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Designation of AAA in employee arbitration agreement can backfire

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Certainty is a valued concept for most employers who decide to use employee arbitration agreements. One manner of increasing certainty in such agreements is the designation of the arbitration forum. Frequently, arbitration agreements will designate a specific alternative dispute resolution (ADR) provider to hear potential disputes. Among the better-known providers is the American Arbitration Association (AAA). Employers should be aware that designation of AAA, and perhaps other similar providers, could backfire if the proper procedures are not followed well in advance of a dispute. A recent California appellate court case, Martinez v. Master Protection Corp. (Second District, April 2004), created a new hurdle with respect to AAA employment dispute arbitrations. The employer found itself facing a jury after it improperly designated AAA. According to the court's published opinion in Martinez, the employer's arbitration agreement called for resolution of employment disputes "in accordance with" pertinent AAA procedures. The employee, Mr. Martinez, filed suit in court alleging that his termination was discriminatory based on his national origin. Master Protection, the employer, successfully moved the court to compel arbitration with AAA. At this point, most employers would expect that the case would move forward to arbitration and that would be the end of the story. However, in Martinez, AAA refused to accept the case because the employer had not complied with certain AAA notification rules. Specifically, AAA pointed to its National Rules for the Resolution of Employment Disputes, Rule 2. That rule requires any employer intending to incorporate AAA rules or refer to AAA services in an arbitration agreement to (1) notify AAA of its intention, and (2) provide AAA with a copy of the agreement for approval. This procedure must be followed at least 30 days prior to the effective date of the agreement. Master Protection had failed to submit its agreement for approval in advance. AAA also objected to the arbitration agreement's time limit for claims. The agreement required the employee to assert a claim within six months, whereas the applicable anti-discrimination statutes allowed claims up to a year after termination. After AAA refused to accept the matter for arbitration, the employer succeeded in obtaining a court order that the parties submit the case to a different arbitrator. The parties went to arbitration, but the employee later appealed. The employer's success in compelling arbitration was short-lived. The court of appeal found that the trial court erred by forcing the parties to arbitrate with a different arbitrator. The arbitration agreement specified AAA, and the trial court had no power to order otherwise. According to the court of appeal, once AAA rejected the case, the trial court should have permitted the employee to proceed with a jury trial. Employers using arbitration agreements can avoid Master Protection's mistakes. First, make sure that AAA arbitration is the right choice. Many employers have not done their homework and have simply designated AAA because it is well known. Review AAA's arbitration rules at www.adr.org. Make sure management will be comfortable with adhering to the rules in the event of a dispute. If the answer is "no," then it is time to consider alternatives. Second, if the arbitration agreement specifies AAA, comply with Rule 2 by submitting the agreement to AAA in advance. Before doing so, however, employers may wish to review their agreements with legal counsel to ensure that the agreement's provisions comply with AAA rules, as well as current case law regarding arbitration agreements. If the agreement is outdated, update it, submit it for review, and redistribute it to employees. Third, consider adding a "saving" clause that specifies that in the event that AAA (or other designated provider) is unable or unwilling to hear the case, alternate arbitrators may be selected by the parties or court. In fact, it may be wise to specifically name alternate provides. Taking these steps will minimize the risk of an unexpected visit to a jury trial the next time an employee files suit.


Olmsted is an attorney with the Barker Law Group.

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