What is Arbitration and What is Alternative Dispute Resolution?

If you are signing up for a service, buying a big-ticket item, or are getting “onboarded” as an employee, you may be asked to sign a mandatory arbitration agreement. Sometimes this is a clause or provision within a larger contract or agreement, but it may also be its own separate agreement. Here’s what you need to know.

“Alternative dispute resolution” (ADR) refers to ways of resolving legal disputes outside the court system. The primary types of ADR are arbitration and mediation. The main difference between these is that arbitration is binding on the parties, where mediation is generally not binding.

How is arbitration different from a court of law?

Like a court case, an arbitration decision is legally binding on both parties. Unlike court, the process is generally private and confidential, usually quicker and less expensive, and generally does not allow for class actions. Also it is usually final and not open to appeal to a court or other entity. Thus it is usually more favorable to larger companies and institutions, and less favorable to employees or consumers.

Many companies prefer to require their employees and customers to submit any disputes to arbitration rather than the courts for many reasons (see below).

Thus, many employers include a “mandatory arbitration clause” in employment contracts, requiring employees, as a condition of getting or keeping a job, to agree that if they sue the employer in the future, they must do so through arbitration rather than through the courts. Over 50% of private sector non-union employees are now subject to arbitration clauses.

Many companies also include a mandatory arbitration clause in purchase or services agreements. This means if a consumer or customer has a problem with the goods or services, they can only sue through arbitration.

What’s more, companies usually go even further in these contracts to prohibit employees or consumers from joining together with others to sue as a “class” in a class action. This makes it much more difficult for the aggrieved employees or consumers to assert their rights.

It was thought that these “forced arbitration” and “forced class waiver” provisions might be unenforceable because they may contradict labor laws allowing employees to take collective action. But the Supreme Court has ruled that employers can force employees to agree to them.¹Epic Systems v. Lewis

Is there a way to opt out of an arbitration clause?

Often the contracts with arbitration clauses will include an opt-out option, which allows you to get out of the forced arbitration while still accepting the rest of the contract. The procedure is usually specified in the contract, and usually consists of sending a simple letter or email with a statement of opting out.

Under a mandatory arbitration agreement, can I still go to small claims court if the claim is small enough?

No.²Am Express Co. vs. Italian Colors Restaurant 133 S. Ct. 2304 (2013)

Why do employers like arbitration clauses?

Employers prefer arbitration over the court system because arbitration usually involves fewer costs and gets resolved more quickly, there is no jury, there is fewer opportunity for appeals, and because arbitration proceedings are generally private and confidential (unlike most court proceedings).

Many employers have used arbitration as a way to keep sexual harassment claims out of the public eye. This practice is getting increased scrutiny in the #MeToo era, and some companies are considering making some changes. As of February 2019, Google has now agreed to drop its mandatory arbitration for its employees.

What is mediation?

Mediation is essentially a negotiation between the parties of a dispute, with assistance from a “neutral” or “mediator.” The mediator attempts to get the parties to mutually agree on a resolution. Unlike arbitration or a court proceeding, it is not binding.

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