Advantage Employers: Reversal Rates in Employment Disputes

An article recently posted on SSRN provides some interesting data about how employers and employees fare when arbitrators’ decisions are reviewed in court.  In Do Courts Create Moral Hazard? When Judges Nullify Employer Liability in Arbitration: An Empirical Analysis, Michael Leroy argues that the possibility of such review – especially when the arbitration clause provides for de novo review, as many do – creates a systematic advantage for employers.  Leroy documents a growing number of bases on which courts (particularly state courts) vacate arbitration awards, providing more opportunities for successful challenges to arbitrators’ decisions.  Perhaps most importantly, however, Leroy measures the rate of reversal of arbitrators’ decisions.  Out of a dataset of 267 separate arbitration decisions, Leroy found that federal courts are routinely extremely deferential to arbitrators’ decisions, upholding decisions for both employers and employees at similar and extremely high rates.  As a general matter federal courts upheld awards for employees at a rate of 85% and for employers at about 92%.  In state courts, however, the picture is more complex.  There were larger differences between trial courts and appellate courts, for one thing, but more striking is the difference in upholding the awards for employers as opposed to awards for employees, particularly at the appellate level.  State trial courts and appellate courts both upheld awards in favor of employers at a rate of about 87%.  But for awards for employees, trial courts upheld them 77.6% of the time, while appellate courts upheld only 56.4% of such awards.  The significantly higher rates of vacatur of employee awards in state courts, Leroy argues, creates a moral hazard for employers.  Their incentives are to require employees to sign arbitration agreements that allow for expansive review in state court.  If the employer wins in the arbitration, its chances of prevailing under court review remain quite high.  On the other hand, if the employer loses in the arbitration, the generous review offered by state courts essentially gives it a second bite at the apple.  As a result, Leroy argues, employers may have less incentive to curtail legally risky behavior because they are less likely to have to pay for the consequences if sued.
This article, while quite different in its focus, is reminiscent of the findings of two articles examining differential appellate court treatment of plaintiffs versus defendants.  In Plaintiphobia in the Appellate Courts: Civil Rights Really Do Differ From Negotiable Instruments,  a 2oo2 article in the University of Illinois Law Review, Theodore Eisenberg and Kevin Clermont found that in federal civil rights employment cases that terminated between 1988 and 1997, defendants who appealed trial losses prevailed on appeal 44% of the time. In other words, where a defendant appealed a verdict, generally entitled to enormous deference, there was an almost even chance that the appellate court would reverse. In contrast, an employment plaintiff who appealed from a pro-defendant verdict had only a 6% chance of prevailing. As a point of comparison, the overall reversal rate from all civil trials was 18%.
In a more recent follow-up (blogged about here), Plaintiphobia in State Courts? An Empirical Study of State Court Trials on Appeal by Theodore Eisenberg and Michael Heise, examined the outcomes of more than 8000 trials and about 550 appeals from 46 large counties.  They found that in general, plaintiffs fare worse on appeal than defendants and that the appellate courts are more deferential to bench verdicts than jury verdicts.  Consistent with the first Plaintiphobia article and with Leroy’s findings, the plaintiff/defendant disparity was very stark in the context of employment cases – with 61.5% of verdicts for plaintiffs reversed and 38.5% of the verdicts for defendants reversed.  (Both of these reversal rates are higher than the overall numbers across all case types – 41.5% of verdicts for plaintiffs reversed and 21.5% of verdicts for defendants.)
All three articles discuss possible reasons for the observed disparities between plaintiffs and defendants.  The Plaintiphobia articles do not find strong evidence to support selection effects, and conclude that their findings are consistent with attitudinal effects – specifically that appellate judges believe (possibly erroneously) that juries are biased towards plaintiffs.  Leroy attributes the disparities at least in part to the expansion of bases for reversal of an arbitration award – a doctrinal development.  Moreover, there is the possibility of a snowballing effect on doctrine – the more pro-employer cases that are decided, the more pro-employer the law becomes.  At minimum, however, these articles collectively raise questions about whether the appellate playing field is level for employers and employees.

Update: It's worth noting that the two Plaintiphobia papers analyze appeals in all different kinds of cases, not limited to employment cases.

Comments

[D.T.]

Can a arbitrators decision be reversed due to inaccurate evidence. if he agrees he made the wrong decision.

[Michael Fairbairn Cordova]

Interesting Results

[CarolynShapiro]

You are certainly right that selection effects must be thoroughly considered -- although both Plaintiphobia articles do so. As to whether appellate court are wrong in their legal conclusions, I would not call it a presumption, but in the context of summary judgment in employment discrimination cases in federal court, I would say (and have said in a non-quantitative piece: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=918280) that the appellate courts are, at best, inconsistent. As always, of course, further research may be warranted.

[frankcross]

Interesting stuff, but it's hard to tell the meaning without knowing the selection effects and settlement outcomes. I don't understand the conclusions about employers engaging in legally risky behavior -- unless you operate on a presumption that the appellate courts are wrong in their legal conclusions.