April 1, 2001

Avoiding Lawsuits is a service of the employment law training and consulting firm of Counsel Consulting Group LLC and the law firm of Powell, Trachtman, Logan, Carrle & Lombardo, P.C.

EMPLOYEE LAWSUITS AND RUNAWAY JURIES - THE SUPREME COURT HELPS EMPLOYERS MANAGE THE RISKS

One of your employees files what you believe to be a bogus ADA/FMLA charge against your company. His lawyer, Hanover D. Muhnie, files a claim seeking $500,000 in damages, plus counsel fees. Mr. Muhnie contacts you, and asks if you would like to settle the case for a mere $75,000. "Absolutely not," you tell him, standing on principal. "Fine with me," he says. "Litigation will cost you at least $100,000 in counsel fees. When its all said and done, this case is going to end up before 12 jurors. You might win. But you might not. Those jurors will identify a lot more with an employee than an employer, and chances are that one or two of those jurors just might hate their employers enough to take it out on you, just for the heck of it. Did you read about the $1,000,000 sexual harassment verdict a jury awarded last week? That was mine. But you appear to be in a gambling mood. So I guess I'll see you in court."

Unfortunately, there's an underlying truth to Mr. Muhnie's sales pitch. Most jurors are, themselves, employees as opposed to employers; based on their personal experiences, many of them are distrustful of, or even hostile to, employers in general; and once in awhile, you get a runaway jury that wants to wreak havoc on all employers. Even if you fervently feel that you did nothing wrong, a case can be made that you ought to settle, rather than paying a lawyer $100,000 for the privilege of taking your chances. But that's a bitter pill that goes down real, real hard.

The Arbitration Alternative

Is there a way around all of this?

Some employers have tried signing up their employees to employment agreements that include a provision that requires all employment-related disputes to be privately arbitrated instead of litigated in court, before a jury. Arbitration costs a lot less - the right to take depositions is limited, and there are no appeals, which can save tens of thousands of dollars - and if the arbitration provision is properly drafted, the case will end up before an objective, neutral professional, which minimizes the risk of a verdict based on emotion and bias.

Employees have, understandably, fought these arbitration provisions. Their argument goes something like this. "I signed the agreement," they admit, "but as a matter of public policy the court should let me off the hook. The employer made me sign it. I didn't do it voluntarily. More important, the federal government guaranties me certain rights, like the right to be free from ADA and FMLA violations. If you violate my rights, the government says I can sue you in a federal court. You can't take away my basic rights by some mumbo-jumbo in an agreement I was forced to sign." Some judges have bought that argument, and some have not. More significantly, some state legislatures have bought the argument, and those states have passed statutes making these kinds of arbitration provisions illegal and unenforceable even if the employee knowingly and willingly agreed.

The upshot of this confusion has been this: when employers asked their lawyers if they could force employment-related disputes into arbitration, their lawyers could not give them a clear answer. But that all changed a couple of weeks ago.

The Circuit City Case

On March 21, 2001, the United States Supreme Court settled the issue, at least for now. A Circuit City employee signed an employment agreement with such an arbitration provision and then fought to get his case out of arbitration and before a jury. It eventually got to the Supreme Court, which seized upon the case as way to settle the arbitration issue. In a 5-4 decision, the Court ruled that a properly-drafted arbitration clause in an employment agreement must be enforced by the courts, even though the arbitration clause might circumvent the right to a jury trial pro-vided by the various federal employment laws, and even if the employee lives in a state that bars these kinds of contractual provisions.

The Circuit City case is monumentally important. Like Mr. Muhnie, for years plaintiffs' lawyers have been using the inherent risks of an employer going before a jury as a sword that could be used to extract a "nuisance" settlement. Employers often felt that they had no choice but to pay something to avoid the burdens and risks of a trial by jury. The proliferation of these "nuisance" settlements has had the effect of encouraging more employees to take their shot at easy money, creating an upward spiral of employment practices litigation, as almost all employers have become painfully aware. But for now - and there is always the possibility that Congress could step in and rewrite the law from the ground up - the balance has shifted. Employers have a come back. "Mr. Muhnie," you might say, "you and I both know that you do not have the evidence to prove your case. Were this a jury case, you might be able to overcome that deficiency by playing on the emotions of a jury, and that risk might cause me to settle. But you won't have that option here. This case will be decided by an objective, professional arbitrator. And he or she will see your case for what it is. See you in court." Cue the Battle Hymn of the Republic, as justice prevails.

What Does It All Mean For You?

In the face of the Circuit City case, our advice is this: all employers should, as soon as possible, carefully analyze how employment agreements with arbitration clauses could lower their employment practices liability risks. This is not a panacea, and it does not apply to every employer or every employee. But properly considered and applied, it is a preventive law device that could be worth hundreds of thousands of dollars in saved legal fees and damages. Here are some points to think about:

• In most jurisdictions, putting a paragraph in your personnel manual requiring that all disputes be arbitrated will not do the trick. It is not that easy. You will need an agreement, signed by the employer and the employee.
• To be effective, an arbitration clause has to be properly drafted. There are various permutations. Will arbitration apply to all disputes, or just certain types of disputes? How will the arbitrator be selected? What qualifications must the arbitrator have? Should there be just one arbitrator, or a panel of three? Will the loser be responsible for the costs? Should mediation be required before arbitration? What are the procedural rules that will apply to the proceedings? How quickly must the case be decided?
• Employment agreements can serve a variety of other purposes. They can be used to create incentives that will help you retain particularly valuable managerial employees. There are many forms of covenants that can protect you when a management employee threatens to leave and take information and customer lists to your competitors. Other provisions can protect trade secrets and intellectual property rights. Inexplicably, many employers have never considered using employment agreements for any purpose, and we think this is a major, strategic error. Use the Circuit City decision as a spur to look at the possibilities in a new light.

Avoiding lawsuits and liabilities is a tough business. You have to use all the arrows in your quiver. The Supreme Court has just handed employers some substantial leverage. We strongly urge you to use it. Contact us if you need assistance.

Powell, Trachtman, Logan, Carrle & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.

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