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Why Arbitration is Terrible
Editor's Note
Why Arbitration is Terrible
I hate arbitration. And I generally discourage people from using arbitration agreements in any context.
Arbitration started out as a reasonable idea. Sidestep the lengthy and expensive court process for a quicker, less expensive resolution that has more finality. The only thing that's still true is the finality.
In California, arbitrators are not required to follow the law. Arbitrators can do whatever they want for any reason or no reason at all. It's justice at-whim. No law; just vibes. (A term coined by several constitutional law scholars in their podcast.)
There is no appeal from an arbitration award and no review. The only check on arbitrators is when they do something outside of the authority the arbitration agreement gave them. In order to be effective, arbitration agreements usually give them broad authority to decide pretty much anything. Sometimes, courts decide that forcing people into arbitration is not fair. But even that is pretty rare and depends on the nature of the forcing.
When decision makers are not bound by rules or law, weird stuff happens. And it's impossible to analyze risk and predict outcomes. This makes it very difficult to advise clients about settlement or even strategy. You have more control in a Casino in Las Vegas. At least there, you can decide not to gamble.
And arbitrations take about as long as court cases and are always more expensive. Not only do you have to pay your attorney, you also have to pay the arbitrator too. Sometimes you have to pay three arbitrators if the arbitration agreement requires a panel. Arbitrators generally charge more than your attorneys. In employment cases, the employer usually has to pay the arbitrator. In most other cases, the parties each pay half.
There are entire arbitration ecosystems with rules, procedures, lots and lots of fees, and arbitrators who are paid hundreds of dollars ($375-1125) an hour to listen—or not. They don't have to. They can do anything they want.
Some arbitrators are excellent and work hard to decide matters fairly. Most are very aware of where their business comes from—the party requiring the arbitration clause. That means they tend to favor the people sponsoring them. Quelle surprise.
This is an interesting case where a court found the process itself unfair. And the article questions whether the court had the authority to do that. It's a good point and inspires me to hate arbitration even more. The process is fundamentally unfair the outcomes are often unjust.
- Heather Bussing
California Appellate Decision Raises New Considerations for Arbitration Agreements
by Ron Chapman Jr., Alexander Chemers, and Zachary Zagger
A California appellate court recently denied a motion to compel arbitration, finding the agreement unconscionable in part because it (1) applied to all claims rather than just those arising from employment, (2) was unlimited in duration, and (3) lacked mutuality by requiring the employee to arbitrate claims against the employer’s affiliates and agents but not requiring those parties to arbitrate claims against the employee. Such provisions are common in arbitration agreements, and the court’s decision is highly questionable in light of prior decisions from the Supreme Court of the United States and other courts. Nonetheless, in light of this new ruling, employers with arbitration agreements, especially in California, may want to update their agreements.
Quick Hits
- A California appellate court refused to enforce an employment arbitration agreement after finding three common provisions were unconscionable.
- The ruling raises new considerations for employers that want enforceable arbitration agreements, especially in California, and such employers may want to update their agreements.
On May 24, 2024, the California Second District Court of Appeal affirmed a lower court’s decision refusing to enforce an arbitration agreement. The appellate court took issue with common provisions pertaining to the scope of claims covered by the agreement, the duration of the agreement, and the parties covered by the agreement. Specifically, the appellate court found three provisions in the arbitration agreement to be unconscionable:
- Scope—The agreement provided that the parties would arbitrate “all claims, whether or not arising out of [employee’s] employment” (emphasis added). The court labeled such language “unconscionably broad.”
- Duration—The arbitration stated that it “shall survive the termination of [e]mployee’s employment, and may only be revoked or modified in a written document that expressly refers to the ‘Agreement to Arbitrate Claims’ and is signed by” the employer’s president (emphasis added). The court found this provision gave the agreement an “infinite duration” and was unconscionable.
- Mutuality—The agreement applied to all claims the employee may have against the employer “or any of its related entities,” including other employees and the employer’s administrators, officers, and agents, “and all claims that the [employer] may have against [e]mployee” (emphasis added). The court found this provision one-sided because it required the employee to arbitrate claims against the employer and its related entities but required only the employer and not the related entities to arbitrate claims against the employee.
The appellate court found these terms unconscionable without citing any controlling authority. The court also refused to sever them from the agreement, concluding that the unconscionability “permeated” the agreement and could not be cured.
Notably, the appellate court reached these conclusions without including in its discussion whether the findings of unconscionability and the refusal to sever the provisions at issue complied with the Federal Arbitration Act (FAA). That statute requires states to treat arbitration agreements the same as other contracts, but the court did not even mention, much less address, the FAA or precedent interpreting the FAA.
The case is one of several recent California court decisions that have been skeptical of employment arbitration agreements, including a July 2024 decision by the Supreme Court of California that provides courts with discretion to refuse to enforce agreements even if only one term is found to be unlawful.
Key Takeaways
The California Court of Appeal concluded three provisions in this arbitration agreement addressing scope, duration, and mutuality, which are similar to provisions in many other agreements, were unconscionable as written. In light of this new development, employers with arbitration agreements, especially in California, may want to update their agreements.
