In recent years, mandatory arbitration agreements have become the norm – and for good reason. Arbitration has its benefits. Discovery can be (and usually is) streamlined, reducing attorney’s fees and lowering costs. The proceedings are confidential. And arbitrators are – from an employer’s perspective – often preferable to juries.
But recent changes to the law, and a rise in both the volume and cost of arbitration demands, have chipped away at these benefits and potentially changed the calculus for employers. Faced with a shifting landscape, employers should reevaluate mandatory arbitration and ask themselves a simple question: Is it still worth it?
Less Confidentiality
Traditionally, arbitration guaranteed confidentiality. Inflammatory and salacious allegations – no matter how baseless – stayed out of the public record. Critically, this confidentiality could then be folded into any eventual settlement agreement. By preserving confidentiality, employers could minimize (or eliminate) the risk of disgruntled employees disparaging the company.
The California legislature, however, has decided that these types of confidentiality provisions are against public policy. Effective January 1, 2022, settlement agreements for Fair Employment and Housing Act 1 (“FEHA”) claims based on any protected characteristic may not include strict confidentiality provisions. C.C.P. § 1001(a). While FEHA claims can be arbitrated, confidentiality cannot necessarily be enforced.
Under the current framework, arbitration only prevents certain types of sensitive or embarrassing allegations (no matter how false or outlandish) from being publicly filed. It cannot, however, guarantee confidentiality – significantly minimizing its appeal in common employment disputes.
Increased Discovery
Employers also prefer arbitration for its streamlined discovery. The American Arbitration Association (“AAA”) Employment Arbitration Rules and Mediation Procedures, for example, include a single paragraph addressing its scope:
The arbitrator shall have the authority to order such discovery, by way of deposition, interrogatory, document production, or otherwise, as the arbitrator considers necessary to a full and fair exploration of the issues in dispute, consistent with the expedited nature of arbitration.
Depending on the circumstances, limited discovery can be hugely beneficial. In most employment cases, the discovery burden is uneven; the employer bears the lion’s share of document collection, production, and evidence gathering costs. Limited discovery curtails employee fishing expeditions and can avoid costly, inconvenient depositions. Without the full panoply of civil discovery tools at their disposal, plaintiffs cannot intentionally drive up (or threaten to drive up) litigation costs to force settlement.
But as courts grapple with public policy concerns over arbitrating employment disputes, they are mandating more arbitral discovery as “[t]he denial of adequate discovery in arbitration proceedings leads to the de facto frustration of statutory rights.” Davis v. Kozak, 53 Cal. App. 5th 897, 938-39 (2020) (citing Armendariz v. Foundation Health Psychcare Srvcs., Inc., 24 Cal. 4th 83, 104 (2000)).
For example, in Davis v. Kozak, the arbitration agreement permitted each party to take two depositions with all other discovery subject to a showing of “sufficient cause.” Id. at 934. The court, while acknowledging that streamlined discovery is a critical component of arbitration, found this insufficient because the plaintiff’s FEHA discrimination case was “factually complex,” involved “numerous percipient witnesses, executives and investigators” and, as a result, the “arbitration agreement’s default limitations on discovery are almost certainly inadequate to permit his fair pursuit of these claims.” Id. at 940. Most employment disputes fit this bill. Long-tenured employees can often demonstrate “sufficient cause” for substantial written discovery and percipient witness depositions.
This leaves employers in a tough spot. Their arbitration agreements must guarantee enough discovery to remain enforceable. At the same time, this additional discovery waters down the benefits of arbitration.
High Costs
Arbitration is not cheap. As arbitrators’ hourly rates increase, a relatively straightforward, single-plaintiff arbitration can very quickly push into the six-figures. And the employer must foot the bill. Increased arbitral discovery is partially to blame. More discovery creates more discovery disputes – which must be decided by expensive arbitrators. A case with even modest discovery, culminating in a one-week arbitration hearing, can often dwarf a case’s settlement value.
The U.S. Supreme Court’s 2018 decision upholding waivers of class and collective actions in arbitration agreements, viewed as a boon for employers, has also had ripple effects. See Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018). Some large employers have been inundated with individual (and nearly identical) arbitration demands on a massive scale. Even the initial fees and arbitrator deposits for each claim can run upwards of $10,000. Simply defending thousands of claims at once, without the ability to consolidate them, can be crippling – even if the claims themselves lack merit.
PAGA Claims
Since the Private Attorneys General Act’s 2 (“PAGA”) adoption in 2004, its contours – specifically concerning arbitrability – have been heavily litigated. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014) (“Iskanian”), the California Supreme Court held representative PAGA claims could not be waived and, notably, that an employee’s individual PAGA claims could not be severed from his non-individual PAGA claims. The upshot was that PAGA claims, in general, could not be arbitrated.
In 2022, the U.S. Supreme Court threw employers a life raft in Viking River Cruises, Inc. v. Moriana, 142 S. Ct. 1906 (2022) (“Viking River”), overruling Iskanian, in part, and finding that the Federal Arbitration Act preempts state law and permits an employee’s individual claims to be arbitrated. The Court then determined that once individual PAGA claims are compelled to arbitration, any related, non-individual or representative claims must necessarily be dismissed for lack of standing. This (briefly) breathed new life into an employer’s PAGA defense toolbox.
But this success was short-lived. In response to Viking River, the California Supreme Court issued its ruling in Adolph v. Uber Technologies, Inc. Deviating from the U.S. Supreme Court in one critical respect, the court held that even if individual PAGA claims are compelled to arbitration, the employee retains standing to pursue his representative claims in state court. Subsequent California cases reinforced this holding. See DeMarinis v. Heritage Bank of Commerce, Appeal No. A167091 (Jan. 8, 2024).
Because representative PAGA claims can now be split but representative claims cannot be compelled to arbitration, this new, post-Adolph framework threatens employers with a two-front PAGA war: arbitrating individual claims while litigating non-individual claims. Defending against split PAGA claims, in different forums, will only increase costs.
Takeaways
Arbitration agreements are still a powerful tool for employers and can, in some cases, save significant time, costs, and headaches. But as the landscape evolves, arbitration may not be the silver bullet it once was. For those employers facing a potential wave of individual (and increasingly costly) arbitration demands, it might be time to reassess the costs and benefits of mandatory arbitration.
For more information on arbitration agreements, please contact Benjamin Kussman, Esq. at [email protected].
