Employment lawyers can argue about the pros and cons of arbitration versus court cases all day long, but the “right” answer from a strategic perspective, and real driver as applied in any specific case (we are, after all, advocates for our clients’ positions), always depends on the circumstances at issue and side you are on. Generally, there is a positive correlation for company lawyers, and negative correlation for plaintiff-side lawyers, between sensitivity/risk and the desire to have arbitration. That is, with sensitive/risky matters (primarily defined as involving bad publicity that can damage the company or its executives, large dollars and/or the uncertainty involved in a “run away jury”), companies want to arbitrate and plaintiffs do not. In contrast are more “mundane” matters (ie. no risk of bad publicity and small damages), where companies and plaintiffs align more often in wanting arbitration.
Harder to predict is when there is a high level executive’s claims against a company. On the one hand, both the executive (who may him or herself be averse to negative publicity) and company (which does not want to air “dirty laundry” publicly) may both favor a more confidential arbitration process. On the other hand, there is a certain “brinksmanship,” pre-suit leverage on both sides when there is no arbitration clause, as it allows the executive to threaten a public lawsuit and, as a result, perhaps obtain a more favorable settlement. However, the company may not be as worried about a lawsuit because it knows that most executives do not want to sue, let alone publicly sue, because perceived as detrimental to their future career prospects. There are exceptions, of course, such as when a material amount (ie. “retirement money”) is at stake or the executive does not care about publicity or perhaps even affirmatively wants publicity given the principles at issue (reputation, fairness, etc.). Company tolerance for risk and uncertainty also play a role, as certain industries (such as in the private equity and VC worlds) generally have too much at stake to want to risk the publicity of a court action.
Two pending examples corroborate these points. Kleiner Perkins Caufield & Byers, LLC (“KPCB”) is a celebrated Silicon Valley venture capital firm with a “who’s who” of prominent investments across its funds (including Google, Facebook and Genentech). It currently finds itself fighting allegations of discrimination, harassment and retaliation by a female junior investment partner. When the junior partner filed a court case, KPCB immediately filed a motion to compel arbitration, alleging that the junior partner had signed various fund operating agreements to which it was a third party beneficiary. The trial court denied the motion to compel arbitration based on the fact that the junior partner had not signed an arbitration agreement with KPCB itself. On November 8, 2012, KPCB appealed the trial court’s decision.
Separate and apart from the merit or lack of merit of the allegations, KPCB has reason to aggressively pursue its arbitration arguments because, as a business matter, the last thing it wants to do is publicly air the internal workings of the firm, for example highly sensitive information such as investment returns, information about limited partner investors, or potentially embarrassing personal facts about the involved parties. In addition, if there is an ultimate judgment, it has reason to want to have the decision made by an experienced, “business reasonable” arbitrator rather than a less predictable jury. On the other hand, the junior partner has reason to aggressively pursue her right to file in court because of the amount at issue, principles involved, and/or possibility of a sympathetic, “run away jury” given KPCB’s deep pockets. Indeed, given what is at stake, determination of the arbitration motion will be a material strategic victory for the winner on appeal, to the point that, in our view, if KPCB loses the motion the prospects of an immediate settlement materially increase. Again, this has nothing to do with the merits of the lawsuit, and everything to do with the parties’ strategic considerations.
The second pending example concerns fallout from the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011). In that case, the Court held that the Federal Arbitration Act permits companies to require their customers to arbitrate their complaints individually, precluding class action claims. The force and effect of Concepcion on employment class action claims in California has been heavily litigated and debated, with review granted on September 19, 2012 by the California Supreme Court in Iskanian v. CLS Transportation Los Angeles, LLC (6/4/12) — Cal.App.4th —, an appellate decision that addresses this issue (including whether or not a Private Attorney General Act (PAGA) representative action can be waived in arbitration). Applying the above principles, companies who by virtue of their size, industry or other factors are at risk for class and collective action lawsuits, such as wage and hour class actions, should (and do) care deeply about this issue as such lawsuits by definition are sensitive/risky because of the dollars involved with large classes (and accompanying wage and hour damages/penalties). To do away with class and collective actions through the arbitration device is therefore a highly strategic company objective. On the other hand, the plaintiffs’ employment bar is vehemently opposed to class action waivers, also for strategic reasons, as class and collective actions have been highly lucrative to pursue and allow a more comprehensive, rather than piecemeal, remedy. Once again, these issues are driven by strategy around arbitration that is separate and apart from the merits.
In sum, the answer to the question as to whether or not arbitration is a good idea is: “it depends.” A second answer is that the particulars are well worth serious discussion given the strategic pros and cons that should be considered and materiality of the issue. Finally, for VCs and private equity funds who are asking, the answer is very likely “yes, and be careful to make sure that you use the right language and all of the relevant fund and operating company entities are covered.”
We regularly provide litigation and counseling/drafting advice on these issues, including strategic advice directed at our clients’ specific dynamics, needs and concerns. If you would like to discuss these issues further, or have any questions about this blog, please contact us.