Judges As Arbitrators: A Conflict of Interest
To Kristy Shubin, it just didn't seem fair. Her boss had greeted the news of her pregnancy by demoting her, Shubin claimed, so she sued him for sex discrimination. But a clause in her employment contract said she couldn't sue. She could only take her complaint to mandatory arbitration, a private process of resolving disputes without judges, juries or the rule of law. The same clause, though, allowed her boss to sue her in certain circumstances, a double- standard that Shubin cited in persuading a trial court to strike down the clause as "unconscionable."
Judges' action cast shadow on court's integrity
Lure of high-paying jobs as arbitrators may compromise impartiality
Reynolds Holding, Chronicle Staff Writer
Tuesday, October 9, 2001
To Kristy Shubin, it just didn't seem fair.
Her boss had greeted the news of her pregnancy by demoting her, Shubin claimed, so she sued him for sex discrimination.
But a clause in her employment contract said she couldn't sue. She could only take her complaint to mandatory arbitration, a private process of resolving disputes without judges, juries or the rule of law. The same clause, though, allowed her boss to sue her in certain circumstances, a double- standard that Shubin cited in persuading a trial court to strike down the clause as "unconscionable."
But Shubin's employer appealed, and on Nov. 14, Justice Daniel Hanlon and two colleagues at the state Court of Appeal in San Francisco ruled the clause, with slight modifications, should stand.
The ruling outraged Shubin. What she didn't know was that while her case was pending, Hanlon had accepted a job with JAMS, formerly Judicial Arbitration and Mediation Service - the very firm that Shubin's contract had named to hear her dispute. In fact, the day before Hanlon and his colleagues issued their decision, JAMS advertised in the San Francisco Daily Journal, a legal newspaper, that it had hired Hanlon.
"There was a clear conflict of interest," says Professor Erwin Chemerinsky, a constitutional law and ethics expert at the University of Southern California Law School. "The judge had something to gain financially by enforcing clauses that might send cases to JAMS."
Hanlon declined to comment. But JAMS President Steve Price said, "it's inconceivable to suggest that a pre-eminent jurist who has served on the bench for more than 20 years with an impeccable reputation for nonbias . . . would compromise his record in any way."
Price added that JAMS wouldn't have heard Shubin's case because the arbitration clause failed the firm's fairness standards.
For more than a decade, corporate America has forced the public into mandatory arbitration - with the blessing of the Supreme Court.
While the system has enabled companies to avoid the costs and risks of jury trials, the nation's judges have benefited, too: Mandatory arbitration not only eases their workload, it offers them potentially lucrative jobs as arbitrators after they leave the bench.
Nowhere have judges flocked to arbitration firms faster than in California, where private judging blossomed more than 20 years ago.
But today the business is "one of the single biggest problems facing the California judiciary," says Justice Anthony Kline of the state Court of Appeal in San Francisco.
Critics believe the allure of mandatory arbitration has caused sitting judges to act in ways that may compromise the integrity of the judicial system:
-- Impressing arbitration firms. Some judges have tried to make themselves more attractive to arbitration firms by requesting specific assignments and pushing for swift settlements in complex disputes. One Los Angeles arbitration consultant gives judges a list of 10 ways to impress a potential employer.
-- Financial conflict. By upholding disputed arbitration clauses shortly before joining arbitration firms, judges may have created at least the appearance of financial conflicts of interest.
-- Clearing caseloads. Judges eager to clear their dockets of difficult and time-consuming discrimination lawsuits have forced such cases into arbitration,
where important civil rights issues are resolved by arbitrators who are rarely required to know or follow the law.
-- Client conflicts. Former judges working as arbitrators who return to court on temporary assignments have been accused of conflicts of interest by hearing cases involving clients of their current employers.
-- Blocked decisions. In some cases, the state Supreme Court has blocked anti-arbitration decisions from being cited as legal precedent after being asked to do so by corporations, arbitrators and former judges.
Bills that would reform the arbitration industry are working their way through Congress and the state Legislature. But many businesses view mandatory arbitration as a shield against the risks and costs of lawsuits, and their financial and political clout may block efforts to restrain a system that even some judges believe is out of control.
"One might call mandatory arbitration the Œdo-it-yourself' approach to law reform," says Professor Jean Sternlight at the University of Missouri law school. "The company need not convince any legislature to pass revised laws, or persuade any judicial body to change court rules, but merely choose to eliminate pesky lawsuits on its own."
Impressing arbitration firms
In recent years, the demand for private judges has soared.
Today, the American Arbitration Association, JAMS and several other arbitration providers compete to hire the biggest names on the bench.
Although arbitrators need not be judges, or even lawyers, most are. And former judges are preferred because "lawyers don't trust each other," says Lucie Barron, head of Action Dispute Resolution Services in Los Angeles.
The attractions for judges are obvious. A Superior Court judge earns $133, 055 a year, while top arbitrators can make $10,000 or more a day, in addition to retirement pay.
Judges who want to become arbitrators often beg off the criminal bench, where the number of cases is rising, and request assignments in civil court, where caseloads are down, so they can hone their settlement skills.
Barron, who advises judges wanting to become arbitrators, says it's a smart move.
"I have about 10 things that I work over with them while they are still on the bench," she explains. "I tell them to settle cases, develop an expertise, get on panels, do a lot of speaking, develop synopses of their cases, that sort of thing."
Eli Chernow, listed with Barron's firm, turned to arbitration and mediation because his salary as a Los Angeles Superior Court judge wasn't enough to support two kids in college. He prepared by getting assigned to the court's family law calendar, he says, "knowing it would be useful" in attracting business.
Chernow says the lure of private judging makes sitting judges "more polite and respectful. Otherwise, they're not going to get any business."
But other judges find the practice troubling.
"Understandably," says Justice Kline, "lawyers are increasingly worried about the objectivity of judges who seek assignments they think will enhance their chances of landing a job as a private arbitrator."
No one has accused judges of issuing favorable rulings to impress arbitration firms.
But critics say judges undermine the judiciary's credibility by joining the firms shortly after issuing opinions that uphold controversial arbitration clauses, particularly when those opinions are reversed on appeal.
"There's the appearance that the decisions are based on self-interest," says Professor Chemerinsky, "and that's very troubling."
On March 13, 1997, for example, U.S. District Judge Eugene Lynch ruled that securities broker Tonyja Duffield must go to arbitration with the sexual discrimination and harassment claim she had filed against her employer.
Duffield argued that she had not agreed to arbitration "knowingly," which the U.S. Court of Appeals had determined was a requirement for enforcing such agreements against employees. Lynch ruled against her anyway.
Less than four months later, JAMS announced that Lynch was joining its panel of arbitrators.
Ten months after he joined JAMS, the U.S. Court of Appeals in San Francisco overturned his ruling in the Duffield case.
Lynch declined to comment.
While stressing Lynch's "impeccable reputation," JAMS President Price explained that "at the end of the day, it doesn't matter to us how they (judges) rule in any individual case."
In a September 1999 decision, state Court of Appeal Justice William Masterson and two colleagues ruled that a law firm could fire legal secretary Donald Lagatree for refusing to sign a mandatory arbitration agreement more than three years after he was hired.
After discussing his options with Barron, Masterson retired to become a private judge in June 2000 - five months before a federal judge barred Lagatree's former law firm from imposing arbitration on its employees. The law firm has appealed the decision. Last August, Masterson joined JAMS.
He says there may be sitting judges who tailor their behavior to impress arbitration firms, but "I just don't see that happening."
Chemerinsky and others acknowledge that any appearance of conflict depends on how soon a judge becomes an arbitrator after upholding an arbitration clause.
In 1999, for example, Justice Christopher Cottle and two colleagues on the state Court of Appeal in San Jose ruled that San Diego's Technology Integration Group could force administrative assistant Amanda Lee to arbitrate her stalking and sexual discrimination suit - even though Lee didn't know she had waived her constitutional right to a jury trial.
The ruling reversed a trial court's decision and conflicted with the federal appeals court's ruling in the Duffield case.
The state Supreme Court agreed to review Lee's case, but then dismissed the appeal after the parties settled.
Earlier this year, Cottle retired from the bench and announced that he was discussing a job with JAMS. He has since decided to practice arbitration independently.
But Cottle says any conflict created by becoming an arbitrator after upholding an arbitration clause "was so remote that it never even came up as an issue in my mind."
In some cases, corporations, arbitration firms and former judges have lobbied against lower court rulings hostile to arbitration, and the state Supreme Court has "depublished" the decisions, in effect striking them from the books. Of about 850 published state Court of Appeal decisions last year, 22 were depublished.
In 1994, for example, the state Court of Appeal in San Francisco struck down an arbitration clause that a mortgage company had duped elderly borrowers into signing. The mortgage company had printed the clause in small, dense type,
effectively preventing the borrowers from realizing that they were waiving their right to a jury trial, the court said.
The decision troubled the American Arbitration Association, its client, Bank of America, and others. The association and state Attorney General Dan Lungren asked the high court to depublish the ruling so that it could not be cited as legal precedent.
A Bank of America spokesman said Lungren was asked to get involved by the bank, which had contributed to his re-election campaign and was facing a class- action lawsuit accusing it of sneaking mandatory arbitration into agreements with card and account holders. A Lungren spokesman said the attorney general acted on the issue's merits.
On July 28, 1994, the state Supreme Court voted 6 to 1 to grant the request.
Two years later, Justice Armand Arabian joined American Arbitration and Chief Justice Malcolm Lucas joined JAMS. Both voted to depublish the decision.
The following year, the state high court depublished another controversial decision involving private judges.
When Edgar Rushing sued his employer, Lancaster Radiology Medical Group, for race discrimination, Los Angeles Superior Court Judge Victor Chavez ordered procedural matters resolved before a private judge - at the parties' expense. Rushing said he couldn't afford the process, but the judge ignored his objections.
Rushing's share of the bill totaled more than $18,000, and when Chavez ordered Rushing's lawyer to pay it, she refused.
The case went before the state Court of Appeal, and in 1996 Justice Miriam Vogel struck down Chavez's order, saying it would "slam the courthouse doors in the face of the poor."
Once again, the decision prompted calls for depublication, including a letter from former high-court Justice David Eagleson and five other retired California jurists working as private judges.
On February 5, 1997, the Supreme Court acquiesced to the request of its former colleagues and struck Vogel's ruling from the books.
"It was a lamentable act of censorship," says Professor Stephen Barnett of Boalt Hall School of Law at the University of California at Berkeley. "It was made even worse in this case by the unfortunate fact that the future economic interests of the justices arguably were affected as well."
Conflicts can also arise when former judges working as arbitrators return temporarily to the bench.
In July 1999, for example, Escondido (San Diego County) restaurant owner Ruben Estrada sued Crusader Insurance Co. for denying his insurance claim. The case was assigned to a retired judge, Kenneth Ziebarth, who was filling a temporary vacancy on the San Diego Superior Court.
When Estrada's attorney, Jack Winters, discovered Ziebarth also worked at JAMS, he demanded that the judge step aside. Many insurance companies - including Crusader - use JAMS, and Crusader could "easily reward Judge Ziebarth for his handling of this case" by subsequently hiring the judge or one of his JAMS colleagues, argued Winters.
But Ziebarth refused to step down. Estrada appealed to the state Court of Appeal in San Diego, and last year the court ordered Ziebarth to explain why he should remain on the case. Instead, the judge stepped down.
"I didn't believe then, and I still don't believe there was any conflict," says Ziebarth. "I was in a no-win situation. If I ruled for the plaintiff, the defense would have thought I was bending over backward not to be biased. If I had favored the defendant, it would have solidified the plaintiff's belief."
For decades, the U.S. Supreme Court insisted that civil rights cases be heard in federal court because arbitration's abbreviated procedures and minimal legal protections would give the cases short shrift.
But in 1991, the high court changed its mind - and federal judges took full advantage.
A study by the U.S. Court of Appeals in New York four years ago found that federal judges consider discrimination cases too difficult and time-consuming. So with the high court's blessing, the judges have forced such cases into mandatory arbitration at an increasing rate - and, say some legal experts, at a troubling cost.
"What the (Supreme) Court has not yet recognized," warns Professor David Schwartz of the University of Wisconsin Law School, "is that it has allowed corporations to avoid not only the courts, but the regulatory impact of the law."
Even some judges are critical.
Montana Supreme Court Justice Terry Trieweiler says rulings upholding mandatory arbitration illustrate "an all too frequent preoccupation on the part of federal judges with their own caseloads and a total lack of consideration for the rights of individuals."
Mandatory arbitration, he says, "subverts our system of justice as we have come to know it."
Prospects for reform
In February, California Sen. Sheila Kuehl, D-Santa Monica, introduced a bill that would allow employees bound by mandatory arbitration to file employment disputes with the state's Department of Fair Employment and Housing.
In June, Reps. Dennis Kucinich, D-Ohio, Barney Frank, D-Mass., and other members of Congress introduced a bill that would overturn the recent Circuit City decision, in which the U.S. Supreme Court granted employers in almost every industry the power to impose arbitration on employees.
"Circuit City made it mandatory," says Kucinich, "that we address arbitration's destructive undermining of a wide range of civil rights protections."
But both bills are likely to face intense resistance from business interests, and politicians from Sacramento to Washington, D.C., are keenly aware of that opposition, as Kuehl recently discovered when she ran into Gov. Gray Davis at a party.
"He started shaking his head," says Kuehl, "and said, "That employment arbitration bill, I really don't want to see it on my desk.' "
Davis declined to comment.
Kuehl has postponed any action on the bill until next year.
Reforms proposed for fairer system
Proposals to reform mandatory arbitration essentially fall into two categories: Make it fairer or make it voluntary. Each raises difficult issues.
Several courts have required fairer procedures. The state Supreme Court, for example, ruled last year that arbitration imposed on employees must provide a neutral arbitrator, enough discovery to make a case, a written decision and limits on costs. Companies and arbitration firms also have adopted rules to protect individuals' rights.
Professor Samuel Estreicher at New York University law school says there has been "a lot of progress" toward making arbitration fair, and additional protections would "just jack up costs" in most cases.
But critics say the changes don't go far enough. And reforms such as granting employees rights to appeal or to obtain more information from an employer could make arbitration just as slow and expensive as court.
In any event, says Cliff Palefsky, a San Francisco attorney who leads the legal opposition to mandatory arbitration, "to work, a justice system must be perceived as fair. And mandatory arbitration will never be perceived as fair so long as someone is forced into it by a stronger party that sets the rules."
Palefsky and others advocate making arbitration voluntary. "If people really are better off in arbitration," he says, "they'll choose it."
And to arbitration advocates who say a voluntary system would produce too few cases to make arbitration practical, Palefsky says, "So what? Increasing the arbitration caseload is not the objective here."
Estreicher, though, says the objective is a better system of resolving disputes, and companies could not afford to create such a system unless enough consumers and employees committed to using it.
He also stresses that mandatory arbitration is as "voluntary" as any other contract term. "It's one of an array of things that an employer or company offers that you may or may not find acceptable," Estreicher says. "But you can't disfavor arbitration by saying you need special standards to apply."
Appearance of conflict
Critics have accused judges of undermining their credibility by joining arbitration firms after issuing opinions that uphold controversial arbitration clauses. .
-- Former California Court of Appeal Justice Daniel Hanlon. On Nov. 14, he and two colleagues upheld a clause forcing a secretary to arbitrate her employment dispute through the Judicial Arbitration and Mediation Service, or JAMS. He accepted a job with JAMS before the opinion in the case was issued.
-- Former U.S. District Judge Eugene Lynch. On March 13, 1997, he ruled that a securities broker must arbitrate her sexual discrimination claim against her employer. Four months later, JAMS announced Lynch was joining the firm.
-- Former California Court of Appeal Justice William Masterson. In September 1999, he and two colleagues ruled that a law firm could fire a secretary for refusing to sign a mandatory arbitration agreement. Masterson retired to become a private judge in June 2000, and joined JAMS last August.
About the series
Sunday: Lost Rights. Fine print mandatory arbitration clauses deprive people of their legal rights -- with the approval of the U.S. Supreme Court.
Yesterday: Conflicts of Interest. Some arbitration firms have financial interests in their clients, creating the appearance of conflicts that would never be tolerated in court.
Today: Compromised Judges. Potentially high-paying jobs as arbitrators tempt some judges to try to impress arbitration firms in ways that undermine confidence in the courts.
E-mail Reynolds Holding at email@example.com.