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The Last Word

What you need to know about arbitration clauses in employment contracts.

The Last Word
Arbitration is not always cheaper than a court proceeding.

Many practice owners require associate veterinarians to sign employment agreements that include arbitration provisions. One reason is that arbitration is generally touted as a good way for an employer to avoid the financial risk associated with taking litigation to a jury trial.

That said, arbitration is not always cheaper than a court proceeding and not all arbitration clauses are created equal. Employers need to choose the terms of arbitration thoughtfully with an eye to satisfying the requirements in their state and the commercial rules of the American Arbitration Association.

Whether you’re about to sign an employment agreement that contains arbitration provisions or you’re looking to review those you have in place, here are a few things to consider.

The Advantages

When used to resolve a dispute, arbitration is private. The public is not allowed to attend the hearing, and the final award is not readily known to outsiders. Second, arbitration offers more procedural flexibility because of rules that are geared toward a quick and efficient resolution. Third, the parties are free in many cases to choose an arbitrator who has industry-specific knowledge.

All these benefits exist only if both parties agree to arbitrate and neither one contests the enforceability of the arbitration agreement.

Challenges

It should be no surprise that practice owners might prefer to resolve employment disputes during confidential arbitration and that disgruntled employees might want to take their chances before a jury. That’s because court action is open to the public and can garner publicity that an employee might leverage regardless of the merits of a claim.

What makes sense for a practice owner is to carefully draft arbitration clauses that include a jury waiver. Doing this often thwarts challenges to their validity. Practice owners need to ask themselves:

  • Is the agreement clearly understood and signed by both parties, or is the clause tucked into fine print at the back of a lengthy employee manual?
  • Is the arbitration provision easy to understand?
  • Does the provision adequately explain its scope and the procedures to which the parties agree?

When answering those questions, keep in mind the adage “The best defense is a good offense.” Make sure the form and terms of the arbitration agreement are consistent with judicial precedents in your state. Otherwise, you run the risk of the agreement being declared unenforceable.

Emergency Relief

Unbeknownst to many veterinarians and practice owners, the appointment of an arbitrator sometimes takes weeks. This is problematic when the parties need immediate emergent relief. To avoid the courts, many arbitration provisions include optional emergency procedures. Specifically, the American Arbitration Association’s optional Rule 38 allows the parties to request an emergency arbitrator (EA), who will be appointed within one business day.

One benefit of Rule 38 is that it eliminates the need to proceed both in court and before an arbitrator when emergent relief is required. Also, the standard to obtain emergency relief is lower before an EA. An EA might issue emergency relief when “immediate and irreparable loss or damage” will result without it. In contrast, courts typically require a party to demonstrate a “likelihood of ultimate success on its claims.”

Unexpected Costs

When adopting an arbitration clause, consider whether you are prepared to entrust a potential dispute to a single arbitrator or whether you would prefer a panel of arbitrators, typically three of them. In the context of employment disputes, the employer often is concerned that a single arbitrator will be sympathetic to the proverbial David, whereas a panel might be more balanced and dispense with the David and Goliath comparison altogether.

Nevertheless, three heads are not always better than one. Unlike a court, which is funded by tax dollars, both parties must pay the arbitrators and absorb the forum fees. One party might be ordered to pay the other’s legal fees and costs, but until such a decision is made, the two sides are equally responsible unless the employment agreement states otherwise. The expense mounts quickly with three arbitrators. Not every dispute calls for a panel of arbitrators.

What’s also important to consider is what happens if one party, typically the associate veterinarian, does not pay his or her arbitration fees. In an American Arbitration Association case, the AAA informs both parties that one side may advance the required payment on behalf of the other. If no payment is made, the arbitrator may suspend or terminate the proceedings. Such a decision does not necessarily mean victory for the financially responsible side. The party in arrears can still march into court and assert a lack of financial wherewithal to arbitrate. The only way to avoid this outcome is for the other side to pay all the fees.

On the upside, if a practice owner pays the employee’s fees, the business may request that the arbitrator order specific measures, including dismissal of the employee’s claim and the awarding of fees paid on his or her behalf. The arbitrator cannot bar a non-paying party from defending a claim or counterclaim.

The Award

Judicial review of an arbitration award is extraordinarily narrow. Under Section 10(a) of the Federal Arbitration Act, the model for most state arbitration laws, an arbitration award may be overturned only if it is the product of “corruption, fraud or undue means,” “evident partiality” or “misconduct” on the part of the arbitrators, or when the arbitrators “exceeded their powers” or failed to render a “definite award.”

Federal law favors finality, so courts rarely disturb an arbitrator’s decision. The U.S. Supreme Court has backed this up. Before opting for arbitration, know that you likely will have to live with the award whether it’s good, bad or ugly.

Legal Lingo columnist Peter H. Tanella chairs Mandelbaum Salsburg’s National Veterinary Law Center. He has advised hundreds of veterinarians on practice acquisitions, sales, mergers, partnerships, joint ventures and associate buy-ins, the structuring of management service organizations, and the development of practice succession strategies. He can be emailed at [email protected]. Mandelbaum Salsburg partner Lauren X. Topelsohn, JD, contributed to this article.


THE TRUTH ABOUT ARBITRATION

Myth: An arbitration clause in an employment agreement bars certain employee claims against an employer.

Fact: Employees who sign an arbitration clause retain the right to all the claims they would have during court litigation. The employee merely agrees to assert those claims in a venue outside of a court of law.

Myth: By entering into an employment agreement that contains an arbitration clause, employees sign away their legal rights.

Fact: Arbitration is a legal remedy that provides both parties with an objective and fair forum for resolving a dispute. Employees who sign an arbitration clause may be represented by counsel.

Myth: Arbitration limits the damages a party can be awarded.

Fact: Damage awards are not limited in arbitration except when required by state law. Courts routinely invalidate arbitration agreements that limit awards. Monetary awards received through arbitration do not differ greatly from those in court cases.

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