Nearly a decade ago, the notion of trading an unpredictable jury verdict and increasing costs and delay in the civil trial process for mandatory binding arbitration in discrimination cases sounded like a good idea to many California employers.

Seeking a simpler, less costly and speedier forum to resolve employment disputes, some non-union employers began including mandatory arbitration clauses in their employment agreements.

In mandatory arbitration, employers found the possibility of reining in expenses, shortening resolution times, eliminating the risk of an inflated jury verdict, and perhaps limiting remedies and recoverable damages.

But, in the intervening years, dozens of published federal and state cases have gone back and forth on the enforceability of employment arbitration provisions. Though it is far from clear that arbitration has failed as a viable alternative forum, it is plain that arbitration has judicially created bounds. Given these bounds, does arbitration still make sense today?

Serious interest in mandatory arbitration of employment disputes was sparked in 1991, when the U.S. Supreme court decided Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). In Gilmer, the high court enforced a compulsory arbitration provision in a securities registration application, foreclosing the plaintiff employee from pursuing a claim under the Age Discrimination in Employment Act (ADEA) in court. In making its ruling, the court relied on the "liberal federal policy" favoring the enforcement of arbitration agreements under the Federal Arbitration Act.

It was generally assumed that Gilmer had opened the door to widespread arbitration of statutory employment claims, but it turned out that assumption was not shared by the Ninth Circuit U.S. Court of Appeals. In Prudential Insurance Co. of America v. Lai, 42 F.3d 1299 (1994), the court held that Title VII claims were not subject to arbitration unless the employee "knowingly agreed" to arbitrate such claims. This required more than the employee's awareness that the employment agreement contained an arbitration provision. The employee must have knowingly agreed to relinquish his or her statutory remedies and to submit claims within the ambit of Title VII to arbitration.

While Prudential left open a remote possibility of arbitration statutory employment claims, four years later, the court closed it. In Duffield v. Roberston Stephens & Co., 144 F.3d 1182 (1998), the Ninth Circuit held that the 1991 amendments to Title VII evinced an intent against conditioning employment on the acceptance of a mandatory arbitration provision: "Employees may not be required, as a condition of employment, to waive their right to bring future Title VII claims in court." The circuit court also applied its analysis to California statutory claims under the state's Fair Employment and Housing Act.

Almost immediately, the California appellate courts began to reject Prudentials "knowingly agreed" standard and Duffields "not a condition of employment" prohibition with respect to California statutory claims under the FEHA (e.g., Lee v. Technology Integration Group, 69 Cal. App. 4th 1549 (1999); 24 Hour Fitness Inc. v. Superior Court (Munshaw), 66 Cal. App. 4th 1199 (1998)). In March, the California Supreme Court agreed to consider these and related issues in Armendariz v. Foundation Health Psychcare Services Inc., 68 Cal. App. 4th 374 (1998).

However, at the same time, the California courts have not hesitated to refuse to enforce particular arbitration provisions that they deem substantively unconscionable. As employers attempted to promulgate restrictions in the arbitration forum, the courts were unwilling to allow constraints that they perceived gave the employer an unfair advantage in its choice of forum. In Armendariz, for example, the court excised an arbitration provision that limited the employee's remedy for wrongful termination to back pay measured from the date of the arbitration. Similarly, in Stirlen v. Supercuts Inc., 51 Cal. App. 4th 1519 (1997), the court voided an arbitration provision that limited employees to breach-of-contract damages and precluded attorneys fees, but did not similarly limit the employer's remedies.

Meanwhile, legislators have entered the fray. Just last month, Assembly Judiciary Committee Chairwoman Sheila Kuehl introduced AB 858, a sweeping proposal to do away with pre-dispute, binding arbitration clauses in all employment and consumer contracts. Of course, it is too soon to predict whether Kuehl's bill will pass into law.

For the moment, then, a California employer has a good chance of having an arbitration agreement enforced in state court, provided it contains procedural and remedial rights substantially comparable to those the employee would otherwise have in civil setting.

In practice, the vast majority of non-union employers do not impose mandatory arbitration agreements on their employees. Most employers are too small, have few disputes that rise to the level of litigation, and maintain resources too modest to be targeted for litigation. For such employers, there is little incentive to change the status quo.

On the other hand, large, deep-pocket employers who face a steady stream of administrative discrimination charges and a number of litigation cases filed each year may wish to consider arbitration as an option.

In their analysis, such employers should keep in mind that arbitration has not evolved into all that was originally expected.

In the past, factors that traditionally weighed in favor of arbitration included cost savings, speed, fewer technical procedural rules and finality. However, today an arbitration can be a costly proposition for an employer. The courts disfavor arbitration agreements with fee-splitting arrangements. While a typical labor arbitrator charges less than $2,000 per day, arbitrators who are retired judge charge up to $6,000 per day. Thus, costs can easily exceed $20,000. Furthermore, because this forum is often "free" for employees, the risk of employees proceeding in pro per on frivolous claims also increases.

Nor is speed guaranteed these days. Usually, employers wait no less than six months to schedule an arbitration and often longer than that for highly regarded arbitrators. Arbitrations still provide a less procedurally technical forum, which can lead to reduced defense costs. However, the resolution of discovery disputes may still pose problems for both employer and employee because few arbitration agreements provide the same discovery structure as the civil setting. The trade-off for fewer technical discovery rules may also mean less employer control over a scorched-earth approach to discovery by the employee.

An employer should now consider three additional factors in deciding whether to adopt a policy of mandatory arbitration.

The first is the reluctance of the courts to enforce unilateral arbitration agreements that give the employer the option to sue.

In Gonzalez v. Hughes Employees Federal Credit Union, 70 Cal. App. 4th 468 (1999), the court of appeal voided an arbitration clause that, among other things, required employees to arbitrate virtually all employment claims, but allowed the employer to litigate unfair labor practices, unfair competition and trade secret claims. The court characterized the clause as allowing the employer, but not the employee, to seek judicial relief for "virtually all important employment matters." A unilateral arbitration provision was similarly voided in Stirlen.

Most companies considering the arbitration option should have no trouble trading away their access to the courts in a bilateral arbitration agreement. Few employers ever sue their employees or former employees on routine matters. In fact, an employee can embezzle, badmouth and even file frivolous claims against an employer with little fear of suit. Employers typically accept these negative actions as a risk and cost of doing business.

However, in highly competitive industries, such as computer technology, a bilateral requirement is unacceptable. Where an employee's conduct strikes at the employer's ability to compete – such as solicitation of employees, unfair business practices, or disclosure of trade secrets and proprietary information – an employer must take quick offensive action to protect its business interests. Speedy declaratory relief or injunctive relief against both the employee and the competing business is typically the only viable remedy.

Arbitration is woefully inadequate for such disputes, and an employer with a need to protect itself in this manner should not take the risk that the employee will seek to compel an arbitration agreement. An attempt could be made to bilaterally exclude such disputes from an arbitration agreement. However, since employers are almost always the parties that seek such relief, there is a risk that the bilateral exclusion could be deemed effectively a unilateral exception to arbitration.

The second factor that should be taken into account is whether the arbitration forum is adequately equipped to address complex legal and factual issues, which may eliminate or reduce an employer's liability.

Many arbitrators are solo practitioners, many work out of their homes, and few have the resources to conduct extensive legal research. Also, labor law arbitrations traditionally focus on the facts. Unless the parties stipulate or the arbitration rules provides for pre-hearing dispositive motions on questions of law, few arbitrators will rule on such motions before commencing evidentiary fact-finding. As a result, arbitration may not result in maximum cost containment because the employer must prepare the entire case, including its factual merits.

Furthermore, in the absence of unequivocal case law, arbitrators will not be inclined to rule in favor of employers. For example, before Foley v. Interactive Data Corp., 47 Cal. 3d 654 (1988), limited implied covenant claims to a breach-of-contract remedy, an arbitrator wold likely have followed Cleary v. American Airlines Inc., 111 Cal. App. 3d 443 (1980), and allowed tort remedies. Similarly, before Reno v. Baird, 18 Cal. 4th 640 (1998), limited an individual manager's liability in most discrimination cases, an arbitrator probably would not have dismissed such individual defendants. Thus, in pursuing arbitration, an employer must be prepared to rely less on legal defenses and attend more to a factual defense.

The third factor an employer should take into account is whether it is prepared to take its best shot in arbitration. Arbitration awards are rarely overturned, and the grounds for doing so are extremely limited.

For employers that simply want disputes resolved, arbitration provides finality. The trade-off for finality, however, is that arbitrators have more latitude to make fact-based decisions, using "fundamental fairness" as a guiding principle without fear of reversal on legal grounds.

In a desire to give something to both sides, arbitrators tend to "split the baby" in their awards. Thus, although employers who arbitrate eliminate the risk of a huge jury verdict, they also increase the likelihood that they will pay something, even for questionable claims.

Despite its limitations, arbitration can be effective for large or rapid-growth companies.

Though the process is slower, more expensive and more complicated than expected, it remains generally simpler and faster than a civil trial.

Arbitration works well for most discriminatory discharge, denial-of-promotion and sexual harassment claims, which account for over 50 percent of the statutory claims filed. With the exception of disability discrimination cases, these types of claims tend to be fact-intensive, turn on witnesses credibility, and for the most part involve well-established legal standards.

Arbitration also continues to be an important option for employers targeted because of their resources or those with high turnover and a desire to keep flexibility in their organizational structure. Otherwise, such targeted businesses may end up having to settle frivolous claims solely to avoid the significant costs of litigation.

For all its warts, arbitration speeds the dispute resolution process and protects both sides from unpredictable jury verdicts. Thus, for many non-union employers, arbitration continues to make sense.