbitrate, which is the exact opposite of California=s public policy.... [O]ne of the worst positions an attorney can be in is to recommend binding arbitration and then have to explain to a bewildered (and angry) client an unexplainable adverse result that cannot be remedied.@

Citing to Deborah Rosenthal=s AScammed?@ article in the August 2001 California Lawyer, Justice Nott observed that A[a]necdotal stories abound where an arbitrator has made an award contrary to the facts or the law. Although I have no statistical facts to back it up, I am willing to bet that there are literally hundreds of cases annually that do not go into arbitration because attorneys or parties are fearful of receiving an arbitrary result that is totally final, without the safety net of judicial review.@

One potential alternative to expanded judicial review is to provide for an appeal to be heard by one or more arbitrators. However, Justice Nott opined that this option Aflies in squarely in the face of one of the goals of arbitration, to wit, economy,@ and that it would be Ano solution for any but the wealthiest of litigants.@

Surprisingly, no petition for review was filed with the state Supreme Court in Crowell. For the time being, then, Crowell is binding on state trial courts. Auto Equity Sales v. Superior Court, 57 Cal. 2d 450 (1962).æ However, a federal court would be free to adopt Justice Nott=s reasoning if it predicted that the state Supreme Court will eventually do likewise. See Kohler v. Inter-Tel Technologies, 244 F.3d 1167 (9th Cir. 2001). This seems reasonably likely, given that Nott=s opinion closely tracks the Ninth Circuit=s analysis of the Federal Arbitration Act in LaPine.

It also is possible that a state or federal court will decide that the rule announced in Crowell is preempted by the Federal Arbitration Act in cases involving interstate commerce, which presumably would encompass most employment cases. The majority and dissenting opinions in Crowell did not address the preemption issue.

Another issue not raised in Crowell is whether a court would enforce an express provision that the arbitrator has no Apower@ to issue an award which is legally erroneous or unsupported by substantial evidence. This language is similar to the arbitration agreement in Crowell, but may be better calculated to support a finding that an arbitrator has Aexceeded [his or her] powers,@ which constitutes grounds for vacating an award under Code of Civil Procedure Section 1286.2(d).æ However, this argument is at odds with the reasoning behind Crowell, and is unlikely to be accepted as long as Crowell remains the law.

The concerns articulated by Justice Nott give employers something else to think about in deciding whether to jump on the ADR bandwagon.æ As with everything else, binding arbitration has its benefits and drawbacks.æ Counsel advising companies on whether to adopt such procedures ought to be well versed in the pros and cons so that the company can make an informed decision.