Whether in an employment agreement, a purchase agreement or a commercial contract, companies are increasingly considering the application of the Federal Rules of Evidence (“FRE”) as it applies to hearsay (“FRE Hearsay Rules”) when selecting arbitration as their dispute resolution mechanism. If the parties agree to apply the FRE Hearsay Rules, then the arbitrator shall be contractually required to limit what evidence is admissible in such arbitration. Limiting the applicability of hearsay may offer distinct advantages to companies in resolving disputes with individuals and may help to level the proverbial playing field in an agreement between two companies.
AAA and JAMS Application of Hearsay Rules
Hearsay is a statement that (i) the declarant does not make while testifying at the current trial or hearing; and (ii) a party offers in evidence to prove the truth of the matter asserted in the statement. Generally, hearsay is not admissible during a trial unless a federal statute, the FRE, or a rule prescribed by the Supreme Court provides otherwise. The FRE Hearsay Rules provide numerous exceptions for the general rule against hearsay, each with their own specific requirements, such as the exceptions for business and public records, statements for medical diagnosis/treatment, and present sense impressions, among others.
The American Arbitration Association (“AAA”) and Judicial Arbitration and Mediation Services (“JAMS”) provide the most commonly used rule sets for arbitration. While JAMS closely follows AAA, there is a key difference:
AAA addresses the admission of hearsay in Commercial Arbitration Rule R-35, which states that “the arbitrator shall determine the admissibility, relevance, materiality, and weight of the evidence offered by any party.”
While following AAA, JAMS references the FRE Hearsay Rules, stating “strict conformity to the rules of evidence is not required…the arbitrator shall consider evidence that he or she finds relevant and material to the dispute, giving the evidence such weight as is appropriate. The arbitrator may be guided in that determination by principles contained in the FRE or any other applicable rules of evidence.”
While the FRE Hearsay Rules generally prohibit hearsay (but for specific exclusions), both AAA and JAMS provide the arbitrator with broad discretion to admit or exclude hearsay if they deem it relevant or material and wide latitude to weigh such evidence once admitted. This increases unpredictability in connection with the admissibility of hearsay during arbitration.
Application of the FRE: Who Does It Benefit?
When negotiating an arbitration provision, application of the FRE Hearsay Rules will typically favor the company, rather than the individual. The FRE Hearsay Rules are geared towards accuracy and predictability through well-defined standards and exclusions. In contrast, the AAA rules focus on speed and efficiency through arbitrator discretion. The invocation of the FRE Hearsay Rules may limit a party’s ability to introduce anecdotal statements that cannot be verified formally, forcing them to build their case around verifiable documents and live testimony. Such necessity often places a higher burden on an individual, while companies may be better equipped to operate under formal evidentiary regimes, with access to well-documented internal records and access to legal teams familiar with the FRE Hearsay Rules.
The application of FRE Hearsay Rules may make a significant impact in a dispute with an employee and vendor (including a contractor), due to the nature of the communications involved. Employees and vendors will often want to rely on informal communications, such as emails, conversations, and secondary accounts, and the employer will often want to stay within the four corners of the signed contract. Under normal AAA rules, informal communications have a much higher likelihood of being admitted because the arbitrator will have discretion to weigh their relevance and materiality. Under the FRE Hearsay Rules, however, the employee or vendor will have to justify the admission of such informal communications by arguing that it qualifies for one of the FRE Hearsay Rules’ predetermined exceptions or exemptions. This places an additional hurdle in front of the employee to get any such evidence considered by the arbitrator. For a company entering into an agreement with several counterparties, requiring the application of the FRE Hearsay Rules in arbitration may reduce its risk by limiting the record to what is provable and preventing exaggerated claims, even if coming from multiple sources.
There are several potential downsides of applying the FRE Hearsay Rules in arbitration:
undermining the speed and efficiency that make arbitration attractive because the FRE Hearsay Rules enable extensive arguments on admissibility issues, whereas the informality of standard arbitration rules allows for faster decisions;
parties will have to be sure that they select arbitrators that understand how to apply the hearsay rules. Standard arbitrators may not be as familiar with applying the hearsay rules during a hearing, leading to a more limited pool of qualified arbitrators;
increased cost to challenging the admission of evidence; and
the FRE Hearsay Rules place restrictions on admissibility that may be overly broad, which increases the risk that evidence that is beneficial to a claim may be excluded.
While application of the FRE Hearsay Rules will presumably slow down the arbitration process (and potentially increase the cost), those considerations are often outweighed by the benefit to the company. Although arbitration under FRE Hearsay Rules may be longer and more expensive than an AAA-ruled arbitration, it would still be cheaper and faster than going to court while maintaining certain court-like evidentiary processes and procedures unavailable in AAA-ruled arbitration.
It is important to note that while the benefits of the application of the FRE Hearsay Rules are more palpable when discussing employees and vendors, there is a potential benefit to be found when dealing between companies. A company should carefully consider how communication will be handled, and particularly consider the following:
Will communications be in writing?
Will verbal direction be acceptable?
Can the terms or responsibilities under the agreement be modified?
How are disputes raised and addressed under the agreement?
For an agreement that requires all direction and modification to be in writing, then the application of FRE Hearsay Rules may be beneficial to the company providing the direction. That is not to say that the other company would necessarily be disadvantaged by their application. In practice, particularly for more mature companies who have their internal protocols in place and are comfortable with how they will operate under an agreement, the application of FRE Hearsay Rules may benefit all parties, because everyone will be on the same page when operating under the agreement.
The result of an arbitration can turn on a single piece of hearsay evidence. The inclusion of such evidence will in large part be determined by which rules the arbitrator is applying. Understanding these rules and prospectively requiring them in an arbitration provision may provide parties with an advantage if a dispute arises. If you have any questions regarding the Federal Rules of Evidence in arbitration provisions, please contact Jonathan Bernstein (jbernstein@sadis.com), Jennifer Rossan (jrossan@sadis.com) or Cameron Posillico (cposillico@sadis.com).
