By Kate McGuinness
Published in Forbes, July 23, 2012.
This is a guest post by author and lawyer Kate McGuinness with a little input by Victoria Pynchon who is a commercial arbitrator with the American Arbitration Association.
Venture capital firm Kleiner Perkins Caufield & Byers suffered a major defeat on Friday when a judge ruled that sexual discrimination claims by Ellen Pao could be litigated in open court.
The judge had ruled against the firm on the same issue earlier this month, but agreed to a re-hearing.
With two strikes against it, Kleiner’s affairs will now be subject to public scrutiny unless an appeals court accepts its arguments to compel arbitration.
Why Not Arbitration?
Arbitration is a process of resolving disputes in which a neutral third party (typically a seasoned attorney or retired judge) hears both sides’ evidence and decides the outcome. Arbitration is typically binding, meaning that the loser can’t appeal.
The standard arguments in favor of arbitration are speed and decreased expense. Because it lacks the formality of a courtroom trial, it is typically less expensive for all parties. Also, it avoids courts’ backlogs and can be scheduled more quickly.
Kleiner’s desperate attempt to force Ms. Pao into arbitration demonstrates the process’ less obvious benefit: privacy.
The complaint Ms. Pao filed publicly with the San Francisco Superior Court has already embarrassed the white shoe firm with it allegations of improper sexual conduct. But the subject most dear to financiers is money.
A hearing of Ms. Pao’s claims will entail detailed disclosure of Kleiner’s finances because she alleges she was denied investment opportunities. That makes Kleiner’s investments relevant to Pao’s claims and hence potentially admissible in evidence and open to pubic view.
The potential damage these revelations might cause may tip the scales in favor of a generous settlement.
Should You Agree to Arbitrate?
If you’re offered an employment contract, read it carefully. Arbitration clauses are often buried at the end of the contracts along with other boilerplate terms that too many people skip over. An arbitration agreement is a commercial pre-nup and no one wants to believe the “marriage” will end badly.
If your employer has contemplated a separation in which it might be sued, however, you should too.
Signing an employment agreement containing an arbitration clause without negotiating its terms is not the only trap for the unwary. You might unwittingly agree to arbitrate if you sign a form stating that you’ve read the employee handbook and accept its provisions. Many employers include the employee’s obligation to arbitrate claims only in that handbook.
You may risk losing your job offer if you ask to have the arbitration provision deleted.
If you’re already an employee and are presented with an arbitration agreement that you refuse to sign, you may be fired if you’re an employee at will.
Ask for Protections
If you’re presented with an arbitration agreement and have the power to negotiate its terms, the following provisions will help you should a dispute occur.
Because the credentials and connections of the arbitrator are key, ask your employer to include a clause requiring disclosure of any interest or relationship he or she has with the employer.
Almost all arbitration tribunals require its arbitrators to disclose conflicts, so this is a bit of a belt-and-suspenders approach. Nevertheless, it’s a good place to begin your negotiation because it shows your employer that you are savvy.
There’s no reason not to include such a provision, so it’s a good way to open the clause up to negotiation. Once you’ve got agreement on one point, it’s far easier for both parties to take a closer look at the boilerplate and tailor it for the particular needs of this particular employment.
Asking your employer to specify that each side should have the right to disqualify at least one arbitrator suggested by the other without specifying a reason is another provision that shouldn’t raise any alarm bells. Now you’re establishing a series of “yeses” to the clause that will make it more difficult for your employer to say “no” when the requests begin to appear to favor you.
How Many Arbitrators Should Dance on the Head of the Pin?
Too many boilerplate arbitration clauses require a three-arbitrator panel.
Each one of those arbitrators is going to charge the parties an hourly fee somewhere between $250 and $550 per hour. If the agreement requires the employer to foot the cost of arbitration, here’s where you can do your prospective boss a favor.
I know you’d have to pay the costs of arbitration. Neither one of us expects we’ll have a dispute so serious we’d have to ask help from the AAA but let’s limit the damage upfront by requiring only one arbitrator, not three.
The employer should bear all costs of the arbitration and in some jurisdictions, like California, the arbitration clause must require the employer to pay all arbitration expenses or the arbitration provision will be thrown out of Court as enforceable. This is because most arbitration clauses are considered to be “adhesion” contracts – i.e., contracts offered on a take it or leave it basis and are therefore subject to challenge on the basis that they’re inherently unfair to the party with the least bargaining power.
The relief you can receive should not be limited. If appropriate, you should be entitled to seek punitive damages for egregious conduct by your employer and damages for emotional distress. Ask your employer to include a provision in the arbitration clause permitting both parties to seek any and all relief that you would each be permitted to seek in a Court of law.
Be aware that there’s likely another clause in the contract about the losing party’s obligation to pay the winning party’s attorney’s fees. Talk to your employer about this provision. Does he really want to pay you your attorneys fees if you prevail? Do you really want to pay his? In many employment cases, the attorneys’ fees exceed the total amount of the award.
There are “up” and “down” sides to having this provision in your contract. You should consult your advisors or attorneys before you sign off an agreement that contains such a clause.
Do not give up your right to an attorney. Ask your employer to specifically provide that all parties may be represented by an attorney of their own choosing if arbitration proceedings become necessary.
Just because you’re entitled to have counsel represent you does not mean you’ll be permitted to seek reimbursement for the fees you pay that attorney in the event you prevail in an employment arbitration. See the last heading for advice on the negotiation of that provision.
All Is Not Lost
If you sign an arbitration agreement, you still have rights with governmental agencies. If, like Ms. Pao, you believe you’ve been discriminated against because of your gender, you can complain to the Equal Employment Opportunity Commission.
If they agree, they can sue your employer on your behalf notwithstanding your arbitration agreement.
Doctors, hospitals and manufacturers have also embraced arbitration. Fortunately, your power to refuse is greater in these situations. Read carefully any form you’re requested to sign. Be prepared to negotiate.
If you’re afraid that commencing a negotiation over the arbitration clause will result in a withdrawn job offer, ask your prospective employer whether the arbitration terms can be negotiated. Your bargaining power will never be as strong as the moment your employer decides it wants to hire you.
Often, your employer hasn’t thought of the “down” sides of arbitration clauses itself, having relied on its own attorneys to draft a clause that could come back to bite it or could engage it in lengthy court proceedings if an employee challenges the employer’s right to force its employees into arbitration.
Your new employment should be the beginning of a beautiful relationship. If you assert yourself from the first, you’ll have an easier time negotiating all other conditions of your employment down the line.
Kate McGuinness is a former BigLaw and major media attorney whose novel Terminal Ambition weaves its mystery around a sexual harassment complaint in a BigLaw firm.