"Being Evenhanded--
While there are advantages to arbitration after 'Armendariz,' there are drawbacks too"
by Richard S. Rosenberg and Jeffrey P. Fuchsman

The jury sheets confirm that law firms are certainly not immune to the considerable risks posed by the expansion of employee rights and employer responsibilities. With reports of six and seven figure jury verdicts in employment cases becoming commonplace, lawyers appear more willing to take on law firms in the litigation of employment disputes. This trend has no doubt prompted law firm managers to search for ways to control this considerable risk. Among the tools most often used for this purpose is requiring employees to channel employment disputes through some sort of alternative dispute resolution procedure. This can be done in a variety of ways, either as a prelude to, or substitute for, the civil litigation process. This trend raises two significant questions which every firm ought to ponder. First, may an employer legally force an employee to give up their day in court? If the answer to the first question is yes, is mandatory arbitration a good idea? A lot has been written about this subject as courts and human resources experts grapple with this thorny issue. Now that the California Supreme Court has weighed in on the arbitration of employment disputes, there are a number of competing factors to evaluate as you consider these alternative routes.

The Legal Landscape - Not surprisingly, the plaintiffs' bar has been at the forefront of the fight in resisting employers' efforts to enforce mandatory arbitration agreements. Plaintiffs' lawyers like jury trials and they believe employers fear them. The conventional wisdom among the plaintiffs' bar is that employees will do better before a jury, and that the mere threat of one will bring many employers to the negotiating table (to their detriment). Efforts to curtail mandatory alternative dispute resolution have met with mixed results. A few recent federal court cases have limited mandatory arbitration of certain federal discrimination claims. E.g., Duffield v. Robertson Stephens & Company, 144 F. 3d 1182 (9^th Cir. 1998). The state court of appeal decisions fall on both sides of the issue, focusing mostly on the contents of the ADR agreement. Some courts have enforced mandatory arbitration agreements (24 Hour Fitness v. Superior Court, 66 Cal. App. 4^th 1199 (1998)), while others have refused, holding such agreements are unconscionable (Stirlen v. Supercuts, Inc., 51 Cal. App. 4^th 1519 (1997)). Several important arbitration cases are presently pending before the U.S. Supreme Court. E.g., Circuit City Stores, Inc. v. Adams, 194 F. 3d 1070 (9^th Cir. 2000), cert. granted, 120 S. Ct. 2004.

The California Supreme recently weighed in on the issue in Armendariz v. Foundation Health Psychcare Services Inc., 2000 Daily Journal D.A.R. 9401 (Aug. 25, 2000). In Armendariz, a unanimous Supreme Court upheld the use of mandatory pre-dispute arbitration agreements in the employment arena so long as the arbitration agreement is fair, mutual, and permits enforcement of employees' statutory rights. Under Armendariz, a valid agreement requiring employees to arbitrate employment claims in lieu of access to a jury trial generally must satisfy the following requirements:

• The arbitration agreement cannot limit damages. To be valid, the arbitration agreement must allow full recovery of all damages available under the applicable substantive law. Thus, if an employee can recover unlimited damages for emotional distress, punitive damages, and attorney's fees under a particular claim (e.g., discrimination) the arbitrator also must be able to award such remedies. Any effort by the employer to limit the nature or amount of damages that an arbitrator may award likely will render the agreement unenforceable.
• The arbitration agreement must be mutual. To bind an employee to submit all disputes to arbitration, the employer must also agree to arbitration. Carving out an employer's claims from the arbitration procedure (e.g., claims for injunctive relief to prevent an employee's misuse of trade secrets) could invalidate the entire agreement. In essence, both sides have to commit to the ADR process.
• The arbitration procedure must be fair. Both sides must have the ability to conduct adequate discovery to adjudicate their claims. This includes depositions, interrogatories, and document requests. Moreover, employees cannot be required to pay arbitration fees or costs which are greater than the filing fees associated with a court case. Thus, the requirement found in many ADR agreements that the parties share the cost of an arbitrator or mediator could render the agreement unenforceable. The theory behind this is that the typical cost sharing arrangement puts the employee at a financial disadvantage relative to filing a court case. As a result, the cost of arbitration must fall largely on the employer.
• The arbitration award must be written. The arbitrator's award must be in writing to permit judicial review.

Firms that choose to require arbitration of employment disputes must take care to be sure their arbitration agreement satisfies the Armendariz requirements.

A good idea? Firms should also carefully evaluate the advantages and disadvantages of implementing an ADR procedure. One of the primary benefits of channeling disputes to arbitration is that arbitration generally can be a quicker and less expensive forum in which to resolve contentious and often highly emotional employment disputes. Armendariz changes this significantly by requiring arbitration to look a lot more like civil litigation. Since employees must be permitted to engage in significant discovery, the trappings of the civil litigation process which employers were trying to avoid (or at least limit) will now likely be present in arbitrated claims. This means depositions, interrogatories, and document requests will now be routine in employment arbitrations. Formal discovery will not only delay the process, but it will add significantly to the firm's overall defense costs. Firms must also shoulder nearly the entire cost of the arbitration. Except for the equivalent of a court filing fee, employees cannot be required to share the cost of arbitration. An experienced arbitrator may charge as much as $5,000 or more per day. A typical employment case takes several days to complete, making the process fairly expensive. Added to this is the cost of refereeing discovery disputes. Does Armendariz portend a full-blown law and motion practice in arbitration? Ultimately, that will be up to the arbitrator or perhaps the court in the event significant discovery limitations find their way into the ADR agreement.

Another potential drawback to arbitration is the absence of a clear right to a summary disposition of claims. Employment claims often are resolved by demurrer or summary judgment. While the parties could conceivably establish arbitration procedures which permit summary disposition, doing so would add to the litigation-like aspects. Moreover, there is no statutory right to such motions. The absence of such remedies could also increase the firm's overall defense costs and makes arbitration less attractive.

It is also clear that Armendariz does not permit the employer to impose any limitation on available remedies. Employment discrimination claims provide for unlimited economic, emotional distress, and punitive damages, as well as attorney's fees. While most practitioners are of the opinion that arbitrators generally are more predictable than juries, and less likely to be influenced by passion or sympathy, reported arbitration cases where employees were given six and seven-figure awards cannot be ignored.

Another significant difference between court and arbitration concerns the right to review the award. Both parties should be concerned about this issue. We often see appellate decisions reinstating claims thrown out on summary judgment or overturning defense verdicts. If a judge makes an erroneous legal ruling, the decision can be reviewed independently by the appellate court. Employment litigation often involves novel legal issues that can be dispositive of a claim. While a legal error by a judge can result in a reversal on appeal, not so in arbitration. In Moncharsh v. Heily & Blase, 3 Cal. 4^th 1 (1992), the Supreme Court confirmed the longstanding principle that an arbitration award may not be overturned for legal errors, even if the error would cause substantial injustice. Likewise, a jury verdict generally can be reviewed on appeal to ascertain whether it is supported by substantial evidence. By contrast, the standard for reviewing arbitration awards is much more deferential. Generally, arbitration awards can only be disturbed if the award was the result of fraud or corruption, or misconduct by the arbitrator, or if the arbitrator exceeded his or her powers. Code Civ. Proc. ? 1286.2. In other words, the parties should assume that the arbitrator's award is final. There is also a concern that arbitrators have a financial incentive to render compromise awards rather than rule for one side entirely.

Firms interested in arbitration may also be required to forgo any right to bring a court action for violations of trade secrets or unfair competition, including requests for injunctive relief. Under Armendariz, any effort by the firm to retain the right to bring a civil action against the employee can invalidate the arbitration agreement.

Given all of this, firms ought to carefully weigh these benefits and drawbacks before adopting mandatory arbitration. Firms should also consider other alternative dispute resolution procedures that could be used instead of, or in conjunction with, arbitration. For example, a peer review committee comprised of co-workers and management can be used to make non-binding decisions. Such a procedure may be well suited for many minor employment disputes. In addition, the firm could offer mediation, either on a voluntary or mandatory basis prior to the initiation of a formal claim. Mediation is often particularly effective in employment cases where emotions run high, and both sides need a forum to vent. Of course, for ADR to work, employees must be made to believe that the procedure is fair, and may be used without retribution.

Armendariz settles many of the legal issues surrounding mandatory arbitration of employment disputes. However, the newly established requirements outlined above underscore the need for firms to carefully consider whether mandatory arbitration is the right choice for them. While there are still many potential advantages to arbitration, there are important drawbacks as well. If mandatory arbitration is utilized either alone, or with other ADR procedures, care must be taken to make sure the arbitration agreement satisfies the strict new requirements established in Armendariz.

Richard S. Rosenberg is a founding partner, and Jeffrey P. Fuchsman is a partner in the Universal City management, labor and employment law firm of Ballard, Rosenberg, Golper & Savitt.