Arbitration “Not Fair” in Discrimination Cases, Argues Top Attorney: Updated

Cliff Palefsky is widely recognized by attorneys and academics alike as one of the best employment and civil rights attorneys in the country. As such, I’ve been hoping to glean some of his thoughts about the gender discrimination suit currently facing Kleiner Perkins and the venture firm’s ongoing efforts to move the case into arbitration.

Reached earlier today, Palefsky, who is based in San Francisco, wouldn’t address the case directly. But he agreed to share his thoughts about arbitration agreements generally, their growing ubiquity, and why in many cases, he thinks they border on scandalous.

Part of that conversation, edited for length, follows:

One of the major driving forces of arbitration agreements is confidentiality, correct?

It’s a selling point. I’m surprised it’s taken so long for the media to understand that [arbitration agreements] are an assault on the public’s right to know what’s going on in the public justice system. It really is about keeping things away from the media in many cases.

But do you see the need for arbitration agreements in some situations? It’s hard to imagine the venture capital world without them, for example.

In the venture world, [VCs] are generally more sophisticated people and there may be legitimate reasons for partners to arbitrate contract issues. But when you’re talking about the arbitration of statutory claims [including direct and indirect discrimination], those are not private matters if they involve public policy matters. The public has the right to make sure laws are being enforced.

Legally or ethically speaking? In some cases, even discrimination allegations can be ruled on by an arbitrator, can’t they?

Yes. Many contracts only require arbitration [for issues] “arising out” of the contract, so if it’s a statutory discrimination case, it doesn’t arise out of the contract. But people do write clauses that are much broader [and include the language] “arising out of or relating to,” in which case, some of those arbitration claims do cover statutory issues, per the [1991 U.S. Supreme Court ruling in Gilmer v. Interstate/Johnson Lane].

That’s alarming, considering that employees seldom have any leverage when signing these contracts.

Worse, most people also don’t know that arbitrators aren’t required to know or follow the law. You can try a case for a month and an arbitrator can flip a coin and assign a million dollar award or dismiss a case. They don’t have to explain their rationale, and even if they explain that “Here is my interpretation of the law,’ and it’s dead wrong, you can’t appeal based on an error of law.

A 1992 California Supreme Court ruling said that an arbitration award has to be confirmed even if there are errors of fact or law that result in a substantial injustice to the parties. You can’t appeal. People don’t realize that. It’s not a legal system.

So it was in the early ‘90s when companies started forcing employees to sign these agreements?

Prior to about 1991, you weren’t allowed to arbitrate discrimination claims. The law said, these are too important; arbitrators aren’t equipped. It took management lawyers a while to convince their clients that arbitration was a good idea for them, because their experience was only in the labor union context and they didn’t like the notion of labor arbitrators being able to reinstate somebody or tell them what to do.

But lawyers started pointing out that, “Hey, you’re getting killed by sexual discrimination cases; look what the securities industry has been able to do with mandatory arbitration, where discrimination cases are being thrown out left and right by arbitrators.” So they were using examples from the securities industry.

But arbitration is also cheaper, faster…

[Companies] are not doing it because it’s cheaper. Arbitrators don’t award punitive damages. And discovery is limited. It’s why no one talks about tort reform anymore [to reduce litigation and damages]. They don’t need to. We now have do-it-yourself tort reform. The statistics indicate they win more often and pay less when they lose.

It’s also not a justice system when the arbitrator is getting paid by the parties, and their future compensation is based on the satisfaction of the repeat player. And there are plenty of statistics to show [that this happens].

I’ve been told that California judges strike down a fair number of these arbitration agreements.

I’ve argued six cases before the California Supreme Court and that was has been largely true. California courts have been very good at making sure that agreements are fair by enforcing California laws against unconscionable agreements and throwing out many clauses that aren’t fair.

I know you don’t want to specifically comment on the Kleiner case, but generally, is it safe to say you don’t think a case of its nature should be arbitrated?

I really don’t want to comment about that case. I will say I have concerns about any discrimination case being sent to arbitration without the knowing and voluntary consent of the victim. I think arbitration can work well when there’s a voluntary agreement to arbitrate a breach of contract case between people on equal footing. I don’t think it’s fair in cases where you need more discovery or you need to prove someone’s state of mind.

Statistics bear out that arbitrators are peacemakers and problem solvers and that they resist accusing someone of discrimination. Arbitrators require a much higher burden of proof than juries before they’re willing to sign a document that accuses someone of discrimination. Also, there’s a well documented deterrent effect when these cases are made public. Already, everyone in the venture capital world is likely looking at [revising] their practices and policies and saying in some cases, “We don’t have enough women and there’s no way to justify that.”

The deterrent effect is huge, and the reality is that one public case can do more than 100 arbitration awards that no one will know about.

Update: This post originally included mention of Kleiner Perkins in its title. It’s been taken out to make clearer that Palefsky was not addressing the Kleiner case but speaking generally about cases involving discrimination claims.

Photo: Courtesy of Law Dragon Magazine