Why Try ADR?

 Consider these recent court rulings:

 • A partner in a West Coast law firm harassed a new secretary, snapping her bra and using vulgar language. She worked for him a total of 15 days, then quit and filed suit under Title VII. Jury verdict: $7.1 million for the plaintiff. Later, the judge reduced the award -- to a mere $3.7 million, or slightly less than $250,000 for each day she worked.

 • A major discount retailer was hit with $50 million in punitive damages by a jury in Missouri. The employee said her complaints about her supervisor and the store manager's comments about her anatomy and sexual innuendo had fallen on deaf ears. She has their attention now.

 • A New Jersey jury awarded $435,000 in compensatory damages in an age discrimination case to a pharmaceuticals salesman fired at age 63. Then the jury awarded an additional $8 million in punitive damages. They deliberated for 2 hours.

 • A partner in a major accounting firm who sued for age discrimination was awarded $3.7 million by a jury in Ohio.

 • A jury awarded $7.1 million to an executive employed by a major soft drink company who was fired while being treated for alcoholism in violation of the Americans with Disabilities Act.

 • A Texas jury awarded $3.4 million to a former paper company executive who was reassigned to a janitor position in violation of the Age Discrimination in Employment Act.

 • A California jury awarded a woman $20.3 million from her employer, an oil company, and ordered it to promote her to a higher managerial position.

• A Nevada jury awarded $38.8 million to 36 former casino workers in an age discrimination action.

 • The average jury award in California doubled in 1994, as compared to 1993. What will it do next year?

 Could this happen to your company? You bet it can. A jury is tougher to predict than the weather, and can easily be led into making gigantic awards to a sympathetic plaintiff. Manipulated by skillful plaintiffs' attorneys, twelve ordinarily reasonable and rational citizens can award millions to sympathetic claimants. The employer's ability to pay, rather than the gravity of the offense, seems to determine the size of many awards. Jurors have been heard to justify jackpots with comments such as "She has had a hard life," "He deserves better," or "They can afford it."

Of course, the first priority for every employer is to avoid potential claims and litigation by emphasizing proper conduct in policies and training and taking care to avoid even the appearance of impropriety. But even the best company cannot protect itself completely by saintly behavior. Mistakes will be made. Conduct forbidden by management and written in large, bold type on posters and in the employee handbook will occur. Comments will be misinterpreted. Feelings will be hurt. Hurt will turn to outrage, and employees will turn to lawyers bedazzled by these million-dollar awards.

 So what else can an employer do? One approach is to attempt to limit your exposure to the whims of juries by establishing an "Alternative Dispute Resolution" or "ADR" system which relies on private mechanisms, rather than the courts, to resolve a dispute. ADR encompasses a wide range of systems and processes which allow employers and employees to resolve problems without "making a federal case" out of every disagreement. Think of it as preventative maintenance in employee relations as well as a way to defend against the high cost of legal fees and avoid outrageous jury awards.

 What Is ADR?

 ADR comes is many shapes and sizes, ranging from a simple "open door" policy that encourages employees to communicate their concerns to management so small problems can be solved before they get big, all the way up to mini-trials indistinguishable from the real thing except for the decisionmaker, who is a private arbitrator chosen by the parties instead of a judge from state or federal court. In between one finds grievance procedures directing employees to make their concerns known to their supervisor and then "take it up the line;" the ombudsperson, an individual independent of management who provides confidential help to employees, get issues resolved; peer review systems, in which a panel of employee "peers" participates with management representatives to iron out problems; mediation, where a mediator or facilitator shuttles between disputing parties and helps them reach a mutually acceptable solution; and arbitration, where the parties designate a third person or panel to decide a matter for them and agree to be bound by the result.


 Open Door Policy Peer Review 

 Grievance Procedure Mediation 

 Ombudsperson Arbitration

These examples are points along a spectrum, and because ADR is more flexible than judicial proceedings these processes can be customized to suit a company's needs. Some systems are better suited to some workforces than others; some may be more appropriate for production line employees and others better suited for executives and managers. Some are probably already a part of the way your company handles day-to-day problems. A company can create its own system, best suited to its industry and workforce, by selecting procedures that fill its needs. Think of ADR as "designer justice."

 Isn't Arbitration Just For Unions?

 In a unionized , arbitration of many grievances is already part of the landscape. Union negotiated grievance procedures typically involve multiple steps for presentation and possible resolution of grievances. Binding arbitration is almost always the final stage of the process.

 ADR programs are growing in non-union workplaces, but along somewhat different lines than their union predecessors. One of the most widely used procedures is the "open door" policy. Some employers take the "open door" a step further and have programs which include a series of steps for the presentation of disputes. Typically, a problem is first presented to a lead person, then a supervisor, then a department manager, and finally to the personnel manager or some other high-ranking management official. Such policies rarely lead to binding arbitration. Usually, procedures such as peer review, ombudsperson programs, and voluntary mediation do not distinguish between routine work-related disputes and legal claims, but are designed to remedy any problem that may arise.

Is ADR "Legal"?

 In the dawn of the civil rights era, when claims seeking remedy for discrimination on the basis of race, sex, and age were relatively novel, the thinking was that an employee's rights under Title VII of the Civil Rights Act of 1964 could not be waived, and consequently that an agreement to arbitrate such disputes could not be enforced. However, in Gilmer v. Interstate/Johnson Lane. Corp. , the Supreme Court affirmed an employer's authority to require an employee to waive a statutory right of access to court and to arbitrate certain claims. This decision sparked interest in ADR among non-union employers in at-will states.

In Gilmer, the employee had been required to sign an agreement stating that all claims were subject to compulsory arbitration as part of the employee's registration as a securities representative with several stock exchanges. When the employee was discharged, the employee sued, claiming that the discharge violated the Age Discrimination and Employment Act ("ADEA"). The employer asked the court to order the employee to submit to arbitration. The Supreme Court agreed with the employer, and held that the employee could be compelled to arbitrate the claim and was precluded from suing in court.

 Since Gilmer, most courts (but not all) have upheld the validity of mandatory arbitration agreements, although some have broadly interpreted language in the Federal Arbitration Act which excludes "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Most courts now limit this exclusion to employees "involved in or closely related to the actual movement of goods in interstate commerce."

The legislative history of the Civil Rights Act of 1991 makes it clear that Congress intended for ADR to add to (not subtract from) the rights granted by Title VII and enhanced by the 1991 Act:

Section 216 of the Civil Rights Act of 1991 encourages the use of alternative means of dispute resolution . . . where appropriate and to the extent authorized by law. . . . [t]he committee emphasizes . . . that the use of alternative dispute resolution mechanisms is intended to supplement, not supplant, the remedies provided by Title VII. [T]hus, for example, the committee believes that any agreement to submit disputed issues to arbitration, whether in the context of a collective bargaining agreement or in an employment contract, does not preclude the affected person from seeking relief under the enforcement provisions of Title VII. This view is consistent with the Supreme Court's interpretation of Title VII in Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974). The committee does not intend for the inclusion of this section to be used to preclude rights and remedies that would otherwise be available.

 Although the law is not completely settled, the trend is definitely in favor of upholding and enforcing agreements to arbitrate. As caseloads spiral ever higher, courts are looking for more ways to ease their burdens and are more inclined to enforce agreements to arbitrate cases that otherwise will end up on their docket. Some state and federal courts even require litigants in employment-related disputes to attempt mediation before proceeding with a lawsuit. Frankly, most federal district court judges are not eager to increase their employment discrimination and harassment caseloads: some have been known to snarl at counsel that they view such cases as the equivalent of state court traffic accident and domestic relations suits and that they don't belong in federal court. Many routinely assign them to magistrate judges for a report and recommendation rather than try them themselves. Accordingly, given a fair and reasonable agreement to arbitrate employment disputes that preserves basic due process rights and remedies and was knowingly entered into by the employee, most judges will be inclined to uphold the agreement and order arbitration rather than invalidate the agreement and try the case.

 What Are The Pros And Cons Of Different Types Of ADR?

 If there were a perfect system, we'd all be using it by now. Although different forms of ADR have many advantages, there are some drawbacks as well. The following tables summarize some of the advantages and disadvantages of arbitration, mediation, and peer review.

A. Arbitration

 When parties submit a dispute to arbitration, they are handing their decision-making power over to a third party, presumably neutral, whose decision will be binding on the participants. Compulsory arbitration requires an agreement to arbitrate which employees may be requested to sign when hired. An agreement to arbitrate frequently is a feature of a contract with a highly compensated employee, although its benefits are by no means limited to executives. The parties must agree upon a neutral arbitrator or panel of arbitrators, and qualified individuals are available through organizations such as the American Arbitration Association ("AAA"). An agreement to arbitrate may be enforced or contested through court action.

 When evaluating the pros and cons of arbitration, it is important to bear in mind that many of arbitration's disadvantages -- that it is an adversarial process, that a third party decides the dispute, and that the result may be hard to challenge -- are equally disadvantages to court proceedings. Viewed in this context, the principal advantage of arbitration is that it removes the jury variable from the equation. In cost/benefit terms, this advantage alone far outweighs most of the disadvantages. Some of arbitration's other pros and cons are outlined below.

+ + + + + + + 


No jury. 


Reduces litigation costs, both for process and in final award 


Expedites resolution process 


Award does not have binding precedential value 


May enhance employee productivity and morale 


May cause employees to reject a call to unionize 


Limited judicial review 


Arbitrators usually are less emotional than jurors 


Employer has flexibility in setting up procedure 

- - - - - - - 


Arbitrator has power to make final decision; result may be difficult or impossible to appeal 


Arbitrator may be inclined to "split the difference" and make a small award to a less-than-meritorious claimant 


Arbitration hearing may produce a record which will be used in other proceedings 


Adversarial process 


Due process challenges if agreement does not protect substantive rights 


B. Mediation Parties to a mediation retain the right to make their own decision but have the benefit of a trained mediator to assist them. The mediator's job is not unlike that of a referee: they are facilitators, not decisionmakers, shuttling back and forth between disputing parties, talking with both sides separately, putting in their own two cents' worth and helping the parties reach a decision.

 One significant advantage of mediation is its ability to defuse tensions, de-escalate conflict, and allow both parties to "let off steam" by airing their case to a neutral third party. Many times this is all the employee really wants: an opportunity to be heard, and to have the employer listen. Mediation is particularly effective when used early in the course of a dispute; for example, when a supervisor's conduct, though boorish and unacceptable, has not yet reached the level of actionable harassment or discrimination.

 Some of the perceived advantages and disadvantages of mediation appear below:

+ + + + + + + 


Truly neutral mediator will have credibility 


Candid dispute assessment through separate meetings 


Educates supervisors 


The parties, not the mediator, have the final word 


Parties don't have to agree -- they have an "out" 


Once agreed to, terms are binding and enforceable 


Either party may walk away 


State statutes may protect confidentiality 


Can be quick and cost-effective 

- - - - - - - 


Employer participation may erode authority or may be perceived as weakness 


Process may suggest that grievant will receive some sort of relief (compromise settlement) 


Not all mediators are highly skilled 


Parties don't have to agree -- they have an "out" 


Time and resources may produce no result 


Confidentiality of proceedings is not guaranteed

 C. Peer Review In the grand scheme of life both in and outside the workplace, most of us handle most problems and disputes ourselves, without the intervention of third parties. With this in mind, many employers have established voluntary, internal peer review systems in which a panel composed of a number of employees and a slightly smaller number of management representatives convenes and decides workplace disputes. The cost advantage is clear: everyone is on the payroll already, and the time lost from work is usually comparable to or less than that which would be required for any other form of dispute settlement. Properly designed and implemented, peer review can be an effective and popular ADR technique.

 Naturally, there are disadvantages as well. Panels can cause dissention within the ranks of the employees, and the risk of inconsistent results and favoritism is considerable. Some other pros and cons of peer review are as follows:

+ + + + + + + 


May promote employee participation and good morale 


Employees may be more likely to use peer review 


Quick and cost effective 


Allows employees to "let off steam" with little downside 


Employees may accept decision by peers more readily than decision imposed purely by management 


Keeps lawyers out of the picture 


Result may make employer look fair and reasonable in subsequent litigation 


Management and employees "share" responsibility for outcome 

- - - - - - - 


"Inmates running the asylum" 


System may give panels too much authority 


Panels may be considered labor organizations under NLRA 


System may not lend itself to resolution of all disputes (for example, sexual harassment) 


Panels may create supervisor/ manager concerns 


Proceedings may "leak" -- confidentiality lapses 


Panel jurisdiction must be carefully defined

 What Are Other Companies Doing With ADR? A 1995 study by the General Accounting Office revealed that virtually all private employers use some type of internal ADR to resolve the discrimination disputes of employees who are not covered by collective bargaining agreements. Negotiation and fact-finding are the most widely used; companies were less likely to use binding arbitration or external mediation.

 A privately conducted study released in January 1995 indicated that many forms of ADR are gaining favor with employers. Of the employers surveyed, which ranged from large Fortune 500 companies to small operations, 78% indicated that they would be willing to allow an arbitrator to resolve an employment dispute with a binding decision in exchange for the employee giving up the right to sue in court. Most of the employers surveyed indicated that they were either considering or had already implemented some form of peer review or mediation programs. Among human resources professionals, an impressive 90% said they personally favored ADR, even if their company did not.

 The lower cost of ADR topped the list of its attractive attributes according to these respondents. The major disadvantage was perceived as the risk that ADR might encourage additional employee grievances due to employee access to a dispute resolution process -- an ironic concern, since experience indicates that access to ADR processes actually produces no rise in employee grievances. The availability of punitive damages and jury trials in the Civil Rights Act of 1991 was identified as a major motivation to experiment with ADR.

It is perhaps most significant to note that of all the companies that have experimented with different forms of ADR, very few (if any) have been known to abandon the effort completely and to choose litigation as their only recourse. Any system is bound to benefit from internal improvements, customization, and experience. Perhaps ADR should be compared to computers: we may complain about them, and constantly spend time and money to upgrade hardware and software, but no one seems to be junking the machines altogether and going back to index cards and ledgers.

 Okay, I'm Sold. So How Do We Implement An ADR Program?

 After you've reviewed the pros and cons of the different systems, the first step is to assess your company's needs and determine what's best for you. Your ADR program can be presented to your employees as a "win/win" situation: by signing an agreement to arbitrate employment disputes, employees stand to gain in proportion to the company's savings and to enjoy an improved working relationship.

 In designing a system, it's important not to let your reach exceed your grasp. You cannot simply require your employees to leave all their rights in the parking lot when they come to work. Due process and procedural protections must be preserved if the ADR system you adopt is to withstand challenge. In a recent Texas case, a district court judge enjoined a mandatory arbitration policy that required employees to agree to binding arbitration as a condition of continued employment. The EEOC sought and won the injunction, which also forbid the employer to require employees to pay the costs of ADR proceedings and to interfere with an employer's right to file charges with the EEOC.

However, it is not essential that the employee enthusiastically embrace the ADR program for an agreement to arbitrate to stand up in court. In some early cases, courts ruled that an employee's consent to arbitration must be both knowing and willing. This might work in situations where a highly compensated executive negotiates a contract for employment in which ADR is one element of the bargain, but it did not reflect the reality that the bargaining positions between most employers and employees are not evenly balanced. Recognizing this difference, courts increasingly ask only whether an employee knew he or she was giving up the right to bring a case before a court and jury, and do not demand that the employee's consent be willing.

 The Dunlop Commission, which reviewed workplace issues for the U.S. Department of Labor last year, recommends the following guidelines for ensuring quality arbitration:

 (1) A neutral arbitrator who knows the laws in question and understands the concerns of the parties;

 (2) A fair and simple method by which the employee can secure the necessary information to present his or her claim;

 (3) A fair method of cost-sharing between the employer and employee to ensure affordable access to the system for all employees;

 (4) The right to independent representation if the employee wants it;

 (5) A range of remedies equal to those available through litigation;

 (6) A written opinion by the arbitrator explaining the rationale for the results; and

 (7) Sufficient judicial review to ensure that the result is consistent with the governing laws.

 In August 1995 the American Bar Association announced its opposition to mandatory agreements to arbitrate harassment and other statutory employment claims. It should come as no surprise that this position was ardently advocated by members of the plaintiffs' bar, although many defense lawyers also feel that the hefty hourly fees these cases generate for their firms may be in jeopardy. The ABA nonetheless acknowledged that mandatory, not voluntary, arbitration was the trend. The EEOC also is ambivalent about ADR, feeling compelled to approve it (at least in theory) but disapproving mandatory programs.

 The basic ingredients of a sound ADR system are (1) procedural safeguards that assure fundamental fairness; (2) protection of substantive rights and remedies; and (3) knowing consent by the employee. One good way to guarantee that these minimum requirements are satisfied is for the ADR system to adopt or incorporate rules devised by professional organizations such as the American Arbitration Association (AAA) or the Federal Mediation and Conciliation Service (FMCS). A signed, written agreement between the employer and the employee is essential and may be required of all new hires. The arbitration agreement may be presented to the employees as one element of the employment package: like a health insurance election form, parking lot assignment, or an agreement not to disclose company secrets, the agreement to arbitrate all employment disputes should be one more item in the new employee package. With respect to existing employees, consider a "signing bonus" for those who agree to waive their right to a jury trial and agree to be bound by arbitration.

 Mediation and peer review systems also should be constructed with care. First, these systems are only as good as the people involved. Peer review panels should be selected with care to maximize employee credibility without sacrificing management interests. An inept mediator may cause more harm than good. Procedures that are ideally suited to one workforce or industry may be utterly inappropriate to another.


 The bottom line is that in view of the potentially catastrophic costs of litigation, ADR in some form is definitely worth trying, and worth a substantial investment of time and effort to create a sound and suitable system that can meet the needs of both the employer and the employee. Be aggressive, but fair: your message to your employees is that we want to solve problems fairly and expeditiously, and that by waiving their right to jury trial everybody gains. The worst that can happen is a return to the courtroom, which is exactly where your company is right now if you don't have an ADR system in place. When the potential exposure in a jury trial can easily exceed $1 million, it is worth your time and money to investigate the alternatives.




Recent Cases on Validity of Arbitration Agreements


1. Brokerage Cases


a. Maye v. Smith Barney, Inc., ___ F.Supp. _____, No. 95 CV 1878 (SDNY August 17, 1995) (sex harassment claim subject to arbitration pursuant to U-4 agreement).


b. Fletcher v. Kidder, Peabody & Co., 62 F.E.P. Cases 599 (NY Ct. App.) cert. den., U.S. Sup. Ct. No. 93-581 (November 29, 1993) (statutory claims of race and sex discrimination may be subject to arbitration pursuant to U-4 agreement and NYSE Rules).


c. Farrand v. Lutheran Brotherhood, 993 F.2d 1253 (7th Cir. 1993) (employee who registered with NASD as opposed to NYSE not required to arbitrate ADEA claim pursuant to U-4 agreement because NASD rules do not require the arbitration of employment claims).


d. Mago v. Shearson, Lehman, Hutton, Inc., 956 F.2d 932 (9th Cir. 1992) (Title VII claims are subject to compulsory arbitration pursuant to agreement in employment application).


e. Saari v. Smith, Barney, Harris, Upham & Co., Inc., 968 F.2d 877 (9th Cir. 1992) (Federal Polygraph Protection Act, state Polygraph Protection Act and slander claims are subject to compulsory arbitration pursuant to U-4 agreement and NYSE Rules).


f. Bender v. A.G. Edwards & Sons, Inc., 971 F.2d 698 (11th Cir. 1992) (stayed Title VII and state claims pending arbitration).


g. Chisolm v. Kidder Peabody Asset Management, Inc., 810 F. Supp. 479 (S.D. NY 1992) (an employee who signed a U-4 registration form was subject to the NYSE Rules and as a result was required to arbitrate state and federal age discrimination claims).


h. Bender v. Smith, Barney, Harris, Upham & Co., Inc., 789 F. Supp. 155 (D. NJ 1992) (former employee of brokerage firm was required to arbitrate employment discrimination claims pursuant to U-4 agreement and NYSE Rules).


i. Haviland V. Goldman, Sachs & Co., 947 F.2d 601 (2d Cir. 1991) (former employees's claim against NYSE member firm was subject to compulsory arbitration pursuant to Rule 347 of NYSE. However, the same employee's claim against the member firm's affiliate was not subject to mandatory arbitration).


j. Willis v. Dean, Whitter, Reynolds, Inc., 948 F.2d 305 (6th Cir. 1991) (Title VII sex discrimination claims are subject to compulsory arbitration pursuant to U-4 securities registration agreement and NYSE Rules. However, employment contracts subject to regulation under Title VII fall within 1 of the FAA exclusion for contracts of employment. Thus, the court compelled arbitration on basis of exchange agreement but stated 1 of FAA excludes employment contracts in general).


k. Alford v. Dean, Whitter, Reynolds, Inc., 939 F.2d 299 (5th Cir. 1991) (former stockbroker's Title VII claim was subject to compulsory arbitration under the FAA and pursuant to signed registration agreement).


l. Kaliden v. Shearson, Lehman, Hutton, Inc., 789 F. Supp. 179 (W.D. Pa. 1991) (an employee's age discrimination claim was subject to compulsory arbitration pursuant to employment agreement and NYSE Rules).


m. Sacks v. Richardson Greenshield Securities, Inc., 781 F. Supp. 1475 (E.D. Cal. 1991) (former registered representative was not entitled to trial de novo of previously arbitrated claim arising under the California Fair Employment and Housing Act).

n. Reese v. Commercial Credit.U.S. District of South Carolina.(Upholding validty of mandatory agreement to arbitrate ADA claim.


2. Non-Brokerage Cases


a. Felt v. Atchison, Topeka & Santa Fe RR, ___ F.3d. _____, No. 93 - 56325 (9th Cir. 1995) (Title VII claim of religious discrimination not subject to mandatory arbitration under Railway Labor Act).


b. Williams v. Katten, Muchin Zavis, 837 F. Supp. 1430 (N.D. Ill. 1993) (female partner's Title VII and 1981 claims subject to mandatory arbitration pursuant to firm's partnership agreement).


c. DiCrisi v. Lyndon Guaranty Bank of New York, 807 F. Supp. 947 (W.D. NY 1992) (an employment contract provision requiring arbitration applied to Title VII claims and thereby waived other judicial resolution. Also, Section 1 exclusion of employment contracts and FAA not applicable).


d. Lightside v. Teltech Corp., 940 F.2d 99 (4th Cir. 1991) (the Appellate Court held that district court must hear case to compel arbitration).


e. Farrel Corp. v. U.S. International Trade Commission, 949 F.2d 1147 (Fed. Cir. 1991) (arbitration agreement waives right of access to judicial forum but not to administrative investigations).


f. Dancu v. Coopers & Lybrand, 778 F. Supp. 832 (E.D. Pa. 1991) (compelled arbitration under requirement in partnership agreement which also waived rights to judicial forum. The agreement was not excluded from FAA under 1).


g. ITT Consumer Financial Corp. v. Wilson, 8 I.E.R. Cases 802 (S.D. Miss. 1991) (employee claims asserting sexual harassment, invasion of privacy and intentional infliction of emotional distress were subject to mandatory arbitration pursuant to broad arbitration clause in independent employment agreement and the FAA).


h. Prudential Insurance Company v. Lai, 1994 WL 705260 (9th Cir. 1994) (arbitration agreement must be clearly understood by employee to be enforceable).

i. Crawford v. West Jersey Health System, 847 F. Supp. 1232 (D. N.J. 1994) (compelled arbitration of employment disputes between medical director and physician group).


j. Nghiem v. NEC Electronics, Inc., 25 F.3rd 1437 (8th Cir. 1994) (Section1 exclusion does not apply to manager employed by electronics firm). 

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