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Study shows 'snowballing futility' for workers in arbitration cases

5/5/2008

Jan Dennis, Business & Law Editor
217-333-0568; jdennis@illinois.edu

Michael Leroy
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Michael LeRoy, an Illinois law and labor expert, examined federal and court rulings on arbitration awards for job-related disagreements. The study showed a disparity between federal and state courts in judging the arbitration cases.

CHAMPAIGN, Ill. — A hodge-podge of state laws has created legal land mines that are blowing away a disproportionate share of awards handed to employees in arbitration cases against their employers, according to a new University of Illinois study.

Labor law professor Michael LeRoy says his research reflects a disturbing trend of “snowballing futility” for the estimated 20 percent of U.S. workers whose only outlet to resolve workplace disputes is through arbitration, not the courts.

“It’s a travesty of justice,” LeRoy said of the findings, which will appear in the Minnesota Law Review. “It’s not the way the system is supposed to work.”

LeRoy examined 443 federal and state court rulings on arbitration awards from 1975 to 2007, covering job-related disagreements such as unjust dismissal, race discrimination, sexual harassment and health-insurance claims.

The study found that federal courts generally rule with an even hand. Federal district courts upheld 92.7 percent of employee awards and 92.2 percent of employer wins; federal appeal courts backed 85 percent of employee victories and 85.7 percent of employer judgments.

State courts, though, give employers a wide edge. State appeals courts backed 86.7 percent of employer wins compared with 56.4 percent for employees. Lower state courts sided with 87.2 percent of employer wins, compared with 77.6 for employees.

LeRoy blames the disparity on differing standards used by federal and state courts to judge arbitration cases, which have grown since a 1991 U.S. Supreme Court allowing employers to require arbitration instead of court to settle disputes with workers.

Federal courts base their review on the Federal Arbitration Act, which provides narrow standards for overturning awards such as evidence that an arbitrator was bribed or displayed misconduct during the hearing, LeRoy said.

Meanwhile, he says state courts can vacate awards based on a myriad of broader standards enacted by state legislatures, ranging from tight filing deadlines for claims to strict conflict-of-interest disclosure requirements for arbitrators.

“If you set up enough tripwires, no arbitrator is agile enough to avoid all of them,” LeRoy said.

He contends employers study state laws to find loopholes then “venue shop,” taking their appeals to courts that are more likely to overturn awards handed to employees in arbitration.

“At the end of the day, what my research is showing is that employers are reading across a wide spectrum of state laws and looking for a statute that the arbitrator overlooked, ignored or didn’t incorporate into the award,” LeRoy said.

“Employers also have the benefit of the ‘repeat player effect.’ The employee is a one-shot player, but the employer is in this regularly. So even when they lose, they learn every time they lose and use that principal to invalidate another award,” he said.

LeRoy says judicial review is becoming an insurance program that protects employers from costly awards. Meanwhile, he says it creates a “moral hazard,” leaving employees with little recourse when awards are vacated.

Some give up and drop the case, while others go back to arbitration, racking up legal fees they may never recover, LeRoy said.

“My research shows disaster cases where the parties are in their third or fourth arbitration,” he said. “That’s a tremendous perversion of the process. It’s supposed to be less time consuming and costly than court. But I literally have cases that are running for 10 or 12 years.”

 LeRoy says the solution is requiring both federal and state courts to follow the narrower standards of the Federal Arbitration Act, which he says was intended to create a single set of rules for the nation. But he doubts the notion will fly, with so much money at stake for business and ongoing political battles between Republicans, who back arbitration, and Democrats, who don’t.

“I think it’s a classic pie-in-the-sky solution,” he said. “It’s a common-sense solution, so therefore it probably won’t happen.”

Editor’s note: To contact Michael LeRoy, call 217-244-4092; m-leroy@illinois.edu.