Chapter 10

• Jurisdiction: United States

Chapter 10

The ADR Process

§ 10.01 Selection and Payment of Neutrals

This chapter considers a number of factors relating to the alternate dispute resolution process. It is concerned with private alternate dispute resolution only and does not speak to court annexed alternate dispute resolution procedures or processes that may be in effect for public employees. Unless otherwise noted, the chapter speaks solely to employees who are not in collective bargaining units represented by unions.

[1]—Selection

Once the parties to an alternate dispute resolution agreement find themselves in an actual dispute that will invoke the process, key concerns will include how the neutral will be chosen, what will be the costs incurred for the neutral, and who will bear the responsibility for paying the neutral. The employee and the employee’s counsel will often be at a disadvantage in neutral selection and compensation.

In alternate dispute resolution, employers may be characterized as “repeat players,” in that over time employers will encounter numerous cases and develop an experience base with arbitrator selection techniques and data. In contrast, employees will be “one shot players” who are unlikely to invoke alternate dispute resolution more than once in their tenure with a given employer. Unless plaintiff’s counsel specializes in employment law matters, counsel also is not likely to have as much data or experience to work with as defense counsel.¹

Faced with alternate dispute resolution, counsel will seek to find as much background information as possible about potential arbitrators in hopes of selecting an arbitrator more likely to be sympathetic to their side’s positions and, when possible, will want to develop personal relationships and influence with the cadre of possible arbitrators. Time and effort spent on research and interpersonal relationships will be far more economic for employers who will be able to use the end product over and over again. Employers and their counsel will also be able to use detailed accumulated experience with neutrals from prior cases.² In contrast, employees and their counsel may have relatively little time to acquire data.

While it is true that the FAA permits an award to be vacated when actual bias is shown,³ employers, who are usually the sole authors of the selection procedure used in alternate dispute resolution for employees who are not union represented, will naturally tend to choose selection techniques for neutrals that limit eligibility to those more likely to be favorable to employer positions. Arbitration procedures often require that the neutral be, or have been, a manager in the employer’s industry.⁴ Parties tend to select neutrals because they trust their knowledge and judgment about the field or industry in which the dispute develops.⁵ However, this presumes knowledge of an arbitrator or mediator’s background, information which is likely to be more difficult for plaintiffs to obtain.

When the Supreme Court endorsed employment arbitration of statutory rights matters in 1991,⁶ it did so in a case involving the alternate dispute resolution procedures in use in the securities industry.⁷ The self–regulatory organizations in that industry have extensive and parallel codes of arbitration procedure which spell out how arbitrators are to be selected. The Code of Arbitration Procedure of the National Association of Securities Dealers sends claims of $10,000 or less to arbitration panels of no fewer than one and no more than three arbitrators, all of whom must be from within the securities industry.⁸ Claims ranging from $10,001 to $30,000 go to a single arbitrator who must be from the securities industry. Larger claims go to a three member panel with the identical requirement that all members be from within the industry.⁹

The Supreme Court was satisfied with the securities industry alternate dispute resolution scheme because the rules required that the parties be informed of the employment history of the arbitrators and that they be allowed to make further inquiries into their backgrounds. Each party was allowed one preemptory challenge, unlimited challenges for cause, and arbitrators were required to disclose circumstances which might preclude them from providing objective and impartial determinations.¹⁰

There have been claims that the character of the pool of neutrals in and out of the securities industry carries a potential of bias. The General Accounting Office has found that in employment discrimination cases within the securities industry, most arbitrators were white, male, and averaged 60 years of age.¹¹ However, a plaintiff attacking arbitration under American Arbitration Association rules with a claim that the panels were unfairly stacked with management employment lawyers, had too many white men, were not a cross section of society, and that the Association was biased because it received substantial contributions from employers, was rebuffed in court.¹²

The Sixth Circuit, in dicta, has expressed concern over the potential for bias when a third-party neutral service, which might be a for profit organization, has a large role in determining the pool of potential arbitrators and receives repeat business through its contracts with employers. The court referenced the employee’s right to have a neutral arbitration forum. However, the case was not decided on this issue.¹³

Selection of mediators raise many of the same questions discussed above which relate to arbitrators, except that the consequences for employees of ineffective mediator selection are less glaring. Certainly the selection of an appropriate mediator should also involve examination of the mediator’s experience, interpersonal skills, style, and knowledge and here too the employer as a repeat player is at an advantage. However, the consequences of selecting a mediator are not as severe as those of selecting an arbitrator as the parties are free to ignore or resist a mediator’s suggestions. Parties who want mediation to work should put considerable effort into researching and selecting a mediator. For example, parties should decide whether they want a mediator who will facilitate or one who will make recommendations and suggestions.

[2]—Payment

Who will pay the cost of private alternate dispute resolution when a third-party neutral is to be utilized? Traditionally, for union represented employees, collectively bargained agreements divide the cost of arbitration equally between the two sides, the employer and the union. But in the labor–management context, the union shares with the employer the characteristic of being an institutional body with institutional resources.¹⁴ In employment alternate dispute resolution outside collective bargaining, the author finds two basic conflicting approaches to the question of who pays. The first approach suggests that if the employer pays the entire cost of arbitration, as well as being a “repeat player,”¹⁵ arbitrators may be influenced in favor of the party paying the bills and the party likely to need their services in the future, the employer. The other view is that if the employee must pay half, or a substantial portion, of the cost of arbitration or mediation, the employee is being taxed and discouraged from using the process and a cost is being imposed on the employee that would not be imposed in litigation where the cost of the judge is paid by the taxpayers.

When arbitrations are conducted under American Arbitration Association Rules, those rules provide that the expenses of arbitration, including required travel and other expenses of the arbitrator, American Arbitration Association representatives, and witnesses, are to be shared equally by the parties, unless the parties agree otherwise or the arbitrator directs otherwise in the award.¹⁶ Under the rules of the National Association of Securities Dealers, arbitrators are limited to an honorarium of $150 per single session, $225 for a double session, $50 for travel to a cancelled hearing, and an additional $50 for chairing a panel.¹⁷ The American Arbitration Association cited $700 per day as the average fee for an arbitrator, while other organizations may charge from $400 to $600 per hour, and the average case may involve fifteen to 40 hours of arbitrator time, yielding arbitrator fee’s of between approximately $4,000 to $14,000.¹⁸ These costs do not include so called “forum costs” or administrative fees, nor, of course, do they include the cost of the employee’s own counsel.

In 1994, the Dunlop Commission noted a consensus view among employers and employees that arbitration must provide a fair method of cost sharing to ensure affordable access to the arbitration system for all employees.¹⁹ When an agreement to use alternate dispute resolution is made post–dispute or is entered into voluntarily, sharing of costs is not as controversial as it is when employees are required as a condition of employment, or continued employment, to submit their disputes to arbitration and, at the same time, required to pay all or part of the arbitrator’s fees.

Alternate dispute resolution is intended to be a reasonable substitute forum to judicial litigation and, at least for statutory claims, the Supreme Court validated pre–dispute arbitration agreements in the context of securities industry practices which do not require employees to pay the arbitrator’s fees.²⁰ Pointing out that employees do not pay for judges in litigation, the District of Columbia Circuit has found that the congressional conferral of statutory rights would be eroded if the beneficiaries of federal statutory rights could be compelled to pay for the services of an arbitrator to hear such matters as the substitute for litigation.²¹ Accordingly, the District of Columbia Circuit held that arbitration rules that require employees to participate in paying the arbitrator’s fees or costs are unenforceable.

The District of Columbia Circuit’s ruling that the employee cannot be required to...