Study Shows State Courts Vacating Many Arbitration Awards for Employees, but Not for Employers

Marcia Coyle
The National Law Journal
04-21-2008

As consumer, employee and other groups carefully build momentum in Congress for changes in the nation's arbitration landscape and business groups just as carefully organize their opposition, a new empirical study reports a "disturbing trend" at the state level: state courts vacating many arbitration awards for employees, but not for employers.

The new study, conducted by labor and employment law scholar Michael LeRoy of the University of Illinois College of Law, is another and important piece in the complex arbitration mosaic, whose various parts are being re-examined by members of Congress and others for legislative "fixes" before the end of this year or early next year -- depending on the November election outcome.

The legislation in Congress focuses primarily on the front end of the system and would prohibit mandatory, predispute arbitration in consumer, employee and franchise agreements. LeRoy's study focuses on the back end of the system: federal and state court review of employment arbitral awards.

LeRoy's data reflects a sense of "snowballing futility for employees," said the author.

"When courts vacate many awards that rule for employees, the individual must either return to a lengthy and costly 'do over' arbitration -- or worse, be stuck with a useless award, and no other recourse" because a Supreme Court ruling prevents them from suing, the study said. Court review is becoming "an insurance program that protects employers from costly awards."

LeRoy's findings did not surprise lawyers at the Washington-based Public Justice (formerly Trial Lawyers for Public Justice), which has a mandatory arbitration abuse prevention project. In preparing a manual for that project, the organization did a less exhaustive review of challenged arbitration awards, recalled staff attorney F. Paul Bland.

"You almost never see a court overturn the arbitrator's decision in consumer cases, but you do see it in employment cases and almost overwhelmingly where the arbitrator ruled for the employee," he said.

REPEAT PLAYERS

LeRoy's database includes 443 federal and state court rulings on arbitration awards -- four levels of review, two in the federal court system and two in state systems -- from 1975 to 2007.

The data set is five years in the making and it is an ongoing project, he said, explaining, "It started with my interest in how employers and employees were responding to mandatory arbitration programs, implemented in the mid- to late-1990s."

His study found a "statistically significant" difference in the rates for confirmation of employer and employee victories by state appellate courts:

"Remarkably, state appellate courts confirmed only 56.4 percent of employee wins in arbitration. But when the same courts ruled on employer victories, they confirmed 86.7 percent of awards," the study found.

The lower state courts acted like the state appellate courts: 87.2 percent of employer awards confirmed; 77.6 percent of employee wins confirmed.

By comparison, federal appeals courts upheld 85.7 percent of employer wins and 85 percent of employee victories. Federal district judges enforced 92.2 percent of employer awards and 92.7 percent of employee wins.

The main reason for the difference between the state and federal court rates, said LeRoy, is that federal courts are essentially following the limited standards of judicial review established by the Federal Arbitration Act (FAA) and state courts are not.

"The problem is that the number of award-reviewing standards is growing, due to new state laws and creeping expansion of common law standards," said LeRoy. "This causes judges to deviate from the FAA's extremely deferential principles."

The "remarkable irony" in what is happening is that employees are losing under these state laws and standards, which were enacted to protect the weaker party in the relationship -- here the employee, said LeRoy.

"Other arbitration scholars have identified what they call the 'repeat player effect,'" he said. "Corporations are repeat players in either the employment or credit card arbitration systems and they learn the system. Even if they lose, they are smarter about how to make system work to their advantage. In any given dispute, they go up against a one-shot player."

Using examples drawn from his database, LeRoy shows in his study how these new laws and standards create pitfalls for arbitrators, or "trip wires," that employers learn to use to their advantage in challenging awards against them.

"Arbitrators tend to be highly experienced neutrals and they often cross state lines and are unaware of varying state laws," he said, adding, for example, a state law prohibiting an award of attorney fees. "I rule for a party and after I rule, the loser does research and finds I have not complied with that or another requirement under state law and gets the award vacated."

If state courts followed the four main elements for judicial review in Section 10 of the FAA, there would be 10 percent or fewer awards overturned, said LeRoy (picture below).

"The door was cracked open by the Uniform Arbitration Act and further opened by the Revised Uniform Arbitration Act, and then furthered opened by piecemeal arbitration statutes," he said.


LEGISLATING FAIRNESS

LeRoy is no foe of arbitration. In fact, he believes due process recommendations adopted by the American Arbitration Association and others have eliminated many of the egregious horror stories emanating from arbitration programs in their early incarnation.

"In my opinion, these changes have not received adequate credit for reforming the system without legislating," he said.

Legislation to prohibit mandatory arbitration now pending in Congress doesn't reflect the fact that many private systems now have opt-out provisions for individuals, added LeRoy.

"One can fairly complain the provisions are cosmetic and designed to be overlooked by individuals," he said. "In some sense, the legislation doesn't appear to account for the fact the market is moving away from mandatory agreements in the employment area. It's a different matter when you look at consumer agreements."

There are two main bills in Congress that are the focus of pro- and anti-mandatory arbitration interest groups: S. 1782, whose prime sponsor is Sen. Russell Feingold, D-Wis., and H.R. 3010, whose chief sponsor is Rep. Henry "Hank" Johnson, D-Ga.

The bills are identical in prohibiting mandatory predispute arbitration in consumer, employer and franchise agreements as well as in any dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.

House and Senate hearings have been held on the bills which, not surprisingly, have drawn combat lines between business interests, such as the U.S. Chamber of Commerce, on one side, and trial lawyer and consumer interests, such as the American Association for Justice and Public Citizen, on the opposite side.

Lobbyists and Hill staffers following the legislation now say nothing of substance is likely to happen on those two bills this year because of the expectation of a presidential veto.

"If the election goes well from the Democrats' perspective, I expect to see a significant ramping up of efforts -- early introduction in the new session and a big push," predicted one lobbyist.

Two possible scenarios surround the two bills, some say. They could end up like the Family Medical Leave Act, which was vigorously opposed by business and took nine years to enact, or they could gain immediate traction because of the economy.

Consumers are now squeezed by an ailing economy, high credit card debt and an anti-consumer bankruptcy law. There also has been widespread publicity about the National Arbitration Association and criticism that it is a badly rigged system against consumers.

"The credit card companies are the principal people funding support for current use of arbitration clauses," said a consumer representative. "If that industry has too many more people angry with it, then this bill will move faster than people thought."

But Larry Akey, spokesman for the U.S. Chamber's Institute for Legal Reform, said the Chamber and its supporters believe there will be an attempt to move something on arbitration before the end of this congressional session.

"We keep hearing rumors emanating particularly from the Senate that Feingold would like to get a [committee] markup on his bill sometime before summer," said Akey.

CARVE-OUTS

What may happen before the end of the session, both sides agree, is legislation to prohibit mandatory arbitration in industry-specific areas, most likely nursing homes and car buyers.

There currently are bills pending to prohibit mandatory arbitration clauses in nursing home admittance policies, livestock and poultry contracts, homebuilding contracts, predatory tax refund anticipation loans and consumer auto purchases.

"It's what I call carve-outs," said Mark A. de Bernardo, partner in the Vienna, Va., office of Jackson Lewis and executive director and president of the Council for Employment Law Equity.

That strategy, he said, makes it difficult for the business community to oppose the bills because it fragments the business community and the piecemeal effort makes the issue appear less controversial.

"What's particularly negative is three things: If we're saying mandatory arbitration is bad for Joe and Sally and then for Bob and Judy, that sets in motion a mindset that is harmful to the very nature of arbitration," he said.

Two, he added, the piecemeal effort has a tendency to lock in some legislators who may vote for one bill that they consider noncontroversial.

"The leap from taking a small step to a larger step may not seem as significant," he said.

Finally, the strategy gives momentum to the bills' proponents.

The U.S. Chamber and other business groups would rather not be divided by that strategy, he said, adding, "It's like sniper fire picking off individual soldiers. As a fighting force, we're less effective."

There may be hearings on, and a push for, the nursing home legislation this year. That area, say the bill's proponents, is rife with horror stories of abusive arbitrations. There also is the possibility of movement, they say, on the car-buyer legislation. Congress several years ago exempted car dealers from the FAA after complaints about their unequal bargaining power in arbitrations with car manufacturers.

"We are getting an ever-mounting number of complaints from consumers and employees who have endured awful treatment in the arbitration system," said Public Justice's Bland. "It would not surprise me if the intense and growing level of anger and unhappiness we are seeing translates into significant pressure on legislators."

There is little hope for compromise in any of these areas.

"We see it as one big package by the trial lawyer association to advance it as in many separate proposals as possible in the hope they can demonstrate this is a wide-ranging problem," said the U.S. Chamber's Akey.

"I think it's hard to compromise when the goal of other side is to effectively eliminate arbitration."

Labor & Employment
State Courts Vacating More Arb. Awards for Employees than Employers
Posted Apr 21, 2008, 06:55 am CDT
By Molly McDonough
LINK

State courts are vacating many arbitration awards for employees these days, a pattern that reveals a "disturbing trend" according to one recent study.

The University of Illinois College of Law's Michael LeRoy took a look federal and state court review of employment arbitral awards. The National Law Journal reports that the data suggests a "snowballing futility for employees."

"When courts vacate many awards that rule for employees, the individual must either return to a lengthy and costly 'do over' arbitration—or worse, be stuck with a useless award, and no other recourse" because a supreme court ruling prevents them from suing, the study said. Court review is becoming "an insurance program that protects employers from costly awards."

According to the NLJ, LeRoy's database includes 443 federal and state court rulings on arbitration awards from 1975 to 2007. His findings reveal statistically significant differences in victories in the state appellate courts.

In the federal courts, where judicial review is more consistent under the Federal Arbitration Act, employer and employee awards are being upheld more evenly.

LeRoy theorizes that employers are benefiting by a "repeat player effect," because they have learned the system and know how to better make it work to their advantage.

Also of interest to anyone who may be going to arbitration:

U.S. Supreme Court
Supreme Court Limits Judicial Review of Arbitration Awards
Posted Mar 25, 2008, 10:20 am CDT
By Debra Cassens Weiss
LINK

The U.S. Supreme Court has ruled that parties to an arbitration agreement may not agree to broader court review than allowed by federal law, SCOTUSblog reports.

The case involved a lease dispute between toymaker Mattel Inc. and the owner of a polluted factory site. The two parties had provided in their arbitration agreement that courts could review an arbitration decision for errors of law, the Associated Press reports.

Justice David H. Souter wrote in the opinion for the majority (PDF posted by SCOTUSblog) that the Federal Arbitration Act "confines its expedited judicial review" to narrow circumstances that are the exclusive means for vacating or modifying an arbitration finding.

Souter noted that the factory and amici had contended that parties will flee from arbitration if expanded review is not an option. On the other side, Mattel and amici argued the decision could result in flight from the courts.

“We do not know who, if anyone, is right, and so cannot say whether the exclusivity reading of the statute is more of a threat to the popularity of arbitrators or to that of courts,” Souter wrote. “But whatever the consequences of our holding, the statutory text gives us no business to expand the statutory grounds.”

Souter added that the parties may be able to obtain expanded court review using avenues outside the FAA, such as state statutes or common law.

The case is Hall Street Associates v. Mattel.