Tuesday, October 13, 2009

Perspectives on Pre-Dispute Arbitration Agreements

There exists an ongoing controversy in the field of employment law regarding the use of arbitration clauses in employment contracts. In short, employers make employees sign contracts when they begin employment indicating disputes will go to arbitration instead of court. There's legislation brewing in the Senate right now called the Arbitration Fairness Act of 2009. The key provision is pretty straightforward:
"no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment, consumer, franchise, or civil rights dispute."
So what's the problem with arbitration?

The proposed Act cites several reasons including the general lack of understanding on the part of employees/consumers (as compared to big employers), the lack of transparency, the lack of judicial review, and allegedly "unfair provisions" in the contracts. Or as The Consumerist describes it:
"mandatory binding arbitration is patently unfair to consumers. It is a joke of justice; a fake tribunal where injured consumers will almost always lose to corporations at the hands of a biased arbitrator."
Well, OK then.

So, what's right with arbitration? Or is it just a way for big business to suppress the little guy? In testimony before the Senate Judiciary Committee last week, Michael W.(not J.) Fox from Ogletree, Deakins, Nash, Smoak & Stewart, P.C. cited some positive statistics:
  • Plaintiffs prevailed 46% of the time in arbitration versus 34% in the Courts;
  • Median monetary awards were approximately equal ($100,000 in arbitration versus $95,554 in litigation); and
  • Arbitration results were 33% faster.
Opponents are no doubt thinking, "There are three kinds of lies: lies, damned lies, and statistics." I think both sides would agree, however, that arbitration is faster and cheaper. That doesn't really address the problems identified above though.

While the debate rages on, the pre-dispute arbitration clauses are generally enforceable for the time being. Congress has at least started the process of changing the game.

Additional Resources
  • One of the main cases behind the controversy is Circuit City v. Adams, 532 U.S. 105 (2001).
  • Fellow employment law blogger, Joseph C. Markowitz has written some nice blog posts on this topic.

1 comment:

  1. No, both sides don't agree that arbitration is necessarily faster and cheaper, nor that those two attributes are inherently good.

    Some of Public Citizen's reports, as well as other consumer org's findings, have shown that arbitration can be very costly, and can even drag on as long as litigation. Neither method of dispute resolution precludes using a lawyer, either, which adds to the expense of either suing or arbitrating. Consumers may be told they "don't need a lawyer in arbitration" but this is a damaging half truth. You don't have to have a lawyer in court either, but you need one in both methods of dispute resolution because the corporate opponent likely has not only a lawyer but a legal dept.!

    That there is inherent bias and secrecy in private industry run arbitration is so patently obvious I won't even debate it here; it's more than adequately covered in other easily found sources such as Public Citizen already named.

    Speed in arbitration can be a trap for a consumer because they often don't have a clear idea what their damages are at first, such as in a construction defect or home warranty dispute. What about injuries where they're not even done being treated yet?

    I've seen homeowners get cosmetic crack repairs from a builder, then months later they have expensive foundation failure, but have signed away their rights by the time they realize that. In litigation or even anticipation of litigation, there is time and effort put into assessing the situation. Being forced to arbitrate quickly often means less pay out to the contractor even if he loses, another reason businesses profit from depriving consumers of their leverage and rights when they retain the right to sue. Most do not want to sue, they just want what they paid for.