Arbitrating Employment Disputes: Pro and Con

I prepared a Proprietary Information and Invention Agreement (“PIIA”) to be signed by the employees of a small but established technology company in the Bay Area. The PIIA ensures that the company owns whatever employees create on the job, and it obligates employees not to disclose the company’s proprietary information to third parties.

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.

Related post: Employee Right to Wage Claim Hearing Trumps Arbitration Clause

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.