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This article by Kathleen McGinn Spring was prepared for the May 16, 2001 edition of U.S. 1 Newspaper. All rights reserved.

Employment Contracts: The Push for Arbitration

Liz Zuckerman, an attorney with offices at Princeton

Pike Corporate Center, recently negotiated a $1 million settlement

for a client who alleged that conditions on his job had made him miserable.

"He was a young white male," Zuckerman says. "He was perceived

as being gay, even though he wasn’t. He was harassed unmercifully

by co-workers and supervisors. Really egregious stuff." As a result

of the teasing, the young man developed a stress disorder. He was

then teased about that, too.

Through extensive legal discovery, Zuckerman was able to establish

that management not only knew of the harassment, but took part. This

was enough to persuade the employer to hand over the seven-figure

settlement. This would not have happened had the dispute gone to arbitration,

she says, citing employers’ fear of huge jury verdicts and of extensive

discovery as powerful incentives to settle before cases come to trial.

If her client had not had access to the legal system, she is sure,

he would not have been handed a $1 million settlement.

It is likely that from now on fewer workers will walk away with a

settlement like this — or indeed with any settlement at all —

and that more employers will sleep easy, free from the pressure to

either settle or risk a multi-million dollar jury award. This is so

because the U.S. Supreme Court has ruled that the Federal Arbitration

Act (FAA) applies to all employment contracts, with the exception

of "seamen, railroad employees, or any other class of workers

engaged in foreign or interstate commerce." An employee who signs

an agreement stating that he will submit any disputes with his employer

to binding arbitration has given up his right to sue in court, even

for alleged discrimination.

This ruling was handed down in late March in Circuit City Stores v.

Adams, a case wherein one Saint Clair Adams claimed co-workers harassed

him because he was gay. He sued his employer under California’s Fair

Employment and Housing Act. The 9th Circuit Court of Appeals allowed

his suit to go forward, despite the fact that he had signed an agreement

to submit all employed-related disputes to an arbitrator as part of

his application for the job. The Circuit Court held that the FAA did

not cover employment contracts and that the claim involved Adams civil

rights.

The Supreme Court, in a five to four decision, disagreed, holding

that the FAA does cover employment contracts. Further, the court,

however narrowly, came down on the side of binding arbitration of

employment disputes, finding it has "real benefits," including

"avoidance of litigation costs" in the employment context.

In a vigorous dissent from the ruling, Justice Stevens stated that

Congress never intended the FAA, an act drafted in 1925, to require

arbitration in employment disputes. Further, Stevens argued, Congress

has exempted contracts of employment from mandatory arbitration because

of "the potential disparity in bargaining power between individual

employees and large employers."

While attorneys who represent employers tend to applaud the Supreme

Court ruling, attorneys who bring suits for aggrieved employees tend

to agree with Stevens. They contend that slipping an arbitration clause

into an employment application or a handbook and then holding an employee

to it, no matter what the nature of his claim against his employer,

is not only unfair, but also, in many cases, contrary to the intent

of New Jersey laws that bar discrimination. Zuckerman is one such

attorney. A graduate of the University of Michigan (Class of 1985),

who holds a J.D. from the University of California, she was with Mason,

Griffin and Pierson before she and a colleague, George Fisher, formed

Zuckerman & Fisher, which specializes in representing employees.

No matter what their view of the Supreme Court decision, attorneys

agree its impact will be significant. An estimated 20 to 25 percent

of all civil cases in New Jersey courts involve employment disputes,

which cover everything from alleged hiring violations through post-termination

issues, including violations of employee agreements not to divulge

work-related secrets.

"Age discrimination is very big now," Zuckerman says. She

suspects that some employers are using layoffs occasioned by a slowing

economy as an excuse to "get rid of older workers." Gender

discrimination provides a large number of cases too, as does disability,

whistle blower disputes, contract issues, and, she says, there’s always

sexual harassment. "With all the publicity, your intuition tells

you sexual harassment couldn’t possibly still be an issue," she

says. "But it is."

The amount employers spend on these cases is not known. Only five

percent of all employment suits reach the courts, and the terms of

settlements are almost always private. Richard Mariani, a Morristown

attorney who has been defending employers for 27 years, says it costs

about $100,000 to defend a case that does not make it to trial. Low-end

attorneys fees for a simple case that is tried run from $100,000 to

$150,000. At the other end of the scale, the tab for a complex case

involving significant employment issues can run to $800,000 or $900,000.

On top of that, of course, is the amount of any jury award. According

to a study by Mariani’s firm, Stanton, Hughes, Diana, Cerra, Mariani

& Margello, employees won 68 percent of the time in cases against

employers during the seven years ending last May 15. In 1993, employees

won 100 percent of the time. The average plaintiff’s award during

the entire period was $1,019,448, and hit a high of $3,031,587 in

1996.

The report states that "plaintiffs trying their employment discrimination

suits in a New Jersey court face favorable odds of being awarded substantial

damages by a jury." These damages may consist of some combination

of lost wages, emotional distress, and punitive damages. Of the three,

punitive damages is the one that is likely to hurt the most. Mariani

says most plaintiffs throw in emotional distress, but "it won’t

be big money." Plaintiffs tend to say "`I’m very sad. I couldn’t

concentrate. I had an upset stomach.’ They hire a psychiatrist who

says they have post trauma syndrome. But juries and arbitrators can

figure out how hurt they are."

"Punitive damages is the big one," Mariani says. "I tell

employers that juries award punitive damages in less than half of

the cases and they say `That’s great!’ But the bad news is that if

punitive damages are awarded, they’re going to be huge. The employer

is going to get soaked. In many cases, awards exceed $1 million."

On top of damages and their own attorney’s fees, which, remember,

can approach $1 million, employers are liable for the employee’s legal

fees if the case is brought under an anti-discrimination statue. "The

whole point being," Mariani says, "employers face very significant

exposure in cases that go before juries."

Zuckerman, the attorney who represents employees, agrees: "Any

employer would prefer an arbitration to a jury." The Supreme Court,

she says, "really missed the boat" in stripping the right

to a jury trial from employees. There are two areas in which arbitration

falls short as a remedy for workplace disputes, she says.

One is access to justice at the hands of an employee’s peers. Jurors,

she says, are "Everyman." They can picture themselves being

the next victim. She acknowledges that the jury system is not perfect

and that "some awards are out of line," but adds that "we

have provisions for fixing juries gone astray." Excessive awards

can be sent back for review and verdicts can be appealed "and

appealed again."

The other important right stripped away in arbitration, in Zuckerman’s

view, is the right to extensive discovery, the process whereby each

side can take pre-trial testimony and can demand a wide variety of

documents. These documents can include anything from performance reviews

to phone logs to E-mails between managers, and can range far beyond

records on the aggrieved employee himself, perhaps including performance

reviews of all people in similar positions. Some discovery is allowed

in arbitration, but generally it is limited, and often is restricted

to records involving the plaintiff himself.

Zuckerman says discovery, or the threat of same, is

a powerful incentive for employers to settle, but she adds that it

is tough on the employee bringing the suit, too. Discovery is a two-way

process, allowing the employer to take depositions and to demand documents

from the employee bringing the complaint. Zuckerman says that because

emotional distress is often among the injuries for which plaintiffs

are seeking redress, their medical and emotional state and history

are fair game, as, often, are all aspects of their lives and relationships.

"It’s like a classic rape case," says Zuckerman. "The

victim gets victimized all over again. Suddenly your personal life

is a matter of public record." She says she gives clients "a

real stern talking to" before she takes a case "to see if

they know what they’re getting into."

"Most employees do not sue unless motivated by extremely unfair

treatment," Zuckerman says. Many employment cases, in fact, are

brought under New Jersey laws banning discrimination. Most of the

rest are the result of contract disputes, or claims that an employee

was fired or otherwise disadvantaged because of whistle blower actions

through which he called the company on illegal practices. Zuckerman

has less of a problem in seeing these cases handled through arbitration,

but still finds it hard to believe that the Supreme Court was willing

to yank cases involving discrimination out of the court system in

every instance where an employee signs an agreement to submit claims

to arbitration.

The discrimination cases fall under state statutes that were enacted

to protect certain classes of people. While this makes them philosophically

different from contract disputes, and lends social significance, there

is another practical difference. The discrimination cases include

among their remedies the right of plaintiffs to receive court-ordered

reimbursement of their legal fees, while the contract disputes do

not. The discrimination cases, therefore, are often accepted by attorneys

on a contingency fee basis.

A case in which Zuckerman’s firm just won a judgment involves a person

with a condition recognized in New Jersey as a disability, and illustrates

how the court system in general, and the discovery process in particular,

works in employment discrimination cases in the United States, where

employment is "at will." This means that employees can quit

at any time for any reason and that employers can fire any employee

at any time for any reason, even one that is capricious (He always

wears green, and I purely hate green.) The exception is that members

of a protected group can not be denied a job, or a promotion, or be

fired or treated badly because they belong to that protected group.

Employees with protected status include women, members of minority

groups, and people with disabilities.

Jacqueline Tillman, a member of Zuckerman’s firm, handled the case,

in which the defendant — Nelson Communications — has just

filed a motion for a new trial. The plaintiff in the case is John

Scott, a man who became ill with AIDS late in 1994, was discharged

in 1995, and died of the disease in August, 1998. The suit is being

carried forward by his family. The plaintiff was hired in 1988 by

an entity of Nelson Communications, now located at Princeton Pike

Corporate Center, which acts as a high-end temporary agency for pharmaceutical

firms, placing sales reps with them in assignments that can last for

years. Nelson Communications was purchased last year by a French corporation,

Publicis Groupe SA.

Scott was a regional director, supervising several levels of managers

in the Northeast. Tillman says he testified, in seven days of deposition,

that he was openly gay, and all his co-workers knew it, he said, because

of the way he dressed, spoke, and carried himself. People joked about

it, Tillman says, and Scott had no problem with that. His supervisor,

the man who fired him, also was gay, and the two men sometimes spoke

about their sexual orientation.

In the summer of 1994, Scott became visibly ill, looking bad enough

and losing enough weight that co-workers began to ask about his health.

In November of 1994 he was hospitalized for pneumonia. In deposition

testimony, a co-worker said all the talk at the office centered on

whether Scott had AIDS. After Scott left the hospital, he called his

supervisor, saying he was ready to come back to work, but the supervisor

put him off again and again while a young woman who had reported to

him took over his work load.

Late in 1994, Nelson lost a big contract with DuPont, decided it needed

fewer employees, and drew up a list of people to be laid off. Scott’s

name was on the list along with those of four other employees and,

says Tillman, "He believed they had put him on the list because

he had AIDS." The other people terminated along with Scott were

recent hires, one of whom was hired back the next day. The other individuals

were hired back with six months, Tillman says.

Tillman says performance was not an issue. She says that the company

admitted Scott was "as good as we could get." He had been

let go, the company said, because the client liked the young woman

who took over for him while he was in the hospital, better.

Under the employment at will doctrine, that would have been reason

enough to fire Scott. But Tillman alleged the real reason he had been

fired was that the company knew he had AIDS. Not every disease is

considered a disability, but in New Jersey AIDS is such a disease.

Tillman persuaded the jury that management knew of Scott’s illness,

and fired him because of it. The jury rendered a judgment of $265,800

for back pay and compensation, and about the same amount for attorney’s

fees.

Tillman says news of Scott’s condition spread through his industry,

he found it impossible to find another job, and died a broken man.

The jury verdict, she says, was a great comfort to his family. And,

if upheld, it may cause employers to think twice about how they draw

up lists of employees to be laid off. But the case also illustrates

some of the drawbacks of using the court system to settle employment

disputes.

Scott’s case has been in the court system for six years, and, Tillman

says, it could go on for another year or 18 months, perhaps more if

the defendant decides to take it to the Supreme Court.

By contrast, says James Farrell, a partner with Princeton-based

Farrell & Thurman, a firm that represents employers, "arbitration

can be over in six months." That speed is among the reasons Farrell

says arbitration is an excellent forum for employment disputes.

He tells a story about George Washington to illustrate his point.

The first thing Washington did after being named Commander-in-Chief,

Farrell recounts, was to go to Connecticut, where he told soldiers

camped out there that he understood there were a lot of grievances,

and said it was important to get them resolved. Our nation’s father

understood, Farrell says, that such grievances are a distraction.

He contends that corporations also need to get past these disputes

as quickly as possible. And the benefit is not only for the employer

and his managers, but also, Farrell contends, for the aggrieved employee.

"Too often a suit becomes all-consuming," Farrell says. "It

takes on a life of its own." The work of a company gets shoved

aside, and the employee remains in turmoil. "There’s a tremendous

psychological value to letting an employee tell his story," Farrell

says. Under arbitration that story can be told, and a result meted

out, in a fraction of the time it takes to move even the most simple

case through clogged courts.

Where litigation is the only option, some employees are denied any

hearing at all, Farrell says. "If liability is not clear-cut and

there is no insurance coverage, it may be difficult for a plaintiff

to find an attorney to take a case on a contingency fee basis,"

he says. "The attorney will have to look at it and say `maybe

you’ll prevail, maybe you won’t.’" Employment cases can take three,

four, five years, or more, to make it through the courts, and attorneys

who take a case on a contingency fee basis generally see no money

until the end. "It’s a substantial investment of resources,"

Farrell says.

The cost of litigation is daunting for employees, especially in contract

cases, where the law does not allow for reimbursement of legal costs,

and, at the same time, it can be ruinous for small businesses. "The

cost of a suit is a significant problem," Farrell says. "Think

of a company with 30 employees and revenues of $3 million. If it gets

in a discrimination lawsuit, and its defense costs go into six figures,

that’s an extraordinary hit."

"I know of companies that have been crippled by law suits,"

Farrell says. "Just because a company is sued doesn’t mean that

it’s guilty. A lot of cases get resolved based on cost."

Arbitration can be a good alternative to the courts, Farrell says.

It can take a fraction of the time and the cost. And it is private,

sparing both employer and employee from laying their souls bare in

a public forum. "If you’re just interested in getting to the heart

of the dispute, here is a way," he says. Farrell speaks in favor

of arbitration not only as an attorney who represents employers but

also as a arbitrator.

Farrell, a graduate of Pace University (Class of 1974), became director

of labor relations for Pan Am while attending St. John’s School of

Law at night in the mid-1980s. In that capacity, he served as an in-house

arbitrator for Pan Am management. Under the federal Railway Labor

Act, labor disputes between many transportation workers and their

employers are subject to arbitration under collective bargaining agreements.

Farrell sat on a panel of four, two representatives from labor and

two from management. Disputes were presented to the panel, and if

there was a deadlock, a federal arbitrator was brought in to break

the tie vote, and the case was heard de novo (from the beginning)

with all five people hearing the case. The system worked so well,

Farrell says, that "We resolved the preponderance of disputes

without the federal arbitrator."

Farrell, who served as an arbitrator before obtained a law degree,

explains that arbitrators do not have to be attorneys, but says that

many are. Others may be former management or union representatives,

or college professors, or even full-time professional arbitrators.

Employees signing an agreement to arbitrate may be asked to agree

to take disputes to a particular arbitration organization. Both sides

generally then are presented with the names of a number of arbitrators

and have the right to turn down some and rank the others in order

of preference. Both sides may be represented by attorneys, and some

discovery is allowed.

Eighty percent of Farrell’s practice consists of counseling companies.

The other 20 percent involves representing high level management,

and includes drawing up employment contracts that can run to 20 pages.

Farrell says agreements to submit disputes to arbitration are often

part of these contracts, and he has no problem with having clients

sign them "if the language is fair and appropriate."

Submitting disputes to arbitration doesn’t automatically mean an employee

signs away rights permitted under the law, Farrell says. Arbitrators

can allow both punitive damages and attorneys’ fees, and employers

may run into trouble if they word their arbitration agreements in

such a way that remedies such as these are foreclosed. The more limitations

employers put on rights an employee would have if the case were to

be tried in court, the less likely it is that their agreements will

stand up.

Mariani, the Morristown attorney, agrees. "There is a question

whether they (arbitration agreements) will be upheld by the courts,"

he says. "My instinct is that if you as an employer want to create

an agreement that will be upheld by the courts, you shouldn’t even

try to limit the nature of remedies."

Some attorneys and arbitration groups urge employers to make an arbitration

agreement a separate document, others counsel that the agreements

can be included in an application for employment or an employee handbook.

A sample arbitration agreement on the National Arbitration Forum’s

website (www.arb-forum.com/library/employclauses.asp) runs to seven

pages.

Some employers’ attorneys, gleeful over the Supreme

Court’s ruling, are urging all of their clients to pass out arbitration

agreements to all of their workers. Farrell and Mariani, seeing arbitration

as ideal in some situations, but not others, are not among them. Arbitration

has its drawbacks, for employers as well as for employees.

"In arbitration, there is an extremely limited right to appeal,"

Mariani says. "Whereas if you go to trial, you have unlimited

opportunities to appeal." Perhaps even more significantly, "In

court you can bring a motion for summary judgment," he says. Employers’

attorneys can often use a summary judgment motion to make claims they

consider frivolous go away. There is no similar mechanism in arbitration.

Another potential mine field employers may encounter in arbitration,

Mariani says, is its relaxed rules on admissibility of evidence. In

a court proceeding, he says, "the employee is always given the

benefit of the doubt in the pre-trial phase, but it’s an even playing

field at trial. The employer counts on this very much in persuading

the jury it did not do anything wrong." In arbitration, on the

other hand, "the rules are of evidence are very relaxed. Everything

goes in, and that could be very significant."

An example of the rules of evidence used at trial is that hearsay

generally is not allowed. Witnesses can only testify to conversations

they actually heard. In arbitration, on the other hand, Mariani says,

a witness can say things like: "My sister’s cousin used to work

for the company, and she said she heard women were never allowed to

run the drill presses."

"This can be huge," Mariani says. "Where an employee really

doesn’t have much going for him, he can bring in all kinds of rumor

and grapevine. From an employer’s point of view, it’s a bad thing."

There are positives for employers in requiring their employees to

sign arbitration agreements, however, Mariani says. Among them are

situations like the one in which Zuckerman, the plaintiff’s attorney,

won $1 million for the young, straight man who was teased for being

gay and then for being a nervous wreck.

"Would employers settle fewer cases? Probably true," he says.

"The fear of runaway verdicts and the cost of litigation are major

when employers assess the appropriateness of settling."

No one really knows how the new Supreme Court ruling will change the

status of New Jersey, as, in Zuckerman’s words "a good place to

be an employee." And there is even some doubt as to whether the

ruling will stand in regard to employees’ claims based on illegal

discrimination. Says Zuckerman: "It’s my hope and gut feeling

that the New Jersey Supreme Court will carve a niche for discrimination

cases to be heard in Superior Court."

Mariani disagrees. "I would be astonished if the Supreme Court

took the position that state discrimination claims are not covered,"

he says. "The game is over."

So, it’s a matter of wait and see, as employers decide whether to

have employees sign agreements to submit all disputes to binding arbitration,

and, inevitably, employees test the legality of specific agreements.

Whatever employers decide, and courts decide to enforce, it appears

there will be no end to job-related clashes, and no perfect way to

resolve them. Of the Supreme Court’s recent attempt to tame the process,

Mariani says, "It’s not a panacea."


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