I’m not a big fan of mandatory arbitration clauses in contracts: Although arbitration is likely to proceed more quickly than litigation (other than small-claims cases), it is not necessarily less expensive. However, I recently saw an arbitration clause that I like quite a bit.

Linden Research, Inc., developer of the Second Life multi-user online service, includes the following in its Terms of Service (emphasis added):

Our goal is to provide you with a neutral and cost-effective means of resolving the dispute quickly.

Thus, for any claim related to this Agreement or our Service, excluding claims for injunctive or other equitable relief, where the total amount sought is less than ten thousand U.S. Dollars ($10,000.00 USD), either we or you may elect at any point in or during a dispute or proceeding to resolve the claim through binding non-appearance-based arbitration. A party electing arbitration shall initiate it through an established alternative dispute resolution (“ADR”) provider mutually agreed upon by the parties. The ADR provider and the parties must comply with the following rules: (a) the arbitration shall be conducted, at the option of the party seeking relief, by telephone, online, or based solely on written submissions; (b) the arbitration shall not involve any personal appearance by the parties or witnesses unless otherwise mutually agreed by the parties; and (c) any judgment on the award rendered by the arbitrator may be entered in any court of competent jurisdiction.

By allowing for arbitration to proceed without personal appearances, based on telephone, online or written submissions, these provisions make it highly likely arbitration will be quick and cost-effective – an outcome that anyone should welcome.

Related post: Which Protections Should be Included in Online Terms of Use?

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A recent court decision held that an employee in California has the right to file a wage claim and to have a hearing on that claim before the Labor Commissioner, even if the employee has signed an arbitration agreement.

In California, employees who are not paid what they are owed can file wage claims (see Wage Claims – Nasty but [Sometimes] Necessary). Because the employee need not retain legal counsel, and because the Labor Commissioner may help the employee, a wage-claim hearing provides to the employee benefits and leverage that are not available in other venues, such as litigation or arbitration.

Some employers, in the interest of reducing their exposure, require that employees agree to arbitration of all employment-related clams. (See Arbitrating Employment Disputes: Pro and Con.) In Sonic-Calabasas A v. Moreno, the California Supreme Court decided that an employee has a right to a wage-claim hearing despite an arbitration provision. Specifically, the court held that:

• A provision in an arbitration agreement that the employee enters into as a condition of employment requiring waiver of wage-claim hearings is contrary to public policy and unconscionable.
• However, the appeal from such a hearing may be made, pursuant to a valid arbitration agreement, in front of an arbitrator rather than in court.

The significance of this case for employers: Pay employees what they are owed – you don’t want to be defending a legitimate wage claim.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

The client pointed out, however, a conflict between the PIIA and the existing Employee Handbook: The PIIA states that any dispute will be resolved in state or federal court in San Francisco, but the Handbook states that all employment disputes will be subject to arbitration. The client asked me how this conflict should be resolved.

Why arbitrate?

Arbitration is a private alternative to traditional court litigation in which the parties present their arguments to, and a decision is made by, a neutral arbitrator.

Companies choose to arbitrate employment disputes because, in contrast to court cases:

• The proceedings and record are not open to the public, so privacy is maintained.
• An arbitrator is unlikely to succumb to emotional arguments that could lead a jury to award excessive damages to a successful plaintiff-employee.

These considerations tend to make arbitration particularly attractive to well-known companies in consumer-facing industries.

Why not?

There are, however, countervailing factors – some of which are specific to employment disputes in California (see, e.g., Armendariz, et al. v. Foundation Health Psychare Services, Inc., 24 Cal.4th 83 [2000]) – that can make arbitration unattractive. For example:

• The employer must pay arbitration fees to the extent that they exceed filing fees for a court case, typically at a rate of several thousand dollars per day. This means that at the outset of the arbitration, the employer is in a financially disadvantageous, rather than neutral, position.
• If the employee has a case without merit, a full arbitration hearing is likely to take place, whereas in court the matter might be dismissed in a pre-trial motion. Particularly given the preceding point, this means that employees with weak or spurious claims have inordinate negotiating leverage against the employer.
• There is no right to appeal an adverse decision except in limited circumstances such as corruption, fraud, misconduct or the arbitrator’s exceeding his or her powers. This means that if the arbitrator does not properly understand an issue in dispute or otherwise makes a mistake, the arbitrator’s decision, nevertheless, will be final.
• Virtually all employment-related disputes must be submitted to arbitration. This means that if the arbitration provision makes any exception for which arbitration is not required, then the employee may be able to reject arbitration entirely.

This last point can be a show-stopper for technology companies, because protection of intellectual property (IP) is crucial. If there is a breach of confidentiality or misappropriation of IP, companies typically seek – and a dispute often is resolved after – prompt issuance of an injunction or other equitable relief.

Arbitrating this type of dispute will be too time-consuming to meet the employer’s needs. Thus if a California company wants to take certain employment disputes to court, then as a practical matter the company needs to give up arbitration completely.

Accordingly, I made the following recommendation, which the client accepted: Protecting intellectual property is essential, so the arbitration provision should be removed from the Employee Handbook.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.