A jury hit Tesla with damages of $137 million in a race discrimination case on October 4, 2021. The jury verdict is one of the largest employment discrimination verdicts in U.S. history. Although this result is certainly a cautionary tale for employers about the need to effectively enforce human resources policies and diligently monitor the work environment, the case also offers employers another opportunity for insight: is it time to revisit the use of mandatory arbitration agreements?

Owen Diaz sued Tesla alleging racial harassment at the Northern California Tesla plant where he worked. Diaz was actually employed by Tesla through a staffing company and claimed that Tesla employees subjected him to a racially offensive work environment, including derogatory images and swastikas. Diaz alleged that he faced repeated use of the n-word, daily racial epithets, and racist graffiti around the facility. Diaz claimed that he was forced to quit his job because he was subjected to such conduct and his repeated complaints to Tesla supervisors did nothing to stop the behavior from creating a hostile work environment. Some news reports indicate that based on this evidence, the jury deliberated for only four hours before delivering the massive verdict.

One significant reason that Diaz was even able to get his case in front of a jury is because he did not sign a mandatory arbitration agreement with Tesla, as apparently some other categories of employees did. In simple terms, arbitration agreements are used by employers to require that most legal claims that can be brought by employees against the company must be handled through a dispute resolution process, rather than in court. That process usually involves selecting a neutral third party arbitrator to hear the evidence. The arbitrator then issues a decision based on that evidence, which is binding on both parties.

The difference that an arbitration agreement can make is evident from Tesla’s experience in a separate case. A New York Times article described as many as 10 other claims of race discrimination that were filed against Tesla involving the same facility where Diaz worked. In one of those cases, decided in August of this year, Tesla reportedly lost an arbitration with one of its former employees, Melvin Berry. The arbitrator ordered Tesla to pay Berry $1 million in damages based on evidence that Berry’s supervisors used the n-word toward him, among other things. Of course, a $1 million award ordered by an arbitrator is certainly not small change, except when compared to the $137 million verdict awarded by the jury in the Diaz case.

In addition to reducing the risk of extreme jury verdicts, there are other advantages for employers to enter into arbitration agreements with employees. Generally, arbitration is a faster process, with more streamlined and efficient procedures. It is also generally a more flexible approach than federal or state court litigation. The parties are generally able to select an arbitrator who has background and knowledge in the employment arena, rather than relying on the random selection of a judge who may not be as familiar with the issues or law. More significantly, an experienced arbitrator is much more likely to be well-versed in the issues than an inexperienced jury. Depending on the nature of the agreement, arbitration can also reduce the risk of private employment class actions for wage and hour violations, employment discrimination claims, and other labor and employment claims. Finally, arbitration also tends to be more cost-effective because the discovery process can be more limited than in court proceedings. This generally results in faster resolution of claims than in standard litigation.

There are also disadvantages to the arbitration process when compared to litigating in court that employers must consider. Perhaps the biggest drawback is that unlike adverse court rulings, a binding arbitration decision generally cannot be appealed. In rare situations, an arbitration ruling may be set aside by a court for very limited reasons, such as proof that the arbitrator was somehow biased. Although generally cheaper overall than litigating in court, discovery costs often remain high in arbitration, especially in cases that involve substantial amounts of email and other electronic discovery. Another significant disadvantage of arbitration is that arbitrators are often less likely than judges to grant dispositive motions, such as motions for summary judgment. Thus, it is more likely that the employees challenging employers through arbitration will “get their day in court,” so to speak. Once in the hearing setting, arbitrators are also more likely to allow hearsay and other irrelevant evidence into the record “for what it’s worth,” because they are not automatically bound to follow court rules governing the admissibility of evidence, unless the arbitration agreement specifically provides for such restrictions.

Some states have passed laws prohibiting the use of the arbitration forum for accusations of sexual harassment and other related claims. This can result in defending cases in multiple proceedings, both before an arbitrator and before a court when some claims are subject to mandatory arbitration and other claims are excluded. It is also possible in such jurisdictions to have extensive arguments to determine the applicability of the laws to the claims being brought. Similarly, entering into binding arbitration agreements with employees may not automatically foreclose lawsuits or investigations by government agencies, such as the Equal Employment Opportunity Commission, the Department of Labor, or similar state agencies.

As a final point, it is critical to note that the scope and enforceability of arbitration agreements is a constantly evolving area of the law. New laws, court rulings, and public opinion surrounding the use and enforcement of arbitration agreements continue to change. These ongoing developments will affect an employer's decision about whether arbitration agreements are a good idea, so it is critical to discuss such agreements with counsel.

Arbitration agreements are not for every employer, every classification of employee, or every circumstance. However, when confronted with the reality that juries have proven to be difficult to predict, there are many reasons, perhaps even 137 million of them, to reconsider your company’s approach.