It’s no surprise that many employers include mandatory arbitration provisions in their employment agreements. Agreements to arbitrate continue to be upheld in courts and the arbitration process can be faster, less expensive, and less formal than traditional courtroom litigation—all attractive qualities for a company that prefers to focus on conducting business. Making arbitration available to employees can also reduce the risk of union organizing. But more and more businesses are now reconsidering mandatory arbitration provisions in response to escalating social backlash. Your company may want to take a second look as well.
A not-so-quiet Riot about mandatory arbitration.
Riot Games is a videogame developer—and a successful one. Its sole game, League of Legends, is one of the most-played games in the world: in 2016 alone, it boasted 100 million players per month and earned $1.8 billion in revenue. Riot has also, however, been the focus of allegations that it maintains a hostile and sexist work environment. Over the last six months, several current and former employees have filed lawsuits against Riot alleging discrimination and harassment. In response, Riot has moved to compel some of those claims to be arbitrated rather than litigated, based on the mandatory arbitration provisions in its employment agreements.
On paper, Riot has made a pretty strong case in favor of arbitration. But Riot’s legal push toward arbitration has provoked an equally strong cultural opposition. Within days of the news breaking about the move to compel arbitration, more than 150 Riot employees walked out of its Los Angeles headquarters in protest, followed the next day by another walkout in Riot’s Dublin, Ireland office. To its credit, Riot has already taken several steps to positively address the claims of a toxic work environment, including an announcement that, once the current litigation resolves, Riot will give new employees “the choice to opt-out of mandatory arbitration for individual sexual harassment and sexual assault claims” and will consider extending that opt-out to existing employees as well.
Riot isn’t the only employer to recently reconsider its blanket reliance on mandatory arbitration provisions. Google stopped requiring arbitration in sexual misconduct cases after several employee walkouts protesting the company’s handling of sexual misconduct claims and perceived lack of transparency. And several large law firms have likewise come under fire for requiring employees to arbitrate claims and dropped those requirements in response.
Companies need to consider the pros and cons of mandatory arbitration.
Let’s be clear—mandatory arbitration isn’t inherently good or bad. But it has been relied upon by businesses for so long that many have lost sight of the risks involved. And new risks are arising. Let’s take a look at some of the pros and cons of compulsory arbitration as they exist today.
On one hand, arbitration could save your company time, money, and exposure.
There are several compelling reasons why companies seek arbitration. To start, arbitration isn’t a public proceeding, which means that the outcome of a particular case isn’t inherently available to the public as is a court ruling. No public ruling means there’s no dirty laundry for your neighbors to share. The non-public forum also means that an arbitration award doesn’t necessarily set a precedent that another court (or arbitrator) is compelled to follow, which can be very helpful if the decision is unfavorable.
Next, arbitrations are often cheaper and resolved more quickly than comparable court cases. They also usually have more relaxed discovery and disclosure requirements, which can reduce the cost of discovery. In many contexts, having arbitration available to resolve employment disputes can reduce the risk of a union organizing your employees. After all, if arbitration exists, a union can’t effectively claim that employees need a union to be able to get to an arbitration procedure. Arbitration agreements can also, if drafted correctly, require a plaintiff to pursue an individual claim rather than bring a class action, as the Supreme Court recently made clear in its Epic Systems and Lamps Plus decisions.1 And if your company can successfully take class actions off the table, that could drastically reduce your company’s financial exposure.
Another attractive feature of arbitration is that it’s tough to challenge a contract’s arbitration provision in court. The Federal Arbitration Act, while nearly 100 years old, remains a strong nationwide policy that continues to heavily favor arbitration. That favor means that if a contract states that disputes must be arbitrated, it’s very likely that a court will enforce that requirement and compel arbitration (especially if the contract mentions the Act). Further, a court has few bases upon which it can reverse an arbitration award.
Long story short, compulsory arbitration provisions can be effective tools for a company to use to mitigate legal and financial risk, especially when paired with non-disclosure and non-disparagement agreements. But that raises the question: if arbitrations can be faster, cheaper, and more private, why wouldn’t everyone use them?
On the other hand, even if you win in the courtroom, mandatory arbitration could cause you to lose big in the court of public opinion.
Nearly every one of the benefits of arbitration also has a potential flip-side that isn’t so appealing.
- Arbitrations are less predictable: Arbitrations lack the consistency of a courtroom. Yes, a court’s procedural rules can make a case take longer and cost more than an arbitration. But those rules—enforced by judges trained in their intricacies—also give the parties a better ability to predict how the case will proceed. Comparatively, it’s often difficult to predict how an arbitrator will feel about different kinds of evidence. Testimony that would be laughed out of a courtroom could be (and often is) allowed to be presented in an arbitration. And that evidence could change the outcome of your case.
- It’s harder to value your risk: Another predictability problem arises from the private nature of arbitrations. Any company facing litigation will want to understand its risk of exposure. Litigators will typically examine judicial analytics to help calculate that risk: we can look up court decisions and get a feel for judges’ reasoning and style on any number of issues. We can also look up verdicts to see how much money and relief has been awarded in similar court cases. But with arbitration, there’s generally less publicly-available information about the scope and amount of arbitrators’ decisions. It’s much more difficult to run a risk analysis when most of the relevant awards were decided in private arbitration.
- You can get stuck with a bad arbitration award: Arbitrators aren’t judges. Don’t get us wrong, most arbitrators are plenty smart and can make reasoned decisions just as well as a judge. But there are always exceptions to that rule. The difference is, if a judge makes an unfavorable legal decision or awards a ruinous amount of damages, you can appeal it. But if an arbitrator makes a similar unfavorable decision, it’s generally much harder to overturn.
The benefits of arbitration can be (greatly) outweighed by the social cost.
In addition to these more traditional downsides, companies must also consider the social cost of imposing mandatory arbitration on their employees. Riot and Google both faced severe public backlash after enforcing these provisions and the consequences of that backlash shouldn’t be discounted. In this era of #MeToo, employees often value—and demand—transparency from their employers.
We’ve watched society’s opposition to mandatory arbitration continue to grow steadily, with few signs of slowing. We’ve also seen several cases where that opposition exploded into a firestorm of social anger on a much broader scale. The damage that can arise from this kind of blowback has convinced some employers to carve out sexual harassment claims from their arbitration agreements, include opt-out provisions in those agreements, or eliminate the arbitration requirement altogether.
Just because it’s legal, doesn’t mean it’s advisable. Consider the realities of your unique situation.
There are no hard-and-fast rules when it comes to your business. We’ve seen arbitrations work out well for employers and we’ve seen them backfire spectacularly. Riot may be able to get matters under control to its satisfaction. Alternatively, the Riot employee pushback against mandatory arbitration may be the straw that breaks the camel’s back and results in the creation of the first real videogame developers’ union.
A lot of costly litigation (and arbitration) could have been prevented had an employer stayed away from applying a one-size-fits-all policy. Mandatory arbitration is no different. Your company needs to consider the many facets of arbitration and customize its policies to the situation at hand: Must every kind of claim be arbitrated or does it make sense to allow some claims to be litigated? Which state’s laws fit best and where should the arbitration be held? Would the likely issues be better addressed using JAMS, AAA, or another option? How will the arbitrator be selected? Does it make sense to incorporate some aspects of established civil procedure? These questions (and many similar issues) should be analyzed and addressed in the arbitration agreement with your lawyer’s input.
Your company can still use mandatory arbitration provisions, but it should thoughtfully consider how and to what extent it makes sense to do so. That consideration process should involve your attorneys. The lawyers at Ryley Carlock & Applewhite have decades of experience in helping companies assess those risks so that they can make the right decisions for their business.
1Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 200 L.Ed.2d 889 (2018) and Lamps Plus, Inc. v. Varela, 203 L.Ed.2d 636 (2019), respectively.