In my 35 years of practice in the field of executive compensation, the use of mandatory arbitration provisions in employment, severance, change in control, and similar agreements has risen steadily. I am not that smart, but an advantage of working with great clients is that I usually learn as much from them as they learn from me. Yet different clients have expressed sharply different views on whether or not to include arbitration provisions in executive plans and agreements.
So what is outside counsel to advise? My approach has been to describe to each client the arguments on both sides of the issue (just as I might describe the perceived advantages of stock options versus restricted stock) so that the client can make an informed choice. Let’s go to the videotape.
One of the most common arguments in favor of arbitration to resolve disputes is that it is less expensive than litigation. Litigation is expensive and time consuming. However, some view lower cost of arbitration as a disadvantage when compared to litigation. They argue that a former employee or executive is unlikely to pursue litigation unless he or she genuinely believes that he/she has a strong case and is able to find a lawyer who agrees (to take the case)—and, generally, is willing to pay legal fees. In contrast, it is argued, a sophisticated but disgruntled former executive could pursue the early stages of arbitration in his/her spare time, without counsel.
Another argument in favor of arbitration is that an employment, severance, or other agreement could require, or the parties could agree, that all aspects of the arbitration proceeding and results are confidential. In many situations, this is a real advantage, but the arbitration clause in the agreement should specify in advance that all aspects will be confidential. We discuss this further below.
I have several experienced and sophisticated clients (and partners) who vehemently believe that agreements with executives and employees should not provide for arbitration. Why? In addition to the concerned noted above, a complaint I hear about arbitration is that some arbitrators, not being strictly bound by the law or rules of evidence and procedure, may tend to “split the difference” or award something to “the little guy” (i.e., the former employee). “Arbitrators are not bound to hear all the evidence tendered by the parties; they need only afford each party the opportunity to present their arguments and evidence.”
That is one possible view of the result in a recent federal court case in Michigan. In this 2018 case, the former CEO argued that he should have received more than the $15 million awarded to him by the arbitrator following his termination of employment. The company argued that the arbitrator should have awarded him nothing because he was terminated for cause. The court denied each parties’ motion to reverse the portion of the arbitrator’s decision that had gone against it. None of the four circumstances that could allow a court to vacate an arbitration award existed, and the former CEO initiated arbitration proceedings through the AAA against the company before the company filed its lawsuit against him.
However, the case also considered issues of confidentiality in arbitration. The former CEO argued that virtually all of the filings in the matter should remain sealed, as they related to “sensitive and private conduct.” The company argued that “this case involves matters of public concern—the termination of the CEO of a publically traded company, and award of his severance benefits,” and urged the Court to unseal all of the pleadings and exhibits from the arbitration.
The contract under which [CEO] sought severance benefits during the arbitration—the Employment Agreement—is publicly available and the subject of SEC filings. [The Company] is a public company and has fiduciary duties to its shareholders. The public deserves to know why [the Company’s] ex-CEO was terminated, and why he is collecting a $15M+ severance package from the company. Meeting the public interest in this matter requires that the Arbitration Award must be unsealed. As for the remainder of the record, the public interest in unsealing the various exhibits and documents outside of the actual award is less significant because the only matter appropriately before the Court is the question whether the Award should, or should not be, confirmed. The other documents and pleadings in this case are not relevant to the Court’s resolution of this issue so that—aside from the Arbitration Award—they shall remain sealed.
So, where do I stand on the issue? [I was hoping you wouldn’t ask.] If pressed by a client, I will confess a slight preference for litigation over arbitration.