« Notes on Complexity: The Weinstein Company Chapter 11 Hearing #1 | Main | The underutilized student loan bankruptcy discharge »

Summer Associate Arbitration Clauses: Why Disclosure Isn't Enough

posted by Adam Levitin

This weekend a mini-scandal erupted over the law firm Munger, Tolles requiring its summer associates to sign pre-dispute arbitration clauses. Munger, Tolles was rightly shamed into rescinding the practice, but one suspects that Munger, Tolles isn't the only firm doing or contemplating doing this. 

I believe law schools have a particular duty to stand up here and protect their students. Law students seeking firm jobs are at an incredibly disadvantage in terms of both market power and knowledge. The students are often heavily leveraged and desperate to land a high-paying job with a large law firm in order to service their educational debt, and even when debt doesn't drive them, a summer associate position at a large firm is often seen as a stepping stone to career success. Law students really have no bargaining power in terms of their contractual relationship with summer employers.  It's take-it-or-leave-it, and leave-it isn't an option for law students.  Law students also lack knowledge about the importance of an arbitration clause in terms of the procedural and substantive rights they will surrender and knowledge about the firm culture they are stepping into and the likelihood it will result in a dispute of some sort (e.g., sexual harassment).  Whatever one thinks of the virtues of arbitration generally, this strikes me as a very clear cut case of pre-dispute arbitration agreements  being inappropriate.  I don't think it's a stretch to call such arbitration provisions unfair and unconscionable both procedurally and substantively.  (Does anyone think the firms are doing this for the summer associates' benefit?) 

I believe that the appropriate response for law schools in light of the situation is to refuse access to on-campus interviewing to any firm that requires its summer associates to sign an arbitration clause. Schools have done this when their students civil rights were being threatened both under don't-ask-don't-tell and in the era when firms would often refuse interviews to women and people of color. The right to have one's grievances heard before a court (including for race and gender discrimination!) is also a civil right.  It is a civil right that is fundamental to the whole endeavor of law schools, and schools should be just as vigilant to protecting their students civil rights in this instance as they have in the face of discrimination. 

I recognize that firms often require their regular associates to agree to arbitration. That's crappy, but it's not something law schools can readily address. I do believe, however, that law schools have a duty to stand up against abusive business practices targeted at their students. 2Ls and 3Ls have less knowledge and less bargaining power than someone who already has a JD. Moreover, alumni have left the nest; students are still in the care of the school.  

I also recognize that schools are reluctant to be overly paternalistic--at least when it suits them--and that they are concerned about limiting students' job possibilities. Indeed, students may themselves not support such a limitation on facilitated access to firms.  But should schools really be sending students off to abusive employers? And if schools don't take a stand now, won't the problem become all the more pervasive?  I personally do not want to be part of a scheme to deprive students of their civil rights under the guise of contract. 

Why Disclosure Is NOT a Solution. 

Some have suggested disclosure as a solution—make law firms that want to interview on-campus disclose whether they require their summer associates (and regular associates) agree to arbitration clauses and whether these clauses cover certain things such as sexual harassment claims. The thinking of disclosure proponents is that there will be a shaming effect on law firms that will result in arbitration clauses being dropped or at least in those covering things like sexual harassment being dropped. 

I think that this disclosure approach is ridiculously sanguine about the value of disclosure. There's a large literature about consumer disclosures. The take away from that literature is that disclosures are generally not very effective, particularly when they involve (1) complex information and (2) the disclosure is not made immediately before the moment of decision. A disclosure made up front at the start of an interviewing process that a firm requires arbitration is unlikely to affect student behavior.  The timing is well before students make decisions of what offers to take; a rational student will interview everywhere irrespective of the presence of arbitration clauses and then see what his/her options are, but at that point the disclosure is long-forgotten. Moreover, even with such a disclosure, are students going to understand what an arbitration clause means in real terms to them?  Doubtful. And how many students are really going to anticipate ever having a dispute with an employer? Just as people don't usually get married anticipating a divorce, they also don't usually take jobs anticipating problems with the employer. There's a lurking optimism bias problem on top of everything. It just seems nuts to me that disclosure will be effective. 

Indeed, disclosure could make things worse. Say that firms have to disclose (a) whether they have an arbitration requirement, and (b) whether it covers sexual harassment. Adding in that second question makes a firm that says "Yes, No" look better than a firm that says "Yes, Yes," when the problem is really about the presence of arbitration in general, not about it extending to sexual harassment (and just how is such a claim defined, pray tell?).  The result is that students will feel better about Yes, No firms than they should, as they won't look as bad as Yes, Yes firms. The result, I suspect is to push the whole market to Yes, No, which is a worse outcome than some No, No, and some Yes, Yes. (Anyone want to try to formalize the game theory here?) 

Despite these huge problems with disclosure, I suspect that this is where the conversation ends up. Schools will require some form of disclosure and will pat themselves on the back for standing up for their students and fly the Mission Accomplished banner high. And this is how disclosure regulation often works—a political compromise that allows people to say that they've done something without it actually changing the world in any material way. (Want an example--look at Gramm-Leach-Bliley Act privacy disclosures and regulations--disclose and do more or less what you want.) Law schools of all places should be better than this and not fall for the same worthless disclosure route that has been the dominant method of consumer contract regulation for the last 75 years or so. We owe it to our students. 

Comments

I can guess what the career services people are going to say. They're evaluated based on how many students get jobs, not whether the jobs are abusive.

It's ultimately about power. Disclosure has limited effectiveness where there is a huge power imbalance in the relationship.

It's no difference from arbitration clauses and other onerous terms for credit cards and other consumer finance agreements. The disclosure means little to nothing if just about all banks have the same account terms. Consumers have limited ability through some kind of concerted boycott to select in favor of banks having more consumer friendly account terms. One, if virtually all banks impose the objectionable terms, many consumers may have no alternative to select. Two, it's easy for banks to pick off consumers by offering better terms on more immediate economic issues. Which would you choose: a 15% credit card with an arb clause, or a 25% card without one?

Same thing here. Worse, actually. The students have no power. To go back to my bank analogy, if one bank in a city does decide to use fairer account terms and advertises it, they can give credit cards or car loans to every good customer who comes in the door. But if law firm XYZ is the only firm in town not asking its summer associates to sign an arb clause, the law students looking for positions in that city can't all select in favor of that firm -- because that firm will only have a fixed and limited number of positions to offer.

Thus, a disclosure requirement is unlikely to change the behavior of either the firms or the students -- because it does not remedy the underlying power imbalance.

Permit me, in the interest of constructive discourse, to articulate an alternative view:

I am generally opposed to arbitration agreements as a condition for obtaining a good or service, especially when it is an industry-wide practice so that opt-out is not even feasible, unless there is an individual opt-out, and even that’s problematic because most consumers will not understand the significance of it. And, of course, the standard imposition of boilerplate requiring individual arbitration disempowers consumers across the board because it thwarts class actions.

That said, it seems to me that mandatory arbitration clauses for summer associates/interns at law firm may not be such a big deal, and may actually work in the interim associate or intern’s favor.

How so?

For most law students, except those that were previously legal secretaries, paralegals, or legal assistants and then chose to get their own JD and license so they can get better compensated for the legal work they are already doing on a day-to-day basis, a summer stint will be the first employment in their chosen field, and the stepping stone to a career as a practicing attorney.

How many of them would seriously contemplate suing the very first employer in their chosen field no matter how egregious the treatment they receive?

How does that look on the background check, if not on the resume? Having started off suing their first employer.

Arbitration would be a different matter because it does not create a public record – as long as neither party initially files in court and neither party seeks confirmation of a resultant arb award later. And if the matter is resolved by settlement, there will no doubt be confidentiality and mutual non-disparagement clauses in the settlement and mutual release agreement. Once a court case is filed, however, the file cannot generally be sealed just because it contains embarrassing material and the only thing that may in the end be confidential is the settlement agreement. And even if the case file does not contain any embarrassing material, the mere fact that the case was filed will be on the filer’s record for decades to come, even if it never shows up on a credit report.

What about the existence of the right to file a lawsuit as a deterrent for bad law firm/partner behavior?

The mere existence of the an arbitration agreement does not preclude the filing of a lawsuit (even if it cannot ultimately be decided by court or jury on the merit), so, to the extent the ability to expose law firm misbehavior publicly through a lawsuit is an important source of leverage for the law student/intern in the latter’s relationship with the employer, a contractual duty to ultimately arbitrate such a claim on motion to compel by the law firm does not mean that a lawsuit cannot initially be filed and serve that function.

The mere existence of an arbitration agreement does not change the fact that the allegations, no matter how “colorful” can be articulated in the pleading and will remain unaffected by any subsequent motion to compel arbitration. (In Texas state courts answers are generally in the form of general denials and assertion of affirmative defenses, so unless the defendant choses to address the factual allegations in its answer, the plaintiff’s “story” will be and will remain the only version of events on file if the dispute is subsequently sent to arbitration on the Defendant’s motion).

How can arbitration be good for the summer intern?
Well, it’s confidential. If a sexual harassment case is litigated, it will leave a paper trail (or rather its now electronic equivalent) and there will likely be unpleasant (or merely private) details exposed even if they are peripheral to the validity of the claim (or lack thereof, as the case might be).

Was leads to the next issue: Any serious discussion on whether arbitration clauses in the summer-associate context are a good idea should also include the possibility of dubious and even frivolous claims.

Given that there are very strong disincentives for a soon-to-be attorney to sue her or his very first legal employer (which will likely kill their career prospects), marginal or even frivolous claims will be more prevalent in the pool of claims that are actively asserted and pursued (as opposed to the total population of potential claims).

Weak or frivolous claims, of course, are much more likely to be lost by the claimant whether in an arbitral forum or a court of law, and they will also be more likely to be fought, rather than settled, by the defendant law firm, which certainly has more clout and resources than a law student at the very start of a legal career. And if the claim is weak in the judgment of experienced attorneys in employment law, the claimant will not be able to get such an attorney on a contingent fee basis. And to take on a law firm pro se in litigation would be folly. A prescription for defeat. And losing one first case as a pro se litigant is not a good start for a "career" as a solo either, although it may be a valuable, if painful, learning experience.

So claimants who ultimately cannot prove their claim on the merits (or would lose for want of competent legal representation) would be better off not having the lack of merit certified publicly by a court of law. Say, a motion for summary judgment.

Such a record is even worse than a record of merely having sued their first employer followed by a confidential settlement or agreed dismissal, which will likely be a career-killer in and of itself in many cases. If an arbitrator denies the claim, the resulting zero-dollar arbitral “award” will not be worth confirming in court, and will not result in a public record. And if the allegations were first presented in arbitration, and not in a public court, the law firm would have no reason or rationale to seek vindication of its (or its allegedly misbehaving partner’s) reputation by squashing the claimant in a public forum.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad