Not Cheaper, Not Quicker: Pitfalls of Mandatory Arbitration

Alternative dispute resolution became all the rave for a cheaper and quick route to solve legal issues. Employers bought into the idea quite heavily under the misunderstanding that arbitration is faster, less formal, and less expensive than bringing a case to court. But, this may not always be true.

It is important for all parties to clearly think their options through before deciding what to do - just because arbitration is an available option does not mean it is always the best one. Take for example, the 11th Circuit Court of Appeals case Hernandez v. Acosta Tractors, Inc., No. 17-13057, 2018 WL 3761126 (11th Cir. Aug. 8, 2018). In that case, Julio Hernandez claimed that his employer, Acosta Tractors, failed to pay him overtime, and he brought an action in federal court under the Fair Labor Standards Act ("FLSA").  Acosta Tractors moved to dismiss the case because Mr. Hernandez signed an arbitration agreement. The judge agreed and dismissed Mr. Hernandez’s case in favor of arbitration.

Once in arbitration, things started to go poorly for Acosta Tractors. Mr. Hernandez was one of three employees who were arbitrating FLSA claims. Acosta Tractors asked the arbitrator to consolidate the three proceedings into one, but the arbitrator refused. Then, the arbitrator refused to limit discovery, resulting in the taking of 29 depositions in the three separate proceedings. 

It is important for parties to understand that an arbitrator is essentially a judge on retainer. Meaning that when they work on a case, arbitrators bill the parties for their work. And, if a third-party organization like the American Arbitration Association or Henning Mediation & Arbitration Service, Inc. is involved, they will charge for their work managing the case as well. Neither of these two costs are applicable in court proceedings.

Acosta Tractors soon received bills for administrative fees of over $100,000.00 for Mr. Hernandez’s case and the other two similar cases, much much more than the amounts in dispute for the claimants. Acosta Tractors refused to pay the arbitration fees, and then asked the federal judge to return the matter to court on the grounds that "the Arbitration of this matter has failed of its essential purpose."  The judge declined, ruling instead, that Acosta Tractor defaulted in arbitration, and thus was also in default in federal court.  The judge entered a default judgment in Mr. Hernandez’s favor in the amount of $7,293.00.

On appeal, the Eleventh Circuit reversed, finding that the trial judge should not have entered a default judgment based solely upon the failure to pay administrative fees in arbitration. Instead, the Eleventh Circuit directed the trial judge to determine whether Acosta Tractors “acted in bad faith in choosing not to pay its arbitration fees.”  The court noted that "[a] calculated choice to abandon arbitration after getting adverse rulings from the arbitrator certainly looks like forum shopping." 

In this case, Acosta Tractors was billed $25,875 in administrative fees on an overtime claim that was worth $7,293.00.  In the end, this is $18,582 Acosta Tractor could have saved by either settling the claim, or by keeping this FLSA case in federal court. This demonstrates that the decision to arbitrate a claim is not a guarantee that the arbitration will be less expensive than an action in court, or that it will be less onerous in the discovery stage.

The biggest lesson for employers to learn from Hernandezis the need to consider the cost of arbitration both when drafting agreements and in seeking to enforce them. Arbitration may be expensive for all parties, especially the employer who is usually on the hook for arbitrator and administrative fees. A carefully drafted arbitration agreement can include terms such as fee-sharing, limited discovery and right of appeal ensure that arbitration lives up to the ADR hype.