Arbitration Agreement May Be A Powerful Tool – If Your Business Can Afford It

Since the California Supreme Court’s Armendariz decision, arbitration agreements under California law have been bitter sweet.

California small-medium businesses (SMB’s) can impose mandatory arbitration agreements on employees to arbitrate employment related disputes, but must pay for all fees and costs associated with the arbitration.

Mandatory binding arbitration removes the case from a jury and requires the plaintiff employee to sue your business before a neutral arbitrator, usually an experienced former judge. This reduces the likelihood of a “runaway jury verdict” based on passion or prejudice and increases the likelihood of a rational decision based on the facts from an experienced judge. Since a “jury of your peers” for a business is generally not the case – a jury is more likely to be made up of the peers of your employee/former employee – arbitration is a powerful tool in the event an employee sues your company.

Post-Armendariz, there is a significant cost to enforcing binding mandatory arbitration agreements. Under the law, the employer must pay for all costs unique to arbitration. This means the employer must pay for all fees the plaintiff/employee would not otherwise have to incur in court. In court, all of our tax dollars pay for the judge and the court system. In private binding arbitration, although there may be some minor filing fees associated with the arbitration, the primary cost is the hired arbitrator’s time.

A good arbitrator can cost anywhere from $400-$1,000/hour. If an arbitrator is $500/hr and the arbitration is 5 days at 8 hours a day, the fee for the arbitrator’s time will be $20,000 (5 days x 8 hours per day x $500/hr). And that does not include any other time spent on discovery issues or ruling on other pre-arbitration matters. The total cost for the arbitrator could easily be $20k-$50k or more. Yes, believe it or not, that makes our fees look “cheap.”

In addition to the company paying for all arbitration fees, other requirements must be met to have a valid arbitration agreement: 1) the plaintiff is entitled to the same remedies/damages that would be available to them in court, 2) their must be an opportunity for discovery (i.e. where each side can learn about the facts from the other side before the arbitration), and 3) the arbitrator must issue a written decision setting forth the essential findings and conclusions upon which his/her decision is based.

The good news is if sent to binding arbitration, the arbitrator’s decision is generally final and the plaintiff/employee’s ability to appeal the arbitrator’s decision is extremely limited, almost impossible. For all intents and purposes the arbitration decision will be final for both sides.