Employers Can Adapt Arbitration Pacts To Changing Needs

By Andrew Murphy and Samantha Rollins
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Law360 (April 29, 2020, 4:38 PM EDT) --
Andrew Murphy
Samantha Rollins
Because of the COVID-19 pandemic and the associated downturn in the economy, many businesses are looking for ways to reduce costs — including their legal spend associated with potential COVID-19-related claims. Accordingly, some businesses are considering whether to adopt or modify programs in which they and their employees (or putative employees) are required to arbitrate, rather than litigate, their disputes.

The U.S. Supreme Court's consistent messaging on arbitration agreements has left little doubt that employment arbitration agreements with class action waivers are enforceable.[1] Some employers that have adopted such agreements, however, have found themselves frustrated and disillusioned with the arbitration process.

They observe that, in practice, arbitration can be just as lengthy and expensive as litigation; that the chance of a dispositive ruling before arbitration is lower than it is in court; and that they now face the prospect of getting bogged down in mass arbitrations — the situation that arises when dozens, hundreds or thousands of individuals who would otherwise be putative class members file arbitration claims at the same time.[2]

But arbitration is fundamentally a creature of contract, and the contracting parties have the power to shape and modify the arbitration process as they see fit. This article encourages employers not to abandon arbitration agreements, but rather to consider whether they can adopt agreements that will help the parties to the arbitration achieve the mutually beneficial goals of resolving their dispute with less time and expense than litigation would require.

Managing the Mass Arbitration Morass

Mass arbitration is the threat du jour of the plaintiffs bar.[3] The plaintiffs bar has, moreover, been successful at portraying employer resistance to simultaneously arbitrating thousands of individual arbitration demands as hypocritical.

In fact, one federal judge, in refusing to halt the processing of over 5,000 arbitration demands against Postmates Inc., noted that the $10 million in arbitration filing fees Postmates was facing was a problem "entirely of its own making."[4] Another, refusing to stay over 2,000 arbitration claims against Chipotle Mexican Grill Inc., called the employer's "attempts to delay and obfuscate the claims of the Arbitration Plaintiffs in both the courts and in arbitration ... unseemly."[5]

But such criticisms rarely capture the full story. The truth is that most employers would gladly arbitrate claims, even hundreds of individual arbitration claims, if the process were orderly and efficient — the (aspirational) hallmarks of arbitration.

The trouble is, that's not always the case. Indeed, while claimants in mass arbitration may express an initial willingness to participate in the arbitration process, many will not actually do so.

For instance, many plaintiffs who opt in to collective actions will, if selected for discovery, drop out of the case rather than sit for a deposition or respond to interrogatories or document requests. The same holds true for mass arbitration claimants.

The result is that, in the event of mass arbitration filings, an employer could be on the hook for thousands (or millions) in filing fees for arbitration demands that have no realistic chance of going forward because the claimant will drop his or her claim before responding to a basic discovery request.

But rather than giving up on arbitration in the face of such circumstances, employers should consider a few possible strategies:

First, employers should consider adopting arbitration agreements in which they and their employees agree not to use the services of an arbitration administration organization. These organizations typically require hefty, filing fees that they won't refund if the claimant decides not to pursue his or her claim.

To avoid such fees, employers should consider whether some of the services offered by these organizations can be obtained in other ways: Most law firms can identify potential private arbitrators through their own networks, without the assistance of an alternative dispute resolution organization; the arbitration agreement itself can specify the rules pursuant to which the arbitration agreement should proceed; and typically the lawyers' and arbitrators' staff can handle any additional administrative tasks that these organizations would otherwise handle.

Thus, contracting to use a private arbitrator outside the formal auspices of these organizations can significantly reduce the upfront costs an employer might otherwise face in a mass arbitration situation and can ensure employers do not foot a significant bill for a claim that will never materialize.

Second, employers can consider including in their arbitration agreements an agreed-upon phased approach in the event of a mass arbitration event. For example, the employer and employee could agree that, in the event of mass arbitration filings, the employer and claimants will select a predetermined number (or percentage) of bellwether cases to proceed to arbitration first, while the remaining arbitration cases are stayed.

Those bellwether cases could be selected at random, or chosen equally by the claimants' counsel and the employer, or some combination of both. They could also either be selected immediately, or after some initial discovery is conducted.[6]

Streamlining the Arbitration Process

Another complaint we hear frequently about arbitration is that the process itself — even for a single claimant — is as lengthy, disruptive and expensive as litigation. Employers should examine the scope of discovery permitted by their arbitration agreements and consider whether it can or should be narrowed.

We see many arbitration agreements that provide discovery will proceed pursuant to the Federal Rules of Civil Procedure. But employers and employees can agree to tailor the scope of discovery and the nature of proceedings to the scope of their case, provided that neither party's discovery rights are unduly narrowed. For example, employment arbitration agreements could:

  • Define a set of initial disclosures that are automatically produced by each side without written discovery requests, like employee handbooks and personnel files, the claimant's income/mitigation information, and claimant's medical records if relevant. This can reduce the cost — and time — associated with a first round of written discovery requests.[7]

  • Require initial disclosures be exchanged before the arbitration can move forward — potentially before an arbitrator is even selected. This would require both sides to engage in a review of the merits of their case (and, potentially, facilitate resolution) before either side pays an arbitrator for his or her time.

  • Limit depositions to three per side in a standard disparate treatment case, with the parties agreeing they need to seek leave of the arbitrator if either side desires more.

  • Require that all paperwork be exchanged electronically, and that all prearbitration matters in which the arbitrator is involved be conducted by telephone or video unless otherwise agreed by the parties.

  • Set forth parameters for efficient briefing of discovery disputes and dispositive motions, including oral conferences with the arbitrator before certain types of motions are filed.

  • Consider a special set of arbitration rules if a claimant agrees to a damages cap after the claim is filed. For example, if the employer and employee agree that damages are capped at $50,000, exclusive of attorney fees, the parties could agree to limit the arbitration to two days, forego dispositive motions, forego depositions, and go to arbitration within 90 days of the case filing.

In sum, employers should not abandon their arbitration agreements wholesale. Rather, they should carefully consider whether they can adopt or modify their arbitration agreements to ensure that they serve the fundamental purpose of arbitration: the orderly and efficient resolution of disputes.

Andrew B. Murphy is a partner and Samantha M. Rollins is an associate at Faegre Drinker Biddle & Reath LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Assuming, of course, that they satisfy all the typical criteria of enforceable contracts, including mutual assent and consideration. Volt Information Sciences, Inc. v. Bd. of Trustees of Stanford Univ. , 489 U.S. 468 (1989) (holding that the FAA preempts state laws that "undermine the goals and policies of the FAA"); AT&T Mobility v. Concepcion , 563 U.S. 333 (2011) (holding the FAA also preempts state laws that prohibit class action waivers in arbitration agreements in the consumer context); Am. Express Co. v. Italian Colors Rest. , 570 U.S. 228 (2013) (holding arbitration agreements should be enforced even if the cost of arbitration exceeds the potential recovery); Epic Systems Corp. v. Lewis , 584 U.S. ___ (2018) (holding class waivers are enforceable in employment arbitration agreements notwithstanding the National Labor Relations Act's protections for concerted activity).

[2] Uber Technologies, Inc. faced over 12,000 arbitration filings in August 2018 (https://www.latimes.com/business/la-fi-uber-ipo-arbitration-miscalculation-20190508-story.html); nearly 3,000 former collective action members announced an intent to pursue their claims against Chipotle in arbitration after they were excluded from the lawsuit (https://www.bloomberglaw.com/document/XFU78UMK000000?bna_news_filter=daily-labor-report&jcsearch=BNA%25200000016895fdd1b9afeebfffcdd70002#jcite); in 2019, JPMorgan Chase fought, successfully, to preclude 30,000 workers with arbitration agreements from being notified of their potential right to file an arbitration claim before the Fifth Circuit Court of Appeals (https://www.bloomberglaw.com/document/XFJSJ2QK000000?bna_news_filter=daily-labor-report&jcsearch=BNA%25200000016baf55ddc5a1fbbfdf3cc30002#jcite).

[3] https://www.law360.com/corporate/articles/1160577/an-epic-year-high-court-s-class-waiver-ruling-turns-1.

[4] Order Denying Postmates' Motion to Stay Pending Appeal, Adams v. Postmates, Inc. , Case No. 19-3042 (N.D. Cal. Mar. 5, 2020).

[5] Order Denying Def.'s Mot. for Entry of Judgment and Motion to Reinstate Stay, Turner et al. v. Chipotle Mexican Grill , Case No. 1:14-cv-02612 (D. Colo. Nov. 20, 2018).

[6] Such an approach has not been tested, to the knowledge of these authors, and employers should carefully review any such arbitration agreement, and its risks and benefits, before implementation.

[7] As an example, the Northern District of California has adopted "Initial Discovery Protocols for Employment Cases Alleging Adverse Action." https://www.cand.uscourts.gov/wp-content/uploads/general-orders/GO_71_2-1-2020.pdf. These protocols could be tailored to suit a particular employer's circumstances to ensure the efficient exchange of initial information relevant to the arbitration.

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