Alternative Dispute Resolution

In Georgia, the State Bar’s Ethical Consideration 7-5 says:

“An attorney as adviser has a duty to advise the client as to various forms of dispute resolution. When a matter is likely to involve litigation, an attorney has a duty to inform the client of forms of dispute resolution which might constitute reasonable alternatives to litigation.”

Over the last two decades, there has been great interest in finding ways to resolve disputes other than through the traditional court system. Some of the dispute resolution techniques that companies have turned to are fairly new, while others have been used for many years. All the methods, however, have as a common objective the resolution of commercial disputes in less time, at less cost and with less emotional turmoil and hostility than typically results from litigation. Mediation and arbitration offer efficient and effective alternatives to litigation. Both may significantly reduce the cost of achieving a resolution of a dispute. Both may be conducted at any time, at any location and at the convenience of the parties.

A. ADVANTAGES OF ADR

Some of the advantages of ADR are that it:

  1. Saves time and money. The savings come primarily from the lack of extended discovery and the elimination of protracted appeals.
  2. Makes the parties focus on the big picture early in the proceeding before a lot of money is spent.
  3. Creates the possibility of a win-win result.
  4. Avoids the necessity of educating the judge or the jury on a complex matter in a new industry. Most forms of ADR use an expert to hear the case.
  5. Offers confidentiality. The parties settle their dispute in private and in most cases keep the results of that settlement private as well.
  6. Lets the parties continue an ongoing business relationship; can permit mediation or arbitration on narrow issues.
  7. Gets business executives involved in the matter at an early stage, leading to quicker settlements.
  8. Provides for extreme flexibility. ADR proceedings can be structured in an almost endless variety of ways.

B. DISADVANTAGES OF ADR

ADR might not be appropriate when:

  1. There are substantial legal issues involved because most ADR methods favor factual proceedings;
  2. There are issues involving the credibility of witnesses;
  3. One party is much better financed than the other;
  4. Multiple parties are involved because it can be difficult to get a large group of litigants to agree to pursue one type of ADR. For a big case, however, this factor can actually cut both ways. In “the big case,” the potential savings in counsel fees and in avoiding corporate disruption are the greatest. These are also the cases where the judge or the jury will likely become confused. These factors favor ADR. On the other hand, in “the big case,” the counsel fees, although they often seem large, may not be that large in relation to the amount that is in dispute; and
  5. Cases involving emotional issues; certain employment disputes and medical malpractice cases can fall in this category.

C. COMMON ALTERNATIVE DISPUTE RESOLUTION TECHNIQUES

  1. Negotiation

Sometimes it is as important how “not” to negotiate than to do it. It is important that the negotiator not have a stake in the dispute. This sometimes comes up when an attorney who drafted a contract is called upon to negotiate a dispute which has arisen under that contract. It is often felt that the attorney will be somewhat “defensive” because it is “his contract” and that perhaps it would be best to have someone else actually conduct the negotiation. The drafting attorney could certainly provide advice and background, but perhaps not engage in active face-to-face negotiations with the other side.

  1. Mediation — “Classic”
    This method of dispute resolution involves a neutral who facilitates a discussion between the parties, often with the presentation of attorney arguments and key evidence. Unlike many other ADR methods, however, mediators are active rather than passive participants. They do not impose a settlement, but through joint sessions and private caucuses help the parties to reach the common ground between themselves. In the most traditional forms of mediation, the mediators never offer their own opinion of the case.

Mediation is very popular today — indeed, it is probably the fastest growing segment of the ADR world. Some experts estimate that 80 to 90 percent of all disputes submitted to mediation are resolved through the process. It tends to work best when it is truly voluntary, when the issues are fleshed out enough for meaningful discussion — which sometimes means there has to be some discovery first — and where the parties are using a trained and experienced mediator. It also helps if the real parties in interest — the representatives of the respective companies — are in positions of authority so they do not have to worry about being criticized or second guessed. It is often recommended that very high ranking executives be the decision makers for this reason.

  1. Evaluative Mediation
    In this type of situation, the mediator may be asked to provide an evaluation as to the strengths of the case and predict the likely outcome at trial. This will give the parties a clear indication of how at least one neutral person views the case. Advocates of mediation disagree on the effectiveness of this method. Some argue that the mediator must remain completely neutral and allow the parties to settle or not settle on their own. Others point out that an evaluation may be the only way to reach an agreement in some situations.
  2. Nonbinding Arbitration
    Nonbinding arbitration generally involves the presentation of the case by attorneys to one to three arbitrators who remain largely passive. Arguments are supported by affidavits, depositions and/or documentary evidence. Live witnesses are rare. Unlike mediation, the process seldom involves private communications with the arbitrators. After the hearing, the arbitrators render a decision which may be accepted by the parties or may become the basis for further negotiations or mediation.
  3. Binding Arbitration
    Binding arbitration bears some similarities to nonbinding arbitration. The attorneys again present arguments to a panel of one to three arbitrators. If a panel is used, each party often selects one arbitrator; these two then select a third. This method has been criticized, however, because it does not result in three neutrals, but rather in one neutral and an advocate for each side.

Affidavits, depositions and documentary evidence are presented without regard for the rules of evidence. The admissibility of evidence is controlled by the arbitrator, although the parties may agree beforehand as to which rules will apply. Because the award is binding, however, the arbitrator must prevent the introduction of unreliable evidence and must restrict the parties to their pleadings and fair notice of issues. Discovery is normally quite limited, though the parties may agree otherwise.

Following the presentation of evidence, the panel makes a binding award, enforceable in court. The award is seldom accompanied by an explanation or “opinion.” Appeals are generally prohibited, although the parties may contract for the right to appeal. Note, however, that most courts will review the proceedings for due process violations, even if the parties have specified there will be no appeals.

If binding arbitration is used, the parties must decide whether it will be administered, i.e., conducted under the rules and guidance of an institution such as the American Arbitration Association (“AAA”), or ad hoc, i.e., managed solely by the parties. Administered arbitration is advisable because:

a. it employs time-tested rules and a professional staff;
b. it employs quality arbitrators and a practical method for selecting those arbitrators;
c. it is a continual buffer between the parties and the neutrals;
d. it offers options (e.g., mediation) throughout the arbitration process so that the parties may be educated in and choose a different ADR method rather than moving directly to litigation;
e. it helps the parties calculate compensation for the arbitrators; and
f. it provides counsel for arbitrators who become involved in post-award litigation.

  1. “Baseball” or “Final-Offer” Arbitration

“Baseball” arbitration is similar to binding arbitration in that the parties must accept the award of the panel without a right to appeal. It differs significantly, however, in the manner in which the award is crafted. Here, prior to the hearing, the parties each submit a proposed award. The panel then hears the case and chooses which award is most appropriate and fair. It cannot substitute its own proposal. Because the panel must choose A or B and cannot create something between the two, this method eliminates the “splitting the baby” problem.

  1. Med-Arb
    Med-Arb encompasses almost any mix of mediation and arbitration. Most commonly, it refers to classic mediation followed by binding arbitration. The two procedures may even occur before the same neutral, again emphasizing the need for a mediator trained in arbitration and vice versa.

An arbitrator converted from a mediator’s role is almost certain to have developed some strong beliefs during the mediation. He is unlikely, when converting to arbitrator, to review critically the quality of the evidence that has brought him to those beliefs. To the extent he does not study both the law and competently evidenced facts in the adjudicative role, a mediator-turned-arbitrator is likely to commit error.

  1. Minitrial

A minitrial involves a moderately formal presentation similar to binding arbitration. Counsel present arguments with few live witnesses. Affidavits, depositions and documentary evidence are admitted without regard to the rules of evidence. The presentation is made to CEO-type representatives of each party with unlimited decision-making authority. This is a significant difference from nonbinding arbitration where nearly any representative with decision-making authority will suffice.

  1. Neutral Factfinder

A neutral factfinder is typically an expert in a nonlegal field who has agreed to investigate and resolve factual issues which are key to the dispute. He or she may be an architect, an accountant, an appraiser, or any other expert. A decision by the factfinder may be binding or nonbinding, as decided by the parties.

  1. Summary Jury Trial

The summary jury trial involves a presentation of arguments to a regularly empaneled jury presided over by a judge or magistrate. If the governing jurisdiction does not provide this program, the parties may arrange for a “private” summary jury presided over by a neutral rather than a judge.

The presentations are generally made by the attorneys and may include reference to affidavits or, in rare cases, the presentation of vital witnesses. The jury renders a nonbinding decision based on the presentations.

Summary jury trials are particularly advantageous in cases heavy on facts and/or damages speculation where the response of a typical jury is likely to influence settlement. The jurors are generally available after the trial to discuss their decision with the attorneys and parties. Knowing how a case “played” to a jury can be a helpful aid to settlement negotiations.

D. CHANGING METHODS OF ADR OR ADAPTING METHODS AS THE DISPUTE UNFOLDS

Obviously, ADR is not fool proof and no single method of ADR works in every given situation. Sometimes there are occasions where it may be necessary, or advisable, to alter the structure of the ADR format, even “midstream” during an ongoing dispute. Here are some ways to adapt your techniques and formats:

  1. Negotiation Hybrids: Providing for Discovery

Many attorneys do not seek binding arbitration because they fear the results based on horror stories they have heard. Skillful drafting in the contract or arbitration agreement can eliminate much of the uncertainty. Counsel may want to begin with the AAA’s model arbitration clause found in its rules pamphlet then add significant supplementation to customize it for the situation at hand. More information on the AAA’s model forms is provided below.

  1. Mediation-Arbitration Hybrids: Resolving Ambiguous Facts

As noted previously, the switch from mediation to arbitration can be dangerous, especially if the same person serves as both mediator and arbitrator. In the right circumstances, however, it can be extremely effective. The switch should be made when it becomes apparent that the basic facts are known to everyone and the only argument that remains is over the interpretation to be given to ambiguous facts. A neutral may then be needed to simply make a decision. Unless the mediator is well trusted or well known for his or her ability in this field, however, counsel should consider choosing a new person to act as arbitrator.

  1. Mediation Hybrids with Arbitration or a Neutral Factfinder: Resolving Valuation Issues

Mediation will often break down when it comes time for the parties to agree on the last detail: How much?

Because of the simplicity of submitting valuations to a neutral, counsel may want to consider adding the following clauses to commercial contracts:
— as to any dispute over valuation of something, the dispute will be submitted to binding Arbitration; or
— will be submitted to a professional appraiser in the subject matter for independent binding fact-finding.

These clauses allow the parties to mediate most areas of the dispute while preventing the mediation from failing because of the valuation issue.

E. OTHER METHODS TO DISCOURAGE LITIGATION
The following clauses can be used in commercial contracts either separately or in conjunction with an ADR clause. Because they make litigation more difficult, costly or inconvenient, they will often encourage the parties to try and settle the dispute without a resort to filing suit.

  1. Escalation Clause

By inserting an escalation clause into a contract, the parties agree that before either sues the other, they will “escalate” the negotiations to higher-level company officials. This is intended to accomplish the basic objective of getting the matter resolved by people who do not have a personal stake in it. Under this technique, there is also some incentive to settle early so that the matter does not go before the respective CEOs of the companies involved, causing potential embarrassment to those at the lower level who were unable to reach an agreement.

  1. Cooling-Off Period

Another alternative to litigation is a simple clause requiring a “cooling-off” period. The contract can state that neither party will institute any legal action against the other unless there has been notice of an intent to do so and a thirty-day or sixty-day cooling-off period. During that time, there shall be at least two meetings of responsible company officers in an attempt to settle the dispute. Filing suit is often a knee-jerk reaction for attorney and many businesspeople. By requiring the parties to wait, cooler heads will often prevail. A cooling-off clause can also be used after a failed ADR procedure to allow the parties to collect their thoughts and possibly make another attempt at settlement.

  1. “Least Favored Choice of Forum” Clause

This clause is aimed at making it more difficult and costly for one party to sue the other by requiring that the party filing suit go to the other’s home jurisdiction to do so. For example, if we have a contract between an Georgia company and a Florida company, the clause would say that if the Georgia company wanted to sue the Florida company, it would have to do so in Florida and vice versa. The idea is to slow down the process and discourage the parties from automatically filing suit when they might be able to resolve the matter by negotiation or compromise.

  1. Payment of Costs/”Last Best Offer”

The contract may also include a provision which permits a judge or arbitrator to award the winning party its costs and attorneys’ fees. This discourages the filing of marginal claims and may even encourage the settlement of strong claims for fear of paying an extensive award to cover fees. One variation on this method limits recovery by the prevailing party to the amount spent by the losing side. This discourages the parties from running up expenses on the expectation that they will be reimbursed.

  1. Dispute Avoidance

More and more, companies are trying a technique known as dispute avoidance. One method is partnering. Using this method, the key players to a contract or agreement (e.g., executives and managers) get to know each other before a project begins by attending meetings or going on a retreat with partnering individuals. During the meeting or retreat, they discuss different ways to handle the problems that will inevitably arise, mutual goals and how to keep the lines of communication open for complaints or suggestions.

A second method is review boards. A review board is a neutral panel established by the two companies which attempts to resolve disputes as they develop and before they go to litigation or ADR. The review board also meets with the parties to an agreement to get progress reports on how people are getting along and how the project is progressing.

II. DRAFTING THE ADR CONTRACT CLAUSE

Another important means of solidifying the use of ADR is to ensure that the appropriate contracts include an ADR or predispute clause. An ADR clause simply establishes that the contracting parties will engage in ADR — typically arbitration, mediation, or an agreement to attempt negotiation as a first step.

In drafting an ADR clause, one should consider several factors, such as:

a. Discovery: Will discovery be permitted at all? If so, how can it be limited to reasonable dimensions without defeating the parties’ legitimate needs for information from each other? How will discovery disputes be dealt with?

b. The Adjudicator(s): Who will adjudicate? Options include retired judges, practicing attorneys, specialized experts, or general businessmen. Will there be one adjudicator, or a panel of two, or three, or even more? Will the parties select the adjudicator(s) by mutual agreement, or will they leave the selection to a third party (i.e., a local court or bar association)?

c. Finality of Results: Will the adjudicator’s judgment be final, with the force of law, or merely advisory? If the judgment is to be final, in the same way as a normal trial verdict, on what basis, if any, may the parties appeal?

d. Evidence: Will formal rules of evidence apply or will the rules be relaxed? What objectives will be permitted? What kind of record will be kept?

e. Time Limits: What deadlines and time limits, if any, will be established for the discovery cutoff and the ADR adjudication? Will the parties negotiate those limits or will the adjudicator set them?

A. SAMPLE ADR CLAUSES

The following forms offer a variety of options and levels of specificity. Form 1, a short, nonspecific ADR clause; form 2, a short-form mediation clause; and form 3, a long-form ADR clause.

FORM 1: A SHORT, NONSPECIFIC ADR CLAUSE

If a dispute arises between the parties relating to this Agreement, the parties agree to use the following procedure prior to either party pursuing other available remedies.

(a) A meeting shall be held promptly between the parties, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute.

(b) If, within [30] days after such meeting, the parties have not succeeded in negotiating a resolution of the dispute, they will jointly appoint a mutually acceptable neutral person not affiliated with either of the parties (the “neutral”), seeking assistance in such regard from the [American Arbitration Association] [CPR Institute for Dispute Resolution] [other named organization] if they have been unable to agree upon such appointment within [40] days from the initial meeting. The fees of the neutral shall be shared equally by the parties.

(c) In consultation with the neutral, the parties will select or devise an alternative dispute resolution procedure (ADR) by which they will attempt to resolve the dispute and a time and place for the ADR to be held, with the neutral making the decision as to the procedure and/or place and time (but unless circumstances require otherwise, not later than [60] days after selection of the neutral) if the parties have been unable to agree on any of such matters within [20] days after initial consultation with the neutral.

(d) The parties agree to participate in good faith in the ADR to its conclusion as designated by the neutral. If the parties are not successful in resolving the dispute through the ADR, then the parties:
[Draftsman may select one of the following alternatives or provide for some other means of obtaining a binding and final resolution.]

(i) [May agree to submit the matter to binding Arbitration or a private adjudicator, or either party may seek an adjudicated resolution through the appropriate court.]

(ii) [Agree that the dispute shall be settled by Arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction.]

(iii) [Agree that either party may initiate litigation upon [7] days written notice to the other party.]

FORM 2: A SHORT-FORM MEDIATION CLAUSE

If a dispute arises between the parties relating to this Agreement, the parties agree to use the following procedure prior to either party pursuing other available remedies.

(a) A meeting shall be held promptly between the parties, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute.

(b) If, within [30] days after such meeting, the parties have not succeeded in negotiating a resolution of the dispute, they agree to submit the dispute to mediation in accordance with [the Commercial Mediation Rules of the American Arbitration Association] [the Model Procedure for Mediation of Business Disputes of the CPR Institute for Dispute Resolution] [other applicable procedures] and to bear equally the costs of the mediation.

(c) The parties will jointly appoint a mutually acceptable mediator, seeing assistance in such regard from the [American Arbitration Association] [CPR Institute for Dispute Resolution] [American Intermediation Service] [ other named organization] if they have been unable to agree upon such appointment within [20] days from the conclusion of the negotiation period.

(d) The parties agree to participate in good faith in the mediation and negotiations related thereto for a period of [30] days. If the parties are not successful in resolving the dispute through the mediation, then the parties:
[Draftsman may select one of the following alternatives or provide for some other means of obtaining a binding and final resolution.]

(i) [May agree to submit the matter to binding Arbitration or a private adjudicator, or either party may seek an adjudicated resolution through the appropriate court.]

(ii) [Agree that the dispute shall be settled by Arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction.]
(
iii) [Agree that either party may initiate litigation upon [10] days written notice to the other party.]

FORM 3: A LONG-FORM ADR CLAUSE

(a) Agreement to Use Procedure. In the event of a dispute between the parties arising out of or related to this Agreement (the “dispute”), the parties agree to utilize the procedure specified in this section (the “procedure”), unless otherwise modified by written agreement of the parties at the time the dispute arises.

(b) Initiation of Procedure. A party seeking to initiate the procedure (the “initiating party”) shall give written notice to the other party, describing briefly the nature of the dispute and its claim and identifying an individual with authority to settle the dispute on its behalf. The party receiving such notice (the “responding party”) shall have [5] days within which to designate, in a written notice given to the initiating party, an individual with authority to settle the dispute on its behalf. (The individuals so designated shall be known as the “authorized individuals.”) [Absent agreement by the parties, neither of the authorized individuals shall have had direct substantive involvement in the matters involved in the dispute.]

(c) Unassisted Settlement. The authorized individuals shall make such investigation as they deem appropriate and thereafter promptly (but in no event later than [30] days from the date of the initiating party’s notice) shall commence discussions concerning resolution of the dispute. If the dispute has not been resolved within [30] days from the commencement of discussions (such [30th] day being the “submission date”), it shall be submitted to alternative dispute revolution (ADR) in accordance with the following procedure.

(d) Selection of Neutral. The parties shall have [10] days from the submission date to agree upon a mutually acceptable neutral person not affiliated with either of the parties (the “neutral”). If no neutral has been selected within such time, the parties agree jointly to request the American Arbitration Association, the CPR Institute for Dispute Resolution and/or another mutually agreed-upon provider of neutral services to supply within [10] days a list of potential neutrals with qualifications as specified by the parties in the joint request. Within [5] days of receipt of the list, the parties shall independently rank the proposed candidates, shall simultaneously exchange rankings and shall select as the neutral the individual receiving the highest combined ranking who is available to serve.

(e) Time and Place for ADR. In consultation with the neutral, the parties shall promptly designate a mutually convenient time and place for the ADR (and unless circumstances require otherwise, such time to be not later than [45] days after selection of the neutral).

(f) Exchange of Information. In the event either of the parties has substantial need for information in the possession of the other party in order to prepare for the ADR, the parties shall attempt in good faith to agree on procedures for the expeditious exchange of such information, with the help of the neutral if required.

(g) Summary of Views. One week prior to the first scheduled session of the ADR, each party shall deliver to the neutral and to the other party a concise written summary of its views on the matter in dispute.

(h) Staffing the ADR. In the ADR, each party shall be represented by the authorized individual and by counsel. In addition, each party may bring such additional persons as needed to respond to questions, contribute information and participate in the negotiations, the number of such additional persons to be agreed upon by the parties in advance, with the assistance of the neutral, if necessary.

(i) Conduct of ADR. The parties, in consultation with the neutral, will agree upon a format for the meetings designed to assure that both the neutral and the authorized individuals have an opportunity to hear an oral presentation of each party”s views on the matter in dispute and that the authorized parties attempts to negotiate a resolution of the matter in dispute with or without the assistance of counsel or others, but with the assistance of the neutral. To this end, the neutral is authorized to conduct both joint meetings and separate private caucuses with the parties. The neutral will keep confidential all information learned in private caucus with either party unless specifically authorized by such party to make disclosure of the information to the other party.

(j) The Neutral’s Views. The neutral (i) shall, unless requested not to do so by both parties, provide his opinion to both parties on the probable outcome should the matter be litigated; and (ii) shall, if requested to do so by both parties, make one or more recommendations as to the terms of a possible settlement, upon any conditions imposed by the parties (including, but not limited to, a minimum and maximum amount). The neutral shall base his opinions [and recommendations] on information then available to both parties, excluding such information as may be disclosed to him by the parties in confidence. The opinions and recommendations of the neutral shall not be binding on the parties.

(k) Termination of Procedure. The parties agree to participate in the ADR procedure to its conclusion (as designated by the neutral) and not to terminate negotiations concerning resolution of the matters in dispute until at least [10] days thereafter. Each party agrees not to commence a lawsuit or seek other remedies prior to the conclusion of the [10] day post-ADR negotiation period, provided, however, that either party may commence litigation within [5] days prior to the date after which the commencement of litigation could be barred by an applicable statute of limitations or in order to request an injunction to prevent irreparable harm, in which event the parties agree (except as prohibited by court order) to nevertheless continue to participate in the ADR to its conclusion.

(l) Fees of Neutral; Disqualification. The fees of the neutral shall be shared equally by the parties. The neutral shall be disqualified as a witness, consultant, expert, or counsel for either party with respect to the matters in dispute and any related matters.

(m) Confidentiality. The ADR procedure is a compromise negotiation for purposes of the federal rules of evidence and state rules of evidence. The entire procedure is confidential and no stenographic, visual, or audio record shall be made. All conduct, statements, promises, offers, views and opinions, whether oral or written, made in the course of the ADR by either of the parties, their agents, employees, representatives, or other invitees and by the neutral (who will be the parties’ joint agent for purposes of these compromise negotiations) are confidential and shall, in addition and where appropriate, be deemed to be work product and privileged. Such conduct, statements, promises, offers, views and opinions shall not be discoverable or admissible for any purposes, including impeachment, in any litigation or other proceeding involving the parties and shall not be disclosed to anyone not an agent, employee, expert, witness, or representative of either of the parties, provided, however, that evidence otherwise discoverable or admissible is not excluded from discovery or admission as a result of its use in the ADR.

B. SPECIAL NOTE ON ADR FORM PROVISIONS

The American Arbitration Association has published a series of AAA-accepted form ADR provisions. These provisions can be easily accessed on the internet at www.adr.org/rules/guides/clausebook.html. Sample forms are provided for arbitration, negotiation and mediation provisions. The AAA also has specific clauses for use in:

  • international disputes;
  • construction disputes;
  • employment disputes;
  • patent disputes;
  • textile disputes; and
  • financial disputes.

III. SPECIAL CONSIDERATION – EMPLOYMENT LAW ISSUES

This seminar deals with a variety of issues arising in the context of joint ventures and other types of business alliances. It is likely that counsel will usually be involved in drafting some form of agreement between the participating companies and the discussion above largely concerns whether such agreements should contain ADR clauses. Other topics to consider involve the employment law issues raised by such joint ventures and business alliances, where employees may be “shared” or “loaned” between various business entities.

Georgia law recognizes that when employees perform work with or for other companies, they may be considered independent contractors, borrowed servants, or joint employees. For purposes of Title VII, depending on the circumstances, all of the companies participating in the venture may be considered to be an employee’s “employer” for purposes of liability and courts recognize the concept of “joint employers” in the employment discrimination context. The question then arises as to whether the joint venture operating agreement, or some separate employment related agreement, should be drafted so as to include an arbitration provision concerning any claims raised by an employee.

A. ARBITRATING EMPLOYMENT DISPUTES – A MIXED BAG

In an attempt to decrease litigation expenses and reduce exposure to uncertain jury awards, an increasing number of employers are now including arbitration clauses in their job applications, employee handbooks and employee contracts. By agreeing to arbitrate instead of litigate, employees give up their rights to have their claims heard by a jury in a court of law. Arbitration provisions can be an effective, efficient and economical way of disposing of employment disputes. However, such agreements are not without their faults.

Why arbitrate? Studies show that many potential jurors tend to have a “pro-labor” mind set that favors terminated employees. Many jurors tend to feel that employees should be the top priority of a company, not its profits. It is not surprising to find out that employees win the majority of all employment lawsuits that go to trial. When they rule in a plaintiffs’ favor, juries can award large damage verdicts and punitive damages are often awarded by juries and can easily reach into six-figures and beyond.

With these risks in mind, it is not surprising that many employers are turning toward mandatory arbitration provisions in their employment contracts, handbooks or even job applications, whereby aggrieved non-union employees agree to waive their rights to a jury trial, to take all common law and statutory claims out of the judicial arena and to privately arbitrate those disputes. Arbitration provisions are not limited to traditional “discrimination” claims, such as those based on race, sex, age, disability, etc. In actuality, the majority of employment related lawsuits allege state common law claims such as breach of contract, intentional infliction of emotional distress and similar allegations and such claims are ripe for arbitration.

A threshold question is: Are mandatory arbitration clauses in employment contracts enforceable? Unfortunately, the answer is, “It depends.” Courts in most judicial circuits will generally find an arbitration provision to be enforceable, so long as certain procedural safeguards are in place. To be enforceable, an employee’s agreement to arbitrate claims must generally be “knowing and voluntary.” In other words, an employer cannot try to slide an arbitration provision into a contract or handbook. The arbitration provision must be conspicuous and should be in plain language. Below you will find a discussion on three cases which are currently pending before the United States Supreme Court and which will address the enforceability of mandatory arbitration provisions in the employment context.

It is recommended that the language be drafted to state that the employee agrees to arbitrate any all claims against the employer, including, specifically, employment disputes. To show that an employee has knowingly and voluntarily agreed to arbitrate her employment claims, it is recommended that both the employee and employer sign or initial beside that specific provision of the agreement. Some states have particular laws which affect the validity of an arbitration provision. Georgia, for instance, specifically requires that there be a space for the employee and employer to include their initials beside the specific arbitration provision; otherwise, the arbitration provision is unenforceable. See O.C.G.A. § 9-9-2(c)(9).

An interesting question regarding the enforceability of an arbitration provision regards the issue of the costs of the arbitration itself. Several courts have found that to be enforceable, a binding arbitration clause must provide that the employer will be solely responsible for the costs of the arbitration proceeding. In other words, some courts find that any provision stating that the company and the employee will “split” or divide the costs of arbitration is invalid, with the effect that the entire arbitration provision will be unenforceable.

The language of an arbitration provision in a handbook or contract is extremely important. If drafted improperly, the arbitration clause may be no more valuable than the paper on which it is written. To be enforceable, an arbitration provision should provide for a neutral arbitrator, more than minimal discovery, the same relief as available in court, a written decision, payment of the arbitrator’s fee by the employer and the claimant’s payment of only reasonable expenses. The language may also need to provide that an arbitrator shall have the right to award a prevailing claimant his attorneys’ fees. Additional considerations arise when an employer tries to bind its existing employees to arbitration agreements, for the company must provide them with additional legal “consideration” for this waiver of their right to have any claims heard by a jury. Thus, while arbitration clauses can be an effective means of cutting costs and minimizing risks, each employer should carefully consider the various pros and cons of such agreements before instituting them.

IV. PENDING SUPREME COURT CASES

There are currently three cases pending before the United States Supreme Court which will, once decided, greatly shape the law on arbitration. These cases all involve questions of the enforceability of arbitration provisions, particularly within the employment context. Some of the issues raised are rather arcane and very narrow. It is obviously unclear whether the Court’s decisions will be very narrowly crafted or more expansive. Many court watchers are looking for the Court to provide more sweeping guidance regarding the general enforceability of arbitration agreements within contracts and to provide an indication as to what factors the Court considers to constitute a “knowing and voluntary” release of rights and agreement to enter binding arbitration. A summary of the three cases is provided below:

A. Green Tree Financial Corp., et al. v. Randolph, Larketta; Case No. 99-1235, Appealed From: 11th Circuit Court of Appeals (178 F.3d 1149)
Questions presented:

(1) Did the appeals court err in concluding that an order compelling arbitration and dismissing the lawsuit is a final decision with respect to arbitration appealable under 9 U.S.C. Section 16(a)(3)?

(2) Did the appeals court err in concluding that an arbitration provision that was silent on the issue of costs and fees was unenforceable under the Federal Arbitration Act because of the risk that plaintiffs might be required to bear unknown costs and fees in trying to vindicate their statutory rights?

When Larketta Randolph bought her new mobile home, she financed the house with Green Tree Financial Corp. Upon receiving the contract, Randolph “went over the front and glanced over the back” of the documents and didn’t see anything that caused her any concern, she said. With no force or pressure from Green Tree, Randolph signed the contract. But on the back page of Green Tree’s contract, a boilerplate clause required binding arbitration and a waiver of any rights to a jury trial for “all disputes, claims or controversies.” The contract allowed only Green Tree to bring court action if they decided to do so. Two years later, Randolph sued Green Tree, seeking damages, attorneys’ fees and costs for Green Tree’s alleged violations against her consumer rights. She claimed the binding arbitration and jury waiver provisions violated the Truth In Lending Act and the Equal Credit Opportunity Act.

The district court dismissed the case and ordered Randolph to submit to arbitration, ruling that she “voluntarily and knowingly entered into her contract, including the arbitration provisions.” The 11th Circuit reversed, finding for Randolph that the arbitration clause is unenforceable “because it fails to provide the minimum guarantees required to ensure that Randolph’s ability to vindicate her statutory rights will not be undone by steep filing fees, steep arbitrators’ fees, or other high costs of arbitration.” The Supreme Court will address the enforceability of such arbitration provisions contained in boilerplate in consumer contracts.

B. Eastern Associated Coal Corp. v. United Mine Workers, District 17; Case No. 99-1038; Appealed From: 4th Circuit Court of Appeals (188 F.3d 501)
Question(s) presented:

Whether a court can overrule an arbitrator’s decision that required an employer to retain an employee in a sensitive job despite testing positive for marijuana use.

James Smith, a drilling operator with Eastern Associated Coal Corp., was subjected to a random drug test, which turned up positive for marijuana. Eastern suspended Smith and then fired him. Smith filed a union grievance challenging his discharge and the case went to arbitration. In April 1996, an arbitrator ruled that Smith should return to work after a 30-day suspension without back pay. The arbitrator also required that Smith submit to random drug testing by Eastern or an approved substance abuse professional for a period of five years. Subsequently, Smith passed three drug tests. But on June 27, 1997, Smith tested positive for marijuana. Again, Eastern suspended Smith and later released him. The case again went to arbitration. This time, a second arbitrator weighed Eastern’s right to hire and discharge workers and the company’s interest in maintaining a safe work environment with the union’s claim that Smith’s two failed drug tests were the only pocks on his otherwise exemplary 17-year employment history with Eastern.

In an August 1997 ruling, the arbitrator acknowledged the validity of Eastern’s safety concerns. However, he did not find “just cause” for Smith’s release. The arbitrator ruled that Smith would be suspended for 2-and-a-half months without pay and then reinstated. Seeking to vacate the arbitration award, Eastern filed suit in federal court in West Virginia, arguing that its drug policy was a key part of the Wage Agreement and that the arbitrator exceeded his authority under the agreement and employed “his own brand of industrial justice.”

The district court held that while Eastern’s drug policy was an integral part of the Wage Agreement, the arbitrator did not exceed his authority in ordering Smith reinstated because the company’s policy did not require mandatory termination for drug use, nor did the DOT’s regulations make it illegal to reinstate employees who test positive for drug use. Eastern appealed to the 4th Circuit Court of Appeals, stating that the District Court decision violated a public policy against the use of illegal drugs by employees in safety-sensitive positions. The 4th Circuit upheld the District Court and arbitrator’s decisions saying, “Neither the Wage Agreement nor Eastern’s substance abuse policy requires that discharge is mandated as the punishment for employees who test positive for illegal drugs.” The 4th Circuit also ruled that while there is a public policy against the use of drugs by those in safety-sensitive positions, there is no public policy against the reinstatement of employees who have used drugs in the past.

C. Circuit City Stores vs. Adams; Case No. 99-1379;
Appealed From: 9th Circuit Court of Appeals (194 F.3d 1070)
Questions presented:

Whether the 9th Circuit Court of Appeals erred in holding that the Federal Arbitration Act doesn’t apply to contracts of employment?

In 1995, when Saint Clair Adams applied for a job at a Circuit City in Santa Rosa, California, he filled out a six page application that included an arbitration clause. Adams signed the arbitration contract, agreeing to settle “all previously unasserted claims, disputes or controversies arising out of or relating to” his employment with Circuit City, “exclusively by final and binding arbitration before a neutral Arbitrator.” Adams left Circuit City just a year later and soon after, wrote a letter demanding arbitration to appeal his benefits. When Circuit City failed to respond to Adams’ arbitration request, he sued Circuit City and three of his supervisors in Sonoma County Superior Court alleging discrimination and harassment based on his sexual orientation.

Although Adams argued that the arbitration agreement was “an unconscionable contract of adhesion,” U.S. District Judge Charles A. Legge disagreed. Judge Legge found that there were some limitations to recovery for Adams, but he did not see it as legally unfair. “I believe it’s clear here that the contract is to be interpreted to bind both parties, that is Mr. Adams and the company, to arbitration,” Legge said in his April 1998 ruling. “I find that the contract is enforceable,” he added, in staying the state court proceeding and sending the case to arbitration.

A unanimous 9th Circuit Court of Appeals reversed and focused on the Federal Arbitration Act, a federal statute regulating arbitration agreements and its applicability to employment contracts. The appeals court found that Adams’ arbitration agreement was an employment contract. Although a disclaimer in the agreement said that it does not “form a contract of employment between Circuit City and me,” the court held that applicants must sign the agreement as a condition of employment.

Since the arbitration agreement between Adams and Circuit City was an employment contract, according to the court, it is not covered under the FAA. “The district court…lacked the authority, as a matter of substantive law, to compel arbitration because the Federal Arbitration Act does not apply to this case,” the per curiam opinion read.

The U.S. Supreme Court granted certiorari on May 22, 2000 and limited review to whether the FAA applies to employment contracts and whether the state retains its right to regulate arbitration agreements.

Sources of Assistance for ADR:

There is now a cottage ADR industry. Following are a few of the major organizations offering ADR services:

American Arbitration Association
140 West 51st Street
New York, NY 10020
(212) 484-4000
Web site at www.adr.org

CPR Institute for Dispute Resolution
366 Madison Avenue
New York, NY 10017
(212) 949-6490
Web site at www.cpradr.org

JAMS/Endispute (phone (800) 352-5267 for nearest office)
ABA Section of Dispute Resolution
740 15th Street, NW
Washington, DC 20005-1009
(202) 662-1680
Web site at www.abanet.org/dispute/home.html

Henning Mediation & Arbitration Service, Inc., 1998-20003350
Riverwood Parkway
Riverwood Building, Lobby, Suite 75
Atlanta, Georgia 30339
Telephone (770) 955-2252 or (800) 843-6050
Fax: (770) 955-2494
info@henningmediation.com

Resources:

Clarke, Smith, Gambrell & Russell – Employment Watch, December 1999

M. Hendershot, Corporate Counsel’s Primer Series on CD-Rom: Alternative Dispute Resolution Techniques, Business Laws, Inc. (1999)

Findlaw.com Supreme Court Resources Page citing Northwestern University Medill School of Journalism Supreme Court Docket Review

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