Do Courts Create Moral Hazard?: When Judges Nullify Employer Liability in Arbitrations

Source: Michael H. LeRoy, Minnesota Law Review, February, 2009

Part I of this Article connects the idea of moral hazard to employment arbitration, explaining that laws and social programs reduce personal incentives to avoid risks and arguing that judicial review can serve as government insurance by relieving employers of liability for socially undesirable conduct.

Part II describes how individual employment arbitration helps employers manage litigation costs, while simultaneously disadvantaging some individuals.

Part III describes the complex web of standards that courts use to review arbitration awards. I also demonstrate that common law standards for vacatur increasingly interfere with arbitration.

Part IV pinpoints four scenarios that often occur in conjunction with reversal of arbitrator rulings: courts find that the arbitrator’s remedy is unauthorized or excessive; when courts vacate awards, delay and litigation expenses grow large; vacatur is sometimes caused by arbitration agreements that embed broad, judicial review standards; and state arbitration laws tend to increase court interference with awards.

Part V is the heart of my study, consisting of research methods and statistical findings, that identifies a disturbing trend regarding court review of arbitration awards: state courts vacated many arbitration wins for employees, but not for employers.

Part VI states that courts create moral hazard by vacating a high percentage of employee wins at arbitration. I also propose two public policy changes to reduce moral hazard.

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