Mandatory Arbitration Used to Hide Sex Harassment

The folks at Public Justice have written a bog post about the pernicious use of mandatory arbitration by American Apparel, a major U.S. clothing manufacturer. Based on an article in the New York Times, the post recounts the story of Dov Charney, long-time CEO of American Apparel. Mr. Charney was known for such witticisms as "Masturbation in front of women is underrated." He was profiled in Jane magazine in 2004. See article. Indeed, he masturbated in front of the reporter during the interview. How compelling. 

American Apparel required mandatory arbitration agreements for all employees and models. There were at least five claims of sexual harassment by American Apparel employees and one claim that he kept a "sex slave." These women sued in court trying to break the arbitration agreement. But, each time, the court upheld the agreement. No one knows how many claims in total were paid or brought in some secret arbitration proceeding. All this was kept from investors, customers, employees and the public for years. The dirty secret about arbitration is that it is not open court. Whatever happens in arbitration stays in arbitration. 

See Public Justice blog post

Weather Channel Anchor Waiting for Her Arbitration Hearing

The fundamental principle of USERRA (Uniformed Services Employment and Reemployment Act) is that a person should not suffer because s/he participates in the National Guard or Reserve duty. I wrote previously about one Reservist, Cpt. Nicole Mitchell, who very likely lost her job as anchor for the Weather Channel due to her Reserve duty. See that post here. She filed suit in 2012 and I said then her evidence sounded strong. 

Well, that was before I knew she had signed an arbitration clause with her employer. Her case has been stuck in limbo since then waiting for arbitration issues to play out. See Chris McKinney's blog about her case here. She did not realize, as most workers do not, that she had signed an arbitration clause. She has not been able to secure new employment and has been waiting for an arbitrator to hear her case. Such is the world of arbitration: workers have rights but they may never get a chance to exercise them. And, in the meantime, they may remain unemployed. 

Note Chris' comments that compared to traditional courts of law, those workers who take their cases to arbitration win about half the time they win in court (which itself is very low anyway) and when they win, they obtain about half the remedies they would in traditional courts. 

Its a heck of a way to say "thanks for your service, Cpt. Mitchell."

Arbitration Results in Suit for Fraud

I first wrote about this case here.  An arbitrator failed to disclose his relationship with the attorney for one of the parties.  The arbitrator, Robert Faulkner, a former US Magistrate, had long standing ties with the lawyer for one of the parties, Brett Johnson.  The arbitration went well for Mr. Johnson of Fish and Richardson in Dallas.  Arbitrator Faulkner awarded $22 million to Mr. Johnson's client and $6 million in attorney fees.  

The Fifth Court of Appeals in Dallas overturned the award last June, finding that Mr. Faulkner failed to disclose his prior relationship to Mr. Johnson and that Mr. Johnson deliberately concealed his prior relationship to the former Magistrate.  The court noted that at the outset of the arbitration hearing, both Faulkner and Johnson pretended to be meeting each other for the first time. 

Now, the losers in the arbitration have sued Fish and Richardson, Brett Johnson and the former opposing party for fraud.  See Texas Lawyer report.  The suit appears to be based on a Rule 11 agreement entered into by the parties early in the arbitration process.  In the Rule 11 agreement, Brett Johnson's client, Jonathan Cooke agreed to arbitrate his dispute and to take the dispute to a neutral arbitrator with JAMS.  A Rule 11 agreement simply describes an agreement between opposing parties which is filed or capable of being filed withe the district clerk. 

As I have stated before, the problem with arbitration is the web of connections between all lawyers and law firms.  In the arbitration world, those connections are not apparent.  If the matter remained in a court of law, where it belongs, there is much greater transparency.  How many more connections are out there of which consumers and employees have no knowledge?  Yet, those same consumers and employees are forced into arbitrations everyday.  Arbitration is premised on the arbitrator and the parties disclosing all prior contacts.  But, if they choose not to disclose, who will know otherwise?

The Vanishing Plaintiff

Legal scholars are becoming more aware that actual trials in federal courts have decreased dramatically since the 1960's.  Suja Thomas discussed this trend in a recent speech at Seattle University to mark the 25th anniversary of the summary judgment trilogy.  See Workplace Prof report.  Prof. Thomas mentions a couple of developments leading to this trend: the rise in arbitration and the summary judgment emphasis in federal courts.  See her paper.  

She mentions her own experience with arbitration when she and her husband purchased a house.  The sale agreement included an arbitration clause.  The house had some serious flaws (like no sewer connection).  The repairs would cost about $5,600.  Yet, the arbitration clause would require them to pay for three arbitrators, typically lawyers, and numerous fees that ranged from hundreds to thousands of dollars.  The arbitrator's fees alone would run into the hundreds of dollars per day.  All for a $5,600 problem.  Because Ms. Thomas is a lawyer, she was able to resolve it much simpler and more direct.  She could do her own research into the legal issues.  But, for the average homeowner, this would have been a minor catastrophe.  

Ms. Thomas mentions a good point regarding these major changes in how we resolve disputes: now, many disputes are not resolved at all and when they are, they are resolved by lawyers and other professionals, not by average citizens.  She mentions her own problem with a home builder.  She also mentions the case of AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011), a U.S. Supreme Court case.  The Concepcions had a $30 dispute with AT&T regarding their cell phone bill.  The cell phone agreement required them to take it to arbitration.  The agreement prevented them from seeking class actions.  The agreement allowed them to file suit in small claims court, but the filing fee for small claims court far exceeded the amount of the $30 dispute.

The California Supreme Court found that the e provision preventing them from seeking class action status was unconscionable and not enforceable.  AT&T appealed to the US Supreme Court, which affirmed the class action provision, saying that federal law favors arbitration.  

This is a crazy result.  The $30 dispute would have little value to anyone other than the Concepcions abd possible class action lawsuits.  Arbitration would require the Concepcions to pay fees in the hundreds of dollars - just to have their case heard by an arbitrator.  

The trilogy of summary judgment cases started the trend toward judicial resolution of cases.  As Prof. Thomas points out, summary (or "quick") judgment has become the tool to dismiss cases.  The trilogy includes Matsushita v. Zenith, 475 U.S. 574 (1986), Anderson v. Liberty Lobby, 477 U.S. 242 (1986), and Celotex v. Catrett, 477 U.S. 317 (1986).  These three decisions made it easier for employers and other to obtain summary judgments, an event that was formerly somewhat rare.  Summary judgment means the judge decides the case lacks merit and no jury ever hears the issues. It is resolution by judges. 

The Federal Judicial Center has found that summary judgment is granted more often in employment cases than any other type of case.  73% of employment cases result in summary judgment.  Other cases see summary judgment 60% of the time.  So, judges decide 73% of employment cases.  Judges are lawyers.  So, like arbitration, we have critical decisions made by lawyers. 

Prof. Thomas discusses remittitur.  If a federal judge is not happy with a jury decision, he can order remittitur, which is a reduction in the jury verdict.  More employment cases see remittitur than any other case.  In a study conducted by Prof. Thomas, 63% of the cases ordered to remittitur were civil rights cases. 

Prof. Thomas cites one estimate that one-third of all nonunion disputes end up in arbitration.  

The trend is toward disputes being resolved by a select, trained but biased dispute "clergy."  They are biased in the sense that this "clergy" will know and feel more comfortable with the employer who brings them business.  It is an institutional bias.  The problem with this arrangement is both constitutional and social.  The Seventh Amendment was intended to garauntee each citizen the right to a jury trial.  Now, by simply buying a house or applying for a job, we waive that right.

The social problem, says Ms. Thomas, is we are working toward having lawyers and judges decide all important disputes in our lives.   I think we all can agree that lawyers look at problems differently than others with different training.  I think we lose something when the average citizen is removed from this process. 


Reference to Arbitration Policy Found Not Binding

In a recent decision, the US Sixth Circuit Court of Appeals found that an arbitration policy referenced in an employee handbook was not binding on the employee.  In Hergenreder v. Bickford Senior Living Group, LLC, No. 10-1474 (6th Cir. 6/8/2011), the employee was a nurse who suffered from cancer shortly after starting to work for Bickford.  She attempted to sue after she was terminated.  The employer claimed the arbitration policy applied and the federal district court agreed.  But, now the appellate court has reversed and has allowed Ms. Hergenreder's case to proceed. See decision.  

The purported arbitration clause was contained in a dispute resolution clause.  In one brief sentence, the employee handbook said there was a dispute resolution clause and the employee should look at it sometime.  The employee handbook itself never mentioned arbitration.  The dispute resolution policy did indeed include an arbitration agreement.  The policy stated that agreement to the dispute resolution clause was a condition of employment.  But, found the Sixth Circuit, the employee nowhere acknowledged that she had been notified of the contents of the dispute resolution clause.  The employer could not show that the employee was aware of the policy or that she had agreed to it in any way. 

And, of course, like many employee handbooks, it contained language stating that the handbook was not contractual.  As Workplace Prof points out, many employers want the contractual benefits of a binding arbitration agreement.  The handbook appeals to employees because it provides a predictable, understandable framework for their employment relationship.  But, a binding employee handbook would present many problems for an employer.  So, they seek to avoid any contractual aspects.  See Workplace Prof blog.  It is hard to have your cake and eat it too....

Texas Court of Appeals Overturns Arbitration Award

Arbitration is not popular with many people.  Part of the problem with arbitration is a lack of accountability.  There is no appeal from an award by an arbitrator.  There is often a lack of information about the arbitrator.  In a recent case, we see what goes on behind some arbitrations.  The Fifth Court of Appeals in Dallas vacated a $22 million dollar award by one JAMS arbitrator.  See decision on Karlseng v. Cooke, No. 05-09-01002-CV.  The decision focused on the social ties between the arbitrator and the lawyer for the winning party.  Robert Faulkner, the JAMS arbitrator and a former US Magistrate, had close ties to the lawyer, Brett Johnson.  The arbitration hearing lasted several days in 2007.  The arbitrator awarded $22 million in damages and another $6 million in attorney's fees to the winning party.  The arbitral hearing concerned a partnership dispute. 

Karlseng, the losing party appealed the award to the trial judge, but was denied.  The Dallas Court of Appeals then overturned the lower court decision - finding that the ties were close between the former Magistrate and Mr. Johnson and those ties were not disclosed.   Of course, in an arbitration, all ties should be disclosed. 

In 2006, Johnson and Faulkner attended a Dallas Mavericks game, with Mr. Johnson paying some $1,200 for the tickets.  They ate dinner at an expensive restaurant to the tune of $428, again paid by Mr. Johnson.  In December, 2006, Mr. Johnson sent a $75 basket of wine to the Faulkners.  

Yet, at the start of the arbitration in 2007, Mr. Faulkner and Mr. Johnson acted as if they were meeting for the first time.  

Later, Mr. Faulkner said his wife opens the presents and he was not aware of the wine basket.  Mr. Faulkner said he forgot about the Mavericks game until reminded by his wife.  So says a report by Texas Lawyer.  

Arbitration is intended to represent an agreement between the parties to have their matter heard by an impartial third party.  It only works if the arbitrator discloses any potential biases.  It is a system based on contract.  If the arbitrator does not disclose all possible ties, the parties have no way of knowing.  The parties cannot make an intelligent choice in the absence of information. 

Arbitrations only work if the arbitrator discloses every possible bias.  Anyone who has purchased a new car, electronic device or who has worked for some 30% of the employers out there have knowingly or unknowingly agreed to mandatory arbitration.  A system based on arbitral disclosure will not work well for the average consumer, much less the average businessman involved in a partnership dispute. 

Study Shows Arbitration Favors Employers

Alex Colvin of Cornell University has published one of the first empirical studies of arbitration in the employment context.  He looked at the reports submitted by the American Arbitration Association, one of the leading providers of arbitrations, in California.  The study looked at 3,945 arbitrations, of which 1,213 were decided by an arbitration award.  See abstract of this study

Key conclusions include: 1) employees win 21.4% which is considerably lower than win rates in trials, 2) among those few wins by employees, the median award amount was $36,500 and the median award was $109,858, both amounts substantially lower than that reported in litigation awards, 3) mean arbitration fees were $6,340 in cases overall and $11.070 for cases disposed of by an award following a hearing (In 97% of these, the employer paid 100% of the fees other than a small filing fee - pursuant to AAA rules), 4) in 82.4% of the arbitrations, the employee was paid less than $100,000 per year.  Note that the author must be comparing California arbitrations to California state court trials.  The success rate of employees in california state courts is generally higher than that found in federal courts.  See my prior post regarding success rates in federal courts on a national level.   

The study also examined whether there was a repeat player effect, that is, wherher employers who appear repeatedly would receive favorable treatment.  The study indicates that yes, employers who appear more than once achieve significantly lower awards.  The study indicates that when the same arbitrator decides a case with the same employer from prior arbitrations, then those employees receive lower awards and win less often. These findings support the anecdotal evidence suggesting that repeat employers do better and they do better in particular when they use the same arbitrator.  

The repeat player effect has a large impact on employees, since employees will very rarely have more than one arbitration.  Employment arbitrations are far different than labor arbitrations, in which the union would also receive some repeat player effect. 

Arbitration Award Set Aside Due to Bias

Arbitration is becoming a way of life for consumers, employees and many others.  Arbitration formerly was only used in the labor union context.  Now, arbitration clauses are everywhere, even at one Whataburger front door.  See my prior post.  

Arbitration makes more sense for the labor union context, because arbitrators have incentive to remain nuetral.  In arbitration, the two sides to a dispute choose an arbitrator.  Both sides are allowed a certain number of picks.  Eventually, the two sides end up with the arbitrator seen as least biased. That process does not work as well in the employment context.  In employment cases, there is no union.  You have one employee who is filing his/her first and only challenge to some employment action.  That one employee will never again pick an arbitrator.  That one employee will have little or no idea regarding prior history of potential arbitrators or possible bias.  The one employee is shooting in the dark. 

In Alim v. KBR, 2011 WL 61868 (Tex.App. Dallas 1/10/2011), we see one instance where a prior relationship leads to dismissal of an arbitration award.  The arbitrator, Scott Rosuck did not disclose that he had presided over a prior arbitration three years prior with KBR, with the same KBR attorney and with the same KBR representative.  Mr. Rosuck was required to disclose prior relationships, but did not mention the prior arbitration.  He did say at the beginning of the arbitration that he had "come across" the lawyer and representative before.  But, the Dallas court of appeals found that to be insufficient disclosure to put the employee on notice. 

Mr. Rosuck said he relied on memory to check prior conflicts.  It appears he had overlooked the prior arbitration with the same employer, the same employer's representative and the same employer's attorney.  Obviously, he needs a better system for checking potential issues.  The court found this oversight to be "inexcusable."  Mr. Rosuck could not even disclose how many arbitrations he had done with KBR in the past. 

But, the more important issue is prior arbitral awards.  This employee somehow learned of the prior arbitration with KBR, the same rep and the same attorney.  But, arbitration awards are not public records.  The real issue is that there is no systemic way for employees to check prior arbitration awards.  Unlike a lawsuit, where you can look in the district court records, we cannot learn that Scott Rosuck presided previously with the same persons. Unless the employee's attorney gets lucky and calls the right employment lawyer who maybe, sort of remembers Scott Rosuck from three years before.  This is a system sure to lead to abuse. 

Arbitrations have been sold to employers as quicker, cheaper alternative to lawsuits.  We are finding out that they often are not cheaper or faster.  But, the real problem is the secrecy.  Judges have biases.  But, we lawyers and observers have some awareness of those biases.   Lawyers usually know.  But, arbitrators are different.  Arbitration awards are private and not available for review.  Biases reveal themselves only haphazardly or not at all. 

KBR Drops Petition for Cert in Jones Case

 Halliburton/KBR has dropped its petition for certiorari to the US Supreme Court in the Jamie Leigh Jones case.  See report.    Ms. Jones is the lady who was raped in Iraq by KBR co-workers.  She retutrned to the US to find that she had sgned an arbitration agreement which would have prevented most of her case from going before a jury.  KBR has fought very hard to keep her case in arbitration.  The employer lost on appeal with the Fifth Circuit.  It looks like that decision will now become the final decision.   The Fifth Circuit found that rape was not related to her employment, and, therefore, not properly a part of an arbitration agreement.  Therefore, the rape allegations would go to trial. 

Ms. Jones was gang raped in Iraq and the locked up by company employees.  In withdrawing their petition for certiorari, KBR is effectively withdrawing its request for appeal.   The company was motivated in part by the Franken amendment which prohibits arbitration for companies that do business with the Department of Defense. 

Binding Arbitration is Not So Binding When You are Bob Perry

 No one supports frivolous lawsuits.  But, few have done as much to stop supposed frivolous lawsuits as has Bob Perry.  The huge home builder from Houston, Texas has donated tens of millions of dollars to political contests largely to oppose consumer lawsuits.  He funded the SWIF boat for truth campaign against John Kerry.  He helped George Bush become governor of Texas.  His pet issue throughout all these donations has been arbitration.  The Texas Residential Construction Commission was created largely due to his support of key state legislators.  Due in no small part to Bob Perry's largesse, binding arbitration is now a fact of life for most Texans from employees to home buyers to automobile owners.  

One particular lawsuit by one of his home buyers has dragged on for over a decade.  Bob Perry was determined not to let this case go to a jury.  He wanted it to go to arbitration.  It did go to arbitration, where Bob and Jane Cull were awarded $800,000 by the arbitrator.  Yes, some consumers do win in arbitration.  Mr. Perry was not satisfied.  He found a way to make binding arbitration not so binding.  He appealed twice and lost until he came to the Texas Supreme Court.  The Texas Supreme Court is a very friendly venue for large corporations and for Bob Perry.  The Texas Supremes came out for their man.  Bob Perry had donated $21 million to the Texas Supreme Court between 2006 and 2009.  Every member of the court had accepted money from Bob Perry.  Yet, not one member of the Texas Supreme Court recused themselves from his case.  In a close 5-4 decision, the Texas Court disallowed the arbitration award and sent it to trial in 2008.  I am sure this is the only Texas case that has ever gone to arbitration but was overturned on appeal in the past ten years. 

So, yes, Bob and Jane Cull's case then went to a jury, an actual trial in 2010.  The Cull's told the jury how the attic caved in and the foundation heaved and how Bob Perry refused to fix it.  On March 1, 2010, the jury responded.  They awarded the Cull's $58 million, including $44 million in punitive damages.  Bob Perry will surely appeal.  He has already described this jury verdict as "jackpot justice." 

The Cull's originally bought their dream home, their planned retirement home in 1996.   Now, in 2010, with years more for appeals, they will not get their home fixed anytime soon.  But, this "jackpot justice" jury award will surely help them if Bob Perry decides to discuss settlement. 


Arbitrations are not Popular with Everyone

 Arbitration has been around forever for labor disputes.  Unions and their employers have long relied on arbitration as a relatively inexpensive way to resolve disputes.  In the labor context, the arbitration process is set up through a collective bargaining agreement.  The arbitrator is picked by both sides from a list of some 10 ore more names.  The unions and employers know more or less who the arbitrators are and how they will approach various issues.  The unions and the employer share the fees for the arbitration.  Arbitrators receive anywhere from $150 to $500 per day.  Fees for renting a room, travel, etc. can add up to another $500 per day.  Since the fees are shared, the incentive is for arbitrators to not favor either side.  This approach has some fairness to it.  The entire process is negotiated.  

By going to arbitration, unions give up jury trials, but instead, they get a quicker system to resolve workplace issues.  

But, in the past 10 years or so have these arbitration style processes have invaded the non-union context.  Employers have seen them as relatively inexpensive and just as fair.  But, that is simply not true.  Unlike labor unions, your average employee involved in non-union arbitrations will participate in an arbitration only once in his/her life.  The employee knows nothing about any of the possible arbitrators on the list.  The employee cannot afford $500 per day for an arbitrator.  The courts have imposed some limitations, but still, the employee is expected to pay some fees in most non-union arbitrations.  

Its a tough deal for employees.  So, why have arbitrations?  Well, mostly because the employer want them, or think they want them.  There have been one or two instances of arbitrators awarding sizeable awards to employees.  But, most employees cannot even afford to get into the door of an arbitration.

But,  at least one defense lawyer finds arbitrations to be not worth the trouble for employers.  In his informal survey, he finds many defense lawyers who agree with him.  The process has grown, in part due to many lawyers and employees pushing to get some of the same protections they would have in court.  

But, across a range of consumer disputes, arbitrations appear to be here to stay.