By Joseph D. Garrison
ENFORCEMENT OF "CUSTOMIZED" ARBITRATION AGREEMENTS
One benefit of arbitration is that parties of equal bargaining power can provide for a method of settling disputes which is alternative to the court system. A negotiated arbitration agreement, which allows parties to resolve disputes quickly and at reduced cost, can dispense with many procedures which apply in court. An expedited, more informal process can allow businesses who have commercial disputes to continue doing business together, or can allow construction projects to proceed while specific questions are being resolved. In general, the theory is that a relationship can be preserved if the dispute resolution process is sensible for both parties. Equal negotiating power, in general, insures an outcome which is sensible, as neither party can impose unreasonable terms or conditions on the other.
Arbitration in the employment and consumer sectors of our economy, however, is different. Most employees (with the exception of highly-compensated executives) do not have much power to negotiate the terms and conditions of employment. Consumers buying products have no negotiating power. The theory in these areas is that employees and consumers can "vote with their feet" by refusing to accept the job or refusing to buy the product.
In the real world, however, consumers won't find out about an "arbitration agreement" until they have opened the box and (perhaps) read the manual enclosed in it. Since most consumers believe that the product is going to work, it is the rare one indeed that will return it just to protest an arbitration provision.
In the real world, however, the employee who has successfully interviewed for an interesting job may have been the one who was selected over 100 other applicants, in a tough job market. That employee also believes that the future will be fine at the workplace. Almost no one would quit a job, before it even starts, in protest that arbitration is the method the new employer has chosen to resolve disputes, which may never arise.
Because the "vote with your feet" concept is unrealistic in these venues, manufacturers and employers have, in some instances, tried to "customize" the arbitration process to their benefit only. One method which has had mixed results is to shorten the statute of limitations.
Ten or fifteen years ago, a few employers successfully inserted six-month limitations periods in arbitration agreements. In a race discrimination case brought in 1992 under Section 1981 in the 7th Circuit, for example, the court upheld a six-month statute of limitations. At that time, however, it was not settled that the section 1981 statute of limitations was four years, so there was a reasonable argument that six months approximated the most analogous state limitations period. In general, many courts in those years saw the issue as whether the shorter statute of limitations was unreasonable or oppressive, giving undue advantage to one party.
Not content with shortening a limitations period to six months, more recently some companies have provided that all claims must be made within as short a time period as 30 days. These attempts have not succeeded. In particular, courts have been offended that a private employer has sought to modify statutory limitations periods which are part and parcel of public policies against discrimination or other employee-protective statutes. Since 2000, various attempts to shorten the statute of limitations have failed, whether the shortened period was 30 days, 90 days, six months or even one year.
Of course, one can search forever for the case in which a company has allowed a longer statute of limitations for claims. To my knowledge, no such case exists. Fooling with the statute of limitations is always one-sided, and is always meant to benefit the drafter. A statute of limitations is part and parcel of a right itself. "Customizing" it should always be unconscionable, and never enforceable, when the contract is of the "take it or leave it" variety.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
CAN COMPANIES GRANT THEMSELVES "GET OUT OF JAIL FREE" CARDS BY USING MANDATORY ARBITRATION?
John Szetela got a credit card from Discover Bank in 1993. In 1999, the Bank amended his earlier Cardholder Agreement by adding a mandatory arbitration section, inserted into an envelope stuffer, which among other things prohibited class actions. If Mr. Szetela did not want to accept these terms, his only choice was to close his account. In 2000, Mr. Szetela filed a class action alleging that Discover improperly charged overlimit fees of $29. Discover's motion to compel individual arbitration was granted; Szetela arbitrated and recovered $29. Then, he appealed and alleged that his class action should be allowed. Essentially, he argued that the no class action provision was unconscionable.
Procedurally, the California Appellate Court held that Szetela was required to "take it or leave it" with no opportunity for meaningful negotiation, establishing procedural unconscionability. He proved substantive unconscionability as well. Although the no class action prohibition was purportedly mutual, the court could not imagine any circumstances in which Discover Bank would sue its own customers in a class action lawsuit. Instead, "Discover has create[d] for itself virtual immunity from class or representative actions despite their potential merit, while suffering no similar detriment to its own rights.... Discover has essentially granted itself a license to push the boundaries of good business practices to their furthest limits, fully aware that relatively few, if any, customers will seek legal remedies, and that any remedies obtained will only pertain to that single customer without collateral estoppel effect.... it violates public policy by granting Discover a "get out of jail free" card."
This line of authority, i.e., that public policy favoring arbitration is outweighed by public policy favoring the class action device to allow an effective redress of grievances, has been echoed in other state court jurisdictions.
On the other hand, the federal courts to date (with the exception of the Western District of Washington in Luna v. Household Finance in 2002) have held that arbitration clauses are not unconscionable when they exclude class actions. For example, Patricia Snowden and six other plaintiffs claimed that Checkpoint Check Cashing charged them usurious interest rates, in part violating the Truth in Lending Act. Checkpoint, in its contract, barred class actions. The 4th Circuit, in a 2002 holding, compelled individual arbitration. It dispensed with her argument that the small damages available to her would preclude legal representation, by noting that if she prevailed in a TILA case, she was entitled to attorney's fees. It summarily dismissed the argument that a no class action clause is inconsistent with public policies protecting consumers, stating that the AAA is a reputable organization and places no limits on remedies available. I assume that means that in the 4th Circuit arbitrators have the power to issue broad injunctive relief consistent with consumer protection. See also, Johnson v. West Suburban Bank (3d Cir. 2000) (no class action arbitration does not suffer "inherent conflict" with TILA, as individual rights may be fully protected).
Finally, Larketta Randolph, who purchased her mobile home through Green Tree Financial Corporation, a transaction which landed her in the United States Supreme Court, returned to the 11th Circuit after remand. She argued that the prohibition of classwide arbitration was unenforceable, but her case was also a Truth in Lending claim. The TILA specifically contemplates class actions, because it caps statutory damages available to a class. Nevertheless, apparently the statute was not "intended to create a non-waivable right to bring TILA claims in the form of a class action," presumably because Congress did not explicitly say so when it passed the TILA well before mandatory arbitration began to catch on. After her years of struggle, I hope her individual case was a winner.
Now that the administering agencies, such as AAA, have promulgated class action procedures, I think these cases can often be reconciled by severing the no class action clauses from the arbitration agreement (as long as the agreement is not otherwise unconscionable). Then all the policies, those protecting consumer rights and those protecting arbitration, would be enforced. Whether arbitrators will adequately deal with class actions is another question altogether, but requiring severance would, at least, present these issues to the arbitrators for resolution.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
I LOST MY RIGHT TO A JURY TRIAL?
The notice it takes to evaporate a jury trial right is minimal. Blind people, by not asking the right questions of an unscrupulous lender, "consented" to arbitration. Envelope stuffers announce that by continuing to use credit cards or other services, you "consent" to arbitration. Generally, you are on notice of an arbitration plan if you sign papers (whether you can read them or not) or if you get your mail (whether you open it or not).
You can have notice of arbitration and "consent" even when you don't have notice but you naughty boys or girls haven't gone to some length to get the notice that a company neglected to provide. A case illustrating how it is your fault, even though Big Company has failed to send the document containing your "consent," is Schafer v. AT&T Wireless Services from the Southern District of Illinois. Ms. Schafer ordered a cell phone. It came in a box, which was supposed to include the AT&T Wireless Welcome Guide. All the terms and conditions of her cell phone usage were in the Welcome Guide. The problem was, she alleged, her box didn't have a Welcome Guide. The lack of instructions didn't matter to Ms. Schafer, who knew how to activate her phone. But it was a careless, naughty thing to do, activating a cell phone without reading all the terms and conditions. I certainly can't imagine any faithful Law Tribune reader who would use a cell phone without thoroughly reading the Welcome Guide, and neither could Judge Foreman in Illinois.
Judge Foreman, probably a person who never could figure out how to use his VCR, made it apparent he couldn't credit Ms. Schafer's claim that she could activate her phone without the Guide. Besides, Ms. Schafer conceded that she received the box. The box said the terms and conditions were in the Guide, so if AT&T neglected to enclose them, well - she should go get them. She just had to find an AT&T salesperson, or maybe, if she called AT&T and the menu let her talk to a real person, that person could send a Welcome Guide. When she didn't do these tasks, she "assumed the risk" of accepting whatever terms were in the document. "Assuming the risk" is an interesting way to put it. She was lucky she only consented to arbitration, and wasn't required to give up her firstborn, to use her cell phone.
So, since you needn't read a contract to assume the risk of its contents, clever companies could include, with their consumer products, instructions on activation by notice that to receive additional important terms and conditions, you could take more steps. Then, they could really make it like a scavenger hunt, the last step staying on hold for an hour hearing why this process improves service to you, their valued customer.
There is one recent surprise in the march toward arbitration without notice. The 1st Circuit, in Campbell v. General Dynamics, decided an e-mail announcement to an entire workforce implementing a new ADR policy was inadequate. Unlike what Ms. Schafer was supposed to do, a General Dynamics employee who received the e-mail only had to click on two links to learn: first click - the new policy; second click - the complete program. No one had to signify receipt. Mr. Campbell alleged in an average day he was "inundated with between 10 and 100 e-mails," and no one told him that he should read them to continue to understand changes in his employment terms. He alleged he did not click the links, and had no clue about required arbitration. The 1st Circuit held that a mass e-mail can be adequate communication. But this Court placed responsibility on the employer to be sure that an e-mail changing employment terms would actually be read. Not surprisingly, it found there were easy ways to ensure such reading: (1) require the employee to check a box confirming receipt and/or reading, or (2) put language in the original e-mail that the links contain an arbitration agreement waiving the employee's jury trial right.
Placing responsibility for adequate notice on the party desiring to alter the relationship seems right. If the company doesn't give fair notice, it is the one which should "assume the risk" of the alteration having no effect.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
MAFIA SHOULD HAVE USED BINDING CLASS ACTION WAIVERS
"Payday loans" are a modern device intended to avoid interest rate regulations and financial disclosure laws. So-called "salary lenders" who engage in these predatory loan arrangements concentrate on low income families who live paycheck-to-paycheck. To circumvent state consumer protection legislation, they partner with obscure national banks which are not subject to state law. People who receive the "payday loans" are usually both desperate and unsophisticated. Charlene Jenkins was a good example. Between June 7, 2002 and September 6, 2002, she received eight loans, each for under $500, from First American Cash Advance of Georgia. If a dispute arose, she agreed to arbitrate, and of course she "agreed" not to "serve as a representative, as a private attorney general, or in any other representative capacity... or... participate as a member of a class." To nail it down completely she "agreed" that "the arbitrator shall not conduct class arbitration." First American included in these "agreements," as a co-participant, the First National Bank in Brookings. Brookings, Georgia? No way. Brookings is not in Georgia, not even near Georgia, but in South Dakota. Naturally, Ms. Jenkins' eight separate promissory notes were all governed by South Dakota law.
By teaming up with this genuinely obscure national bank, First American charged annual percentage rates between 438% to 939%. By teaming up with an arbitration agency, First American figured it would avoid class actions. In fact, without class relief First American might be lucky enough to avoid litigation altogether, because of the difficulty that a poor person like Ms. Jenkins would have finding an attorney to represent her in an individual capacity only.
The Chief Judge of the Southern District of Georgia, however, concluded that "enforcing the arbitration clause... against the payday consumers would lead to an unjust result." When First American moved for reconsideration, Judge Bowen highlighted the invaluable assistance that "unconscionable mandatory arbitration agreements" offered "to circumvent state laws [and] enable stronger parties to force weaker parties into binding arbitration."
Judge Bowen probably believed his decision would be affirmed in a heartbeat. Maybe, like me, he thought it was only the Mafia who charged interest rates of 100% or so. The Mafia's big mistake was to threaten physical violence if the borrower didn't pay on time. All they really needed was a bit of interstate commerce to get federal jurisdiction, and a mandatory arbitration clause waiving class actions. In the 11th Circuit, Mafia Cash Advance Services would be well protected.
Judge Bowen’s decision was, disgustingly, reversed. The 11th Circuit panel held that class actions can be precluded, because under the Georgia RICO statute attorney's fees are recoverable. Supposedly, that would make Ms. Jenkins' individual case an attractive proposition. Just think, for example, of all the civil RICO cases that have been brought in Connecticut! Why, with only a couple of years of discovery, Ms. Jenkins' $1000 usurious interest recovery could be proved to be a product of racketeering, and therefore Ms. Jenkins can vindicate all her individual substantive rights. That is, if the arbitrator in his or her discretion will award the hugely disproportionate attorney's fees required to obtain the evidence to prove a RICO violation. At any rate, since arbitration is generally confidential, we will probably never know.
If the Mafia is not smart enough to get the case into federal court, however, there is hope. Florida's Supreme Court, in January, held that Mr. John Cardegna could bring a class action against Buckeye Check Cashing, Inc. because the contract containing the mandatory arbitration clause was illegal and therefore void from the beginning. The same kind of financial scheme was at issue. Florida's Supreme Court correctly put the horse before the cart in deciding that a court first had to determine whether the usury laws were violated, because otherwise it would "breathe life into a contract that not only violates state law, but is also criminal in nature, by use of an arbitration provision. This would lead to an absurd result. Legal authorities from the earliest time had unanimously held that no court will lend its assistance in any way towards carrying out the terms of an illegal contract. Illegal promises will not be enforced in cases controlled by federal law." No contract, no arbitration clause. No public policy exists, in Florida anyway, to let an arbitration clause subvert the usury laws.
The Mafia will be closely watching continued developments.
Published in The Connecticut Law Tribune January, 2006
By Joseph D. Garrison
IT’S MY GAME, BUT I'M NOT PLAYING
I love the names companies use to label the mandatory arbitration programs they impose on their employees. Today, we can enjoy the workings of the "Fairness in Action Program" used by the Dillard's Department Store chain.
In July, 2001, Stephanie Brown was one of a number of workers who were summoned to a supervisor's office. They were told that Dillard's was starting the "Dillard's Fairness in Action Program" which they were accepting by continuing to work. As the brochure describing the program said:" ...the Fairness in Action Program assures that each party gets a fair deal - that's what justice is about, after all." Each worker, however, had to sign the "agreement."
So then, one of Stephanie's co-workers asked to take the "agreement" home with her to discuss it with her parents. The supervisor, exemplifying "fairness in action" from the get-go, told her she might be fired if she did not sign the form immediately. Naturally, they all signed up.
The Dillard's concept of "fairness" reared its head in a number of places in this store. For example, employees were required to clock in and out, but when the computer was (often) down paper time sheets were used. Evening shift employees like Stephanie, who were scheduled to leave at 9:15 p.m., were required to stay until the store was fully cleaned. If cleaning took until, say, 9:45, they were required to falsify their time sheets showing they left on schedule - so Dillard's could avoid overtime pay.
In May, 2002, on a day she was not scheduled, she was requested to work for another employee who was sick. She was told not to report before 6 p.m., because otherwise she qualified for overtime, which Dillard's did not want to pay. She said, and produced corroborating evidence, that she had clocked in at 5:58. Store officials, alleging that the computer had not worked properly, called her in the next day to fill out a paper time sheet. When she did, the store manager told her she was being immediately terminated for falsifying her time, alleging that she had actually arrived at 6:10. She was sympathetically advised "people like you cost the company money." When she began to cry, the store manager reminded her "you already got another job, right?" (Which was true - she was saving money to attend air traffic control school.)
Feeling she was wrongfully terminated, Stephanie filed her arbitration claim. Dillard's, evidencing its superior knowledge of "what justice is about, after all," decided that her claim "had no merit" and refused to participate in its own arbitration program. Her repeated attempts to contact Dillard's were useless. After almost one year of no progress, she filed her lawsuit in state court. Incredibly, Dillard's removed to federal court and moved to compel arbitration.
Shortly before Christmas, 2005, after Dillard's had lost in District Court, Ms. Brown received, at least, a modicum of procedural justice in action. The 9th Circuit, correctly analyzing Dillard's tactics, noted that if Dillard's succeeded it would "set up a perverse incentive scheme." Employers would have an "incentive" to refuse to participate hoping the employee would get frustrated and drop the effort. And, refusal would carry no cost because if the employee filed a lawsuit, then the employer could appear and move to compel arbitration.
Three and one-half years later Stephanie Brown can pursue her state court lawsuit. As the 9th Circuit aptly found: "Many people in Brown's position would simply have given up." I would hope that other courts, if confronted in the future with this tactic, more severely punish such a hypocritical company. At the minimum, the CEO should have to write, 1000 times on the blackboard, what the "Fairness in Action Program" assures. That would provide a bit of justice.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
CAN MANDATORY ARBITRATION "AGREEMENTS" PROHIBIT CLASS ACTIONS?
Here, in a nutshell, are the competing considerations:
In Harper v. United Healthcare Corp., a 1998 case in the Northern District of Illinois, the judge opined: "[R]egardless of how evil it may be to permit a party to evade liability... parties can agree by contract to limit... damages...Indeed, short of authorizing trial by battle or ordeal, or more doubtfully, by a panel of three monkeys, parties can stipulate to whatever procedures they want to govern the arbitration of their disputes; parties are as free to specify idiosyncratic terms of arbitration as they are to specify any other terms in their contract." There is no question about it - this is the extreme laissez faire end of the spectrum.
In Lytle v. Citifinancial Services, Inc., a 2002 case in the Superior Court of Pennsylvania, the judge opined: "This litigation reveals yet another vignette in the timeless and constant effort by the "haves" to squeeze from the "have nots" even the last drop.... The legislative and executive branches have in a fashion more occasional than regular risen to serve the interests of the "have nots" (borrowers), but the "haves" (lenders) consistently design new devices and definitions to preserve the unjust imbalance, since our history demonstrates that their unquenchable thirst for profits is not to be sated." This is, without question, the extreme populist end of the spectrum.
Both of these cases involved contract clauses which prohibited class actions in arbitration. They, like many of the cases decided to date, involved consumer issues. Betty Hutcherson's case is a good example. She applied for and received a credit card from Sears, but did not request the Sears AccountCare Plan, a form of credit insurance which cost 96 cents for every $100 of the outstanding balance. Once Betty found out that she was being charged for the Plan, she called Sears to dispute it, but her billings continued. She went to a lawyer. Who believes that she was the only Sears customer receiving these unauthorized charges, which only benefited Sears? Certainly her lawyer did not, and filed a class action lawsuit, partially under The Illinois Consumer Fraud and Deceptive Business Practices Act. Sears moved to compel arbitration based on an envelope stuffer containing Ms. Hutcherson's "agreement" to arbitrate.
Judge Wolfson began his opinion stating: "This case serves as a reminder that people should read their mail -- especially when it comes from their credit card companies." Is he kidding? Even if she did read the "mind-numbing small print" (as another judge described it), what could she do about it? I suppose she could return her credit card, and file an arbitration claim for refund of her $2 or $5, although the cost connected with arbitration would far exceed any possible individual recovery. Or, she could keep her credit card, and arbitrate. Or, most likely, she would just forget about it. That alternative, however, allowed Sears to continue to breach the exact same contract with its customers, i.e., billing for Plans which the customers never ordered.
Judge Wolfson, looking as narrowly as possible at the cost issue, held that because Sears would advance arbitration fees upon a written request, costs would be minimal. But, what about her time, mileage to go to an arbitration, even postage - who would ever pursue such a small claim as an individual? Moreover, a consumer would never find a lawyer to take this case, so the consumer would always oppose Sears pro se. And, as fundamentally, why would a court so specifically enforce an arbitration clause in a contract, prohibiting a class action, when the only foreseeable result is that Sears could continue its own breaching conduct unabated? If, as here, companies are really free to engage in private legislation, i.e., place mandatory arbitration in contracts they write, prohibit class relief, and totally unburden themselves of significant liability under consumer protection statutes, the Federal Arbitration Act has taken on a significance which its authors most assuredly never contemplated.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
WHAT'S SAUCE FOR THE GOOSE.
Consumers and employees often believe that mandatory arbitration clauses drag them into a forum they didn't choose, to be heard before an arbitrator whose powers are virtually unreviewable, who will award them a minimum of nothing and a maximum of less than they wanted. Once in a while, however, a "runaway arbitrator" appears, to let us all know that the arbitration system also can produce capricious, functionally unreviewable, results which favor down-and-out individuals. The $6 million punitive damages award in Stark v. Sandberg, Phoenix & Von Gontard and EMC Mortgage Corporation is a great example.
The Starks ran a business which was failing. To rescue it, they borrowed $56,900 and secured the loan with a mortgage on their house. Not too much later, the business failed anyway. They filed for bankruptcy. The original lender sold the note to the defendant EMC Mortgage Corporation. The couple moved out of their house into an apartment, anticipating the foreclosure which EMC commenced.
Maybe foreseeing publication of their case as a hypothetical question for law school examinations in the future with their lawyer named prominently in it, the Starks hired attorney Roy B. True (six degrees of separation, perhaps, from the former basketball player World B. Free). He notified EMC's counsel, Scott Greenberg of the Sanders firm, that he represented the Starks and that EMC should not contact them directly. Nevertheless, while the arbitration was pending, EMC contacted Mrs. Stark at her apartment, contacted Mr. Stark at work, and wrote to them directly about keeping their insurance coverage. There were at least ten such contacts. In addition, EMC hired someone to forcibly enter the Starks' home and put a sign in the front window, stating: "Property has been secured and winterized. Not for sale or rent. In case of emergency call 1st American (732)-363-3626."
Those actions, and only these, cost the defendants $6 million. The arbitrator, justifying the award which amounted to one-tenth of one percent of EMC's shareholder equity, wrote that it was "not great punishment but it should act as a deterence [sic]." The arbitrator was particularly emphatic about the forcible entry, which he found "reprehensible and outrageous and in total disregard of plaintiff's [sic] legal rights." (The 8th Circuit added both the [sics].)
Can anyone imagine that this punitive damages award, if given by a jury in a federal district court, would have remained intact through an appeal to the 8th Circuit? The award of statutory damages for EMC's violation of the Fair Debt Collection Practices Act was $1000 to each plaintiff, along with $1000 to each for actual damages. Costs and attorneys fees were assessed against the defendants, as well. Under the circumstances, defendants argued that the punitive award evidenced a manifest disregard for the law, because it conflicted with recent Supreme Court case law invalidating high ratios of punitive to compensatory damages, such as BMW v. Gore where a 500:1 ratio was vacated. A showing of manifest disregard, however, requires that a party had to make the controlling case known to the arbitrator during the arbitration, thus giving him a chance to disregard it. Here, probably relying on a clause in the arbitration agreement which precluded an award of punitive damages (the arbitrator correctly found that such a restriction was unconscionable), the law firm never argued how a proper punitive damages award should be measured.
The 8th Circuit panel concluded that EMC had mandated this form of dispute resolution for itself and its customers. It should have realized that "although this result may seem draconian... arbitration is not a perfect system of justice, nor is it designed to be." Indeed, EMC itself had compelled the case (originally filed in court) into arbitration. So, it "got exactly what it bargained for."
One rationale for imposing mandatory arbitration is that it avoids the "runaway jury." Time will tell whether this rationale will hold up. If a jury in the 8th Circuit had awarded $6 million on these facts, it is more probable than not that the Starks would have been fortunate to retain $60,000. That is because the "runaway jury's" award is subject to full appellate review. The "runaway arbitrator's" award is not.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
THEY JUST CAN'T HELP IT
A highly regarded California arbitrator, who also designs mandatory arbitration plans for employers, has stated: "A desire to gain the advantage may be irresistible. Employers just can't help it."
Mandatory arbitration, as a condition of employment or a condition of doing or continuing to do business with a company, presents an extraordinary opportunity to the company to design a system which is a binding alternative to court. When the two major arbitration organizations (AAA and JAMS) are chosen to administer company plans, both publicly announce that, for them to agree to administer a proposed plan, it must comply with due process provisions which will assure fairness to all parties. AAA's basic proposal, known as the Due Process Protocol, may be found on its web site at www.adr.org. The Due Process Protocol has been favorably cited by many courts as, in fact, providing protections which allow the speed and efficiency of arbitration to continue in effect without depriving parties of their rights.
Some companies, however, look for the edge. They write plans which are calculated either to bar access to the arbitration form altogether, or else to tilt the scales to their advantage. What follows are three current examples:
1. Fleet Bank maintains a Conflict Resolution Policy, which includes mandatory arbitration. Fleet Bank continues to preserve its own right to use the courts for provisional remedies or interim relief, but for its employees arbitration is the exclusive remedy for all claims. Although Fleet purports to govern its process by the employment dispute rules and procedures of the AAA (which would include the Due Process Protocol), it requires the loser to pay the attorney's fees of the prevailing party: "the prevailing party shall be entitled to payment from the non-prevailing party of the costs and expenses incurred by the prevailing party... including without limitation the prevailing party's reasonable attorney's fees."
This provision would likely act as a bar to any prospective claimant against Fleet. Trial lawyers know that even the most favorable case, if liability is in dispute, might have a 70% to 30% chance of success, which means that even this best case will still lose three times out of ten. Approximately one year ago, our office completed a five-day arbitration, during which time we kept track of our fees, which by completion amounted to slightly over $100,000. Defense fees would have been as high, or higher. We would, of course, be compelled (had the case been against Fleet) to advise any client that if he or she lost the arbitration, it could also include losing his or her house. Only the very richest clients, or conversely those who are judgment-proof, could afford to enter an arbitration with Fleet.
2. SFX Broadcasting, owned by Clear Channel Communications (a huge broadcaster owning many radio and television stations across the country), mandates arbitration which must be initiated "within one year of the conduct giving rise to the claim." Thus, in Connecticut, where under a written contract a claimant would have six years to sue, the same claimant must arbitrate with a written demand filed within one year. If it is not, "the claimant waives any entitlement to arbitration and to any other legal or equitable remedy." This shortened statute of limitations applies to future claims. Incredibly, however, an already-employed employee who must, as a condition of continued employment, sign this agreement, waives all pending claims unless he or she acts within 3 days: "I acknowledge and confirm that I have no claims against the company... unless I deliver written notice of any such claims... to the President of the company, within three (3) business days of executing this agreement." This wholly unconscionable waiver is administered by JAMS.
3. Finally, another media group, Sinclair Media, mandated arbitration with the following provisions: (1) the loser pays all costs of the arbitration; (2) Sinclair exempts itself from the arbitration requirement if it seeks a remedy, and includes a loser-pays provision for any such court proceeding; (3) a statute of limitations shortened to three months from the event or occurrence giving rise to the dispute and, most incredibly, (4) a provision that if the employee did not "respond within fourteen (14) calendar days to each communication regarding the selection of an arbitrator and the scheduling of a hearing and other matters relating to arbitration proceedings... Employee agrees Employee will have waived any right to raise any claims arising out of any dispute or controversy... in arbitration or in any court or other forum." No continuances, no equitable tolling, and no application mutually to the company, Sinclair.
These mandated programs are unconscionable. If they survive court scrutiny, employees and others will lose countless basic rights. It is up to the courts to strike these systems down, and ensure basic due process when arbitration is mandated.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
SPEED AND EFFICIENCY: PRIORITIES IN ARBITRATION?
Two of the characteristics which are consistently touted as attributes which make arbitration better than litigation are its "speed" and its "efficiency." There are a fair number of arbitrators who would place these attributes as the key priorities in the alternative dispute resolution system which arbitration provides. Those arbitrators can usually be identified by their complaints about how arbitration is looking more and more like litigation, particularly with "unlimited discovery."
If you ask most lay people what the most important priority of our court system is, my bet is that the answer would be "justice." Politicians in particular (maybe not Tom DeLay or "Duke" Cunningham at the present time) refer to our court system as the "justice system." Most people do think that justice will be done in court. Those who are selected as jurors generally try their best to achieve justice, or (and it might be the same thing) fairness.
Arbitration has its roots in business to business, construction and labor-management disputes. Many, if not most, business and construction disputes involve parties who will continue to work together, or at least will consider a continuing relationship if a pending dispute can be resolved. In these situations, the speed and efficiency of arbitration is really important. If the dispute were to drag on for three or four years, the chances of an ongoing business relationship could be irreparably damaged. In addition, commercial, construction or labor-management arbitrators build up a substantial fund of knowledge and expertise which can be incredibly useful in achieving practical results. Experienced arbitrators can often cut through the "fluff" and control proceedings by utilizing their substantial discretion to manage the cases before them. Speed, efficiency and knowledge of the industry are therefore important and substantial reasons which persuade companies to use arbitration and experienced arbitrators. Often, reaching an expedited result which the parties can live with is more important than reaching the precisely correct result.
When arbitration is compelled upon an individual employee or consumer by a company which mandates arbitration as a condition of employment or use of its product, it should be no surprise that the individuals subject to this alternative system believe that it will produce the same "justice" as the individuals believe they would have received had they been allowed a free choice of going to court. Often, in the public relations campaign which accompanies the rollout of mandatory arbitration, employees are told directly that arbitration is better for them than court. Obviously, if that is the case, arbitration is simply an alternative way to achieve "justice."
Speed and efficiency are components of justice. There is truth to the saying: "Justice delayed is justice denied." But there is no longer any substantial dispute that the availability of discovery, particularly by deposition, allows individuals a reasonable opportunity to uncover facts which will support a facially meritorious legal claim. When arbitrators interfere with discovery, particularly by limiting depositions, they are perceived as taking the side of the company. Arbitrators in employment and consumer cases should not really care if discovery in those cases make them look like "traditional litigation." Arbitrators in those cases should care that the process they are overseeing produces "justice." Without fair and reasonable discovery, particularly by depositions, justice for individuals is an empty dream.
A full opportunity for discovery is not a value which must conflict with the values of speed and efficiency. There is no magic, however, to an arbitrator's mandate that a case must be heard within six months of the filing date. If the playing field for the individual is leveled by setting the hearing date ten months from filing, the playing field should be level. The conduct of arbitrators in the administration of cases may be the most important component in the public perception of arbitration, just as the conduct of judges is such an important component in preserving the public perception that we, in America, have a system of justice. If "speed and efficiency" are the overarching values in arbitration, with "justice" no more than a second thought, arbitration's reputation will be increasingly compromised.
Published in The Connecticut Law Tribune
By Joseph D. Garrison
THE TROUBLE WITH ARBITRATION
Some recent developments are making me wonder whether arbitration is just an alternative forum to resolve disputes, as the courts are so fond of saying. Or, on the other hand, is arbitration really a get out of jail free card which allows a wrongdoer to write rules which will virtually exempt it from liability for those wrongs, as critics are fond of saying?
One cardinal, unwritten black-letter rule of law seems to be re-emerging in some of the court decisions trumpeting the "public policy favoring arbitration." That rule is: "Rich is better than poor; money talks." The re-emerging trend is most apparent in the cases where poor people "agree" to illegal, usurious interest rates, combined with arbitration clauses providing the forum for eventual collection, in exchange for "payday loans," that is, advances against paychecks. When the advances plus interest are not paid in full, compounded interest rates and other fees begin to mount up in a way similar to the way plantation workers could not get out from under the company store.
The scheme becomes "legalized" by the use of arbitration clauses. A couple of plaintiffs, however, went after one such check-cashing outfit, and persuaded the Florida Supreme Court to hold that an arbitration clause in an illegal contract could not survive any more than the contract itself could survive. As that court saw it, enforcing the arbitration clause "could breathe life into a contract that not only violates state law, but is also criminal in nature." Sounds pretty elementary, doesn't it?
Not when the Federal Arbitration Act is subject to interpretation. The Supreme Court of the United States, in Buckeye Check Cashing, Inc. v. Cardegna, recently decided in this term, made the case into a "who decides" issue, and held that a challenge to the validity of the contract must be resolved by an arbitrator. Indeed, how could anyone have thought that a state Supreme Court should be able to interpret its own statutes and public policy, when the illegal contract, despite its illegality, provides for arbitration?
It is not much of a step for the illegal business to decide that, since the "agreement of the parties" under the contract will govern the arbitrator's jurisdiction and powers, it might as well include a ban on class actions. That way, even if an arbitrator found that an individual contract was void as against public policy, and therefore the debt in the individual case was unenforceable, it could continue going on its merry way collecting all the other illegal debts as long as those debtors did not find lawyers to challenge them. This tactic is starting to work. One of the New York state Appellate Division courts recently affirmed a class action waiver for New York borrowers by the County Bank of Rehoboth, Delaware, an out-of-state bank to which these payday loans are immediately assigned.
Is it just me who na V vely believes that this kind of unconscionable tactic could not possibly work in our court system? Is there any judge in our District Court, or on the state Appellate or Supreme Court, who would not allow class actions to invalidate usurious loans to working people who don't make enough to get out of poverty? And if I am right about that, what is it about the existence of an arbitration clause that allow these illegal businesses to indirectly accomplish what they could not accomplish directly?
Unfortunately, because the agencies administering arbitration don't have the stomach to refuse to enforce class action waivers, and because states are preempted from doing so because of the conflict with the Federal Arbitration Act - which has turned into the King Kong of statutes -the only hope for relief is the United States Congress.
Don't hold your breath.
CHAPTER CONTRIBUTION ON MEDIATION
BY: JOSEPH D. GARRISON
EMPLOYMENT MEDIATION: THE EMPLOYEE'S PERSPECTIVE
I. Is Mediation Advisable?
Mediation, rather than litigation, is advisable before any adversarial proceedings have begun, in some circumstances. Certain disputes, including discrimination or other statutorily-based claims, are more appropriate for mediation than any other dispute resolution process. These disputes include: (1) where the employee still works for the employer, and a decent working relationship could be maintained or re-established; (2) where private or sensitive matters are involved, such as in sexual harassment claims or where both parties might want to avoid the embarrassment of public proceedings; (3) where an employee seeks "reasonable accommodations" under the Americans with Disabilities Act and (4) where executive contract terms or severance benefits are in dispute, and the parties would prefer to keep the terms private.
Mediation may also be advisable when one party has a case which is much stronger than the other's. If the strong case belongs to the employee, even if the case is costly in a settlement, the employer is probably better off for having resolved the matter quickly and privately. If the strong case belongs to the employer, a mediator may act as an early "reality check" to the employee (or at least to the employee's lawyer) and the case may settle for a token or perhaps nothing at all.
Finally, mediation is advisable, in any case, at certain times while adversarial proceedings are in progress. For an employee litigant, the strongest position is after a motion for summary judgment has been defeated and the case awaits jury trial. An employee may consider the case to be a strong one has a result of beneficial discovery, when the employee has a substantial belief that the case will go to a jury. Conversely, if discovery has been mixed or problematic, and the employee perceives a substantial risk of dismissal, something may seem better than nothing and the employee may be prepared to give up a lot in mediation. Risk is what is being analyzed in most mediations; there is almost no time when there is no risk. Because risk may be evenly spread before litigation occurs, pre-litigation mediations, where positions are fluid and new information can change previous assessments, are often successful.
II. Persuading the Other Party To Mediate
Some attorneys, although the number is dwindling, believe that even if an early settlement would be warranted for the client, an early offer to mediate shows weakness. Early mediation, however, is becoming a generally-accepted vehicle to resolve disputes, with many court-ordered systems requiring mediation at early stages. If a court order is inevitable, it may make more sense to mediate voluntarily, which allows you to retain the choice of a mutually acceptable mediator. In addition, in your own practice if you make it a general policy to invite mediation in all or the large majority of your demand letters, all that defense counsel will understand about your case is that you have, as a firm, a pro-mediation policy.
As attorney for the employee, you can also inquire if the corporate party has a mediation policy. Most Fortune 1000 companies have signed the ADR pledge which is sponsored by the CPR Institute for Dispute Resolution, and a list of those companies is available on the CPR web site. The company which has signed that pledge should be willing to mediate.
If you represent employees and have had good experiences with mediation, if the opposition is reluctant you can refer opposing counsel to other attorneys on the management side who have had experience with the mediation process. Many excellent trial lawyers on both sides are advocates of mediation, because generally it is true that mediation is a "no lose" proposition. You might use your own persuasive skills to suggest that using one day with its attendant time and cost could save the time and cost of years of litigation. Even if no settlement occurs you will have learned some things about the other side's case and in that respect obtained "free" discovery.
Finally, you can ask opposing counsel to call administering agencies such as JAMS and AAA, and speak with their mediators. Mediators working for or with these agencies will spend some time discussing the process, which could result in a mediation taking place.
III. When To Mediate
The largest obstacle to early mediation is lack of information. The balance to be struck is whether the information you can gain in formal litigation proceedings is worth the cost and expense, as well as the risk of shifting perceptions as the case proceeds. Money spent by the employer in discovery might have been used to pay, in whole or part, for settlement. Money spent by the employee in legal fees and expenses increases the bottom line necessary for settlement.
While it is true that some cases require additional information before mediation is possible, it is not true that the only way to get such information is by formal discovery. Particularly if discovery is largely of documents, the parties might agree to provide enough document discovery so a reasonable evaluation can take place, without prejudice to either position if the case does not settle. If, once mediation begins, it becomes clear that other essential information is necessary, a mediation may be adjourned pending disclosure of that information.
One reason harassment cases stand out as excellent candidates for accelerated mediation is that the issues and facts are sensitive, and what can be perceived as a brutal discovery campaign by the employer will make any settlement either very expensive or impossible to obtain. Mediation, where the harassed employee is able to fully express his or her feelings to a neutral who will listen, avoids hardening of the attitudes which litigation so often brings. In addition, in a harassment case the centerpiece of discovery is likely to be the investigation which took place. Exchange of that document should produce enough information to allow realistic positions to be taken by each party.
IV. Pre-Mediation Preparation
A. Picking the Right Mediator
Selecting a mediator takes place in a free market, where credentials are close to meaningless. At this stage in the development of mediation, there is no empirical evidence that "certified" or "credentialed" mediators are any better than those who are not. Nor is there a uniform definition of what makes a "good" mediator. To select the right mediator for your case, you need to analyze why you are mediating, what is the nature of the dispute and what process will be most useful to resolve it.
The reason why you are mediating is important. Have negotiations resulted in an impasse? Do the parties want to negotiate but cannot seem to begin the process? Has a court ordered mediation? All of these reasons are good reasons to mediate, but the type of mediator you may choose could be different in each case.
The nature of the dispute also casts some light on the type of mediator you want. Is this a dispute simply over money? Or is it one where the employee feels his or her dignity or honor is implicated? Is non-monetary relief an important component of settlement? Is the other side, or your own client, acting out of ignorance, anger or simple irrationality? In each case, a different type of mediator may be warranted.
The process of mediation also differs depending on the interests. If all that is at issue is a money settlement, then the settlement conference mediation model is extremely useful, and a mediator with substantial experience in holding settlement conferences (like a retired judge) may be most beneficial. If personality issues predominate, it will be important to have a mediator who will listen carefully to both sides, empathize with them and diffuse the strong feelings so settlement discussions can become productive. If the case has elements of irrationality, then a mediator who can establish what is perceived by these parties as a reasonable process for resolution may be the most likely candidate.
In the employment area, usually experience and substantive knowledge of the law are essentials. Credibility with the parties is crucial, and for that reason many defense attorneys may pick members of the plaintiffs' bar as mediators because they have credibility to the plaintiff, and for the same reason members of the plaintiffs' bar should not be reluctant to use a mediator who has been consistently identified with management. No one, however, should pick a mediator without having obtained references, and any potential mediator should be able to provide names of attorneys for whom they have done mediations. Reputation is important in this area, and mediators who clearly favor one side or another will find that this area of business will not continue.
B. Who Should Attend
It states the obvious to say that the individual plaintiff must be at a mediation. There is literally no case in which the plaintiff is too fragile to attend a mediation, because the alternative, which is the litigation process, will be much more difficult. If you have a fragile client, you can let the mediator know that the client will speak only in the private caucuses. In addition, at a mediation you can also bring other persons who will make the client more comfortable.
A spouse, for example, may not only make a client more comfortable but also may be essential to the settlement process. Spouses sometimes have a different agenda, and if this is not uncovered and dealt with at the mediation, settlement will not occur, or if it does then it will be revoked in the seven-day revocation period.
The employee should insist that the mediator obtain management's commitment to bring the person(s) with authority to the mediation. Plaintiff's counsel probably is better off leaving the mediation than to conduct it without an authorized decision maker present for the other side. Particularly if there is insurance, the presence of the authorized adjuster is essential to resolution. If the defendant is an uninsured corporation, which is common, as counsel for the employee you need to make a careful analysis of whether the company is serious about settlement. If no business person is present, as a practical matter settlement is less likely. If there is a business person present, or more than one, who appear to have enough authority for settlement, you should proceed in good faith. If in fact a final proposed resolution requires those persons to obtain agreement from others in the company, the resolution should be reduced to writing, everyone should sign it, and it should provide that the signatories will use their best efforts to obtain final approval. The above process will probably be necessary if the defendant is a public entity because some form of Board approval normally would be required.
C. Where Should Mediation Take Place?
Where mediation occurs is inconsequential. The only requirement is that the separate caucus rooms allow confidential discussion.
D. Allocation of the Costs of Mediation
The general rule of thumb is that mediation fees and costs are split evenly between the parties. As a practical matter, however, terminated employees may either have difficulty affording, or simply be unable to afford, the projected cost of mediation. In those circumstances, the company will have to agree to pay the bulk of the fees. In every circumstance, however, it is useful for the employee to make some financial investment in the mediation process. A day-long mediation, conducted by experienced mediators, will cost in the neighborhood of $3,000 to $5,000. At minimum, an employee should contribute $500 to $1,000 of that amount, so that it will be more difficult for the employee to reject what may be seen by the lawyer to be a reasonable settlement. It is easier for an employee to walk away when none of his or her money is at stake. The employee's counsel should avoid offering the client that incentive.
E. Preparing the Employee For Mediation
Many instructors train that one of the values of mediation is that it allows an employee (or in rarer instances the employer) to "vent." As a result, some advocates are seduced into "winging it" believing that the client should not be restrained in "venting." This is a serious mistake for two reasons: (1) the client is being evaluated as a witness; expressions of unrestrained anger, frustration or sarcasm will only result in opposing counsel reducing his or her assessment of potential damages, and (2) mediators who use the term "venting" are themselves devaluing what may well be legitimate feelings of the employee party.
Employee counsel should, therefore, never prepare a client for mediation by simply leaving the client free to make any remarks. Instead, clients should be prepared to speak at the mediation as if they were witnesses, on limited points, at trial. In other words, clients should be prepared to make some or all of a substantive opening statement. Because the opening statement, in a joint session, is so important, the client should prepare the statement in advance, and counsel should review what the client intends to say, making changes as appropriate. Generally, if the client explains his or her perceptions of what happened, why it was wrong and how it felt, this can translate to a very powerful opening. At minimum, the client should be prepared to explain, in a sympathetic manner, the changes in his or her life caused by the termination and, if appropriate, the problems he or she is facing in finding new employment.
Settlement is in fact most likely to result when a mediation is "client-centered," which means that the client is extremely active in the presentations and is prepared to speak candidly with the mediator in the private sessions. The lawyer's exercise of control over the client should have taken place before the mediation began. Mediation often succeeds because it is the substitute for the client's "day in court," so it follows that if the attorney does all the talking and orchestrates all the proceedings the client is less likely to feel satisfied that all of his or her interests have been fully expressed. As important, mediation in crucial respects is not adversarial, in the sense that a lawyer should try to impress the opposition with his or her toughness and aggressiveness. The unprepared client, however, may not realize that the mediation forum is different, and may expect aggressive, tough behavior from the lawyer. Thus, client preparation for a successful resolution definitely includes orienting the client to the different process which mediation embodies.
Preparation should not only include working on the substantive facts and explaining the differences in the process. Clients should go into a mediation with an open mind, and at least some realism about strengths and weaknesses. Clients must be prepared to understand that if a mediator takes a position, or makes suggestions, which appear to endorse the other side's position, the mediator is simply trying to put these issues on the table so they may be realistically assessed. Since, by picking a mediator, you have expressed your belief in the mediator's neutrality, I have found it useful to tell the client that if we were to pick a jury, this mediator may well be our best juror. Therefore, when the mediator suggests that problems exist, those suggestions must be taken realistically.
In addition to the above preparation, before a mediation begins the tax consequences, and the payment of attorneys fees and expenses, must be clear to the client. To the extent possible, some negotiation strategy should be planned in advance. Strategies could include negotiating a period of consultancy, reimbursement of medical insurance or COBRA payments, payment of money over time or purchase of an annuity, agreements to buy back company stock, vesting of stock options or other forms of deferred compensation, altering the date of termination to provide for longer notice which may allow vesting or exercise of stock options or receipt of bonus payments or even, in some circumstances, making a charitable contribution or establishing a foundation in the plaintiff's name. The Standard settlement terms, most importantly the confidentiality of settlement, should be discussed pre-mediation so if there are objections those can be put on the table at an early stage. Finally, employment negotiations can include options for settlement which are non-monetary, such as apologies, reference letters, outplacement support, changes in policy or commitments to conduct training.
It is almost impossible to overemphasize the importance of significant client participation in a mediation. A mediation puts a terminated employee, whose feelings of self-esteem and worthiness have been injured, in a setting where both parties are on equal footing. If the client's own lawyer, however, treats the client as if he or she is an insignificant appendage, and the lawyer insists on "running the show," at the minimum even if settlement is achieved the client probably will have lingering doubts and may be dissatisfied. A reasonable settlement, which the client contributed to by active participation, not only produces much stronger feelings of satisfaction, but helps restore dignity and self-esteem.
V. THE MEDIATION
A. The Art Of Listening
Employment cases are noteworthy for their nuances, so it is crucial for the attorney to listen carefully to both the mediator and the company representatives. There is a substantial difference, for example, in a harassment case, between company management representatives beginning with an apology for what happened compared to a statement that harassment never happened and they intend to prove that the plaintiff is making a false accusation. Both cases may settle, but the settlement process will clearly be different in each occasion.
Mediators will, during the course of mediation, communicate various ideas. Many times, without saying so directly, mediators are trying to obtain a reaction either to a proposal which has been made or to a proposal which they believed they would make if your reaction is favorable. Never assume that every suggestion coming from the mediator has been initiated by the opposing party. A corollary of the above is that you should think carefully about enlisting the mediator to help you gain information or develop ideas for settlement. If you need a private conference with a mediator, you should not hesitate to ask for one. You may need to use the mediator to help you force your client to become realistic, or deliver bad news. On the other hand, if you believe the mediator is treating your client too harshly, you should seek a private conference in this instance, also, particularly if the harsh treatment is becoming counter-productive.
B. The Negotiation Process
Most mediations, with a single plaintiff, can and should be concluded in one day. It is almost always a mistake to adjourn a mediation, unless a true impasse has been reached. If negotiations are continuing, even slowly, it is better to remain during the evening to try to wrap up the case. Settlement is a process of compromise. Employees who have adjourned mediations, and then report the results back to friends (or more dangerously psychiatrists or psychologists) will be told, almost without exception, that they have already given up too much, and therefore they must return to the mediation by taking their previous offer off the table and substituting a higher one. Conversely, management representatives who have found, in the course of mediation, that the evidence of wrongdoing is substantial, and have been convinced to increase their previous "bottom line," will return to the company to find that they are not heroes for being realistic, but wimps for having "caved in." Persistence and stamina are virtues in mediation; if you possess these virtues, always continue negotiations.
Impasse is always a possibility. If impasse is reached, it is worthwhile to consider a "mediator's proposal." If the mediation will be adjourned, continue to think about why impasse has been reached, and suggest new possibilities if appropriate. Continued to keep the mediator involved, even by telephone, if there is any possibility of continued dialogue.
C. Settlement
If settlement is reached, to avoid disputes over the fact of settlement or any of the material terms and conditions, it is a good idea to type, or write in longhand, the essential terms. Be certain to date the document, and have both the clients and attorneys sign. Provide in the document that it is an enforceable contract. If there is confidentiality, but something limited can be said, draft the script. If the settlement will be allocated, provide for the allocation. Deal with the scope of releases, and whether releases will be mutual. If the settlement is claimed by any party to have been breached, provide for the process of enforcement, i.e., arbitration or court. If the settlement is indeed conditional on further approvals, or if other conditions exist, be clear about what conditions must be met and what happens if they are not. Obtain approval from the signatories that they will use their best efforts to secure further necessary approvals, and place reasonable time limits on the process.
VI. CONCLUSION
Mediation of employment cases is rapidly proving to be a very effective tool for resolving this form of business problem. Its benefits when compared to litigation or arbitration have been significant and apparent. Its continued development should be encouraged, both by employees and management.