Adverse Inferences in Arbitration

By Lee Hornberger,
Arbitrator and Mediator

This is an overview of adverse inferences in labor arbitration. This includes reviewing provider organization rules, labor arbitration awards, case law, and treatises on labor arbitration.

American Arbitration Association (AAA) Rules

The AAA Labor Arbitration Rules and the AAA Employment Arbitration Rules do not explicitly mention adverse inferences.

AAA Consumer Arbitration Rule 23 “Enforcement Powers of the Arbitrator” indicates:

The arbitrator may issue any orders necessary to enforce the provisions of rules R-21 and R-22 and to otherwise achieve a fair, efficient, and economical resolution of the case, including, but not limited to: …

(d)  in the case of willful non-compliance with any order issued by the arbitrator, drawing adverse inferences, excluding evidence and other submissions, and/or making special allocations of costs or an interim award of costs arising from such non-compliance; … . Emphasis added.

AAA Commercial Arbitration Rule 24 says:

The arbitrator shall have the authority to issue any orders necessary to enforce the provisions of Rules R-22 and R-23 and any other rule or procedure and to otherwise achieve a fair, efficient and economical resolution of the case, including, without limitation: …

(d) in the case of willful non-compliance with any order issued by the arbitrator, drawing adverse inferences, excluding evidence and other submissions, and/or making special allocations of costs or an interim award of costs arising from such non-compliance; … . Emphasis added.

National Arbitration and Mediation

National Arbitration and Mediation Employment Rules and Procedures, Rule 14(D), says:

The Arbitrator shall have the power to award sanctions against a Party for the Party’s failure to comply with these Rules or with an order of the Arbitrator. These sanctions may include an assessment of costs, prohibitions of evidence or, if justified by a Party’s wanton or willful disregard of these Rules, an adverse ruling in the Arbitration against the Party who has failed to comply. Emphasis added.

Financial Industry Regulatory Authority (FINRA)

Financial Industry Regulatory Authority (FINRA) Code of Arbitrators for Industry Disputes Rule 13212 says:

(a) The panel may sanction a party for failure to comply with any provision in the Code, or any order of the panel or single arbitrator authorized to act on behalf of the panel. Unless prohibited by applicable law, sanctions may include, but are not limited to:

• Making an adverse inference against a party;
• Assessing postponement and/or forum fees; and …

(b) …

(c) The panel may dismiss a claim, defense or arbitration with prejudice as a sanction for material and intentional failure to comply with an order of the panel if prior warnings or sanctions have proven ineffective. Emphasis added.

Adverse inferences in labor arbitration awards

Heinz, NA, 132 LA 1089 (Hornberger, 2013) [cited at Elkouri & Elkouri, How Arbitration Works (8^th ed. 2016), p. 8-51], stated:

The Union argues that the fact that the Company failed to produce ___ and ___ to testify supports the Union’s position concerning the creditability of witnesses. This argument does not control for a number of reasons. First, ___ and ___ are bargaining unit employees who may or may not have witnessed the activity in the vicinity of the ___ Room. The record is silent as to whether they are Union officials. Second, they were equally available to both sides as witnesses. They were not peculiarly within the Company’s control. Third, given the fact that these bargaining unit employees were equally assessable to the Union, I do not make an adverse inference against the Company for not calling them.

The failure of a party to call as a witness a person who is available and should be able to provide important testimony may permit an arbitrator to form an inference that the testimony would have been adverse to the party that did not call such person as a witness. Elkouri & Elkouri, pp. 8-51 to 8-52.

Sometimes party A argues that the fact party B failed to call certain employees to testify supports party A’s position concerning the credibility of witnesses. Arbitrators look at whether these employees were equally available to both sides as witnesses. Were the witnesses peculiarly within the other party’s control? Were these bargaining unit employees who were equally assessable to the party?

Michigan case law concerning adverse inferences in arbitration

In UHG Boca, LLC v Medical Mgt Partners, Inc, unpublished per curiam opinion of the Michigan Court of Appeals, issued January 18, 2024, Docket No. 361539, lv den ___ Mich ___ (2024), after the arbitrator issued the final award, the plaintiff moved to vacate in part the award, asserting the arbitrator improperly applied the wrongful conduct rule. The arbitrator had concluded the revenue plaintiff was seeking from defendants was the result of illegal patient billing or other illegal business practices, and, in the arbitrator’s viewpoint, it would be contrary to public policy to enforce the agreements. The plaintiff also argued the arbitrator improperly applied the adverse inference rule when the arbitrator concluded, on the basis of adverse inference, that the parties were conducting an illegal enterprise. The Circuit Court disagreed with the plaintiff and confirmed the award. The Court of Appeals affirmed the Circuit Court.

The arbitrator assigned an adverse inference to the decision of certain witnesses not to testify regarding illegally obtained  police reports. The Court of Appeals indicated:

The privilege against self-incrimination permits a defendant to refuse to answer official questions in any other proceeding, no matter how formal or informal, if the answer may incriminate him or her in future criminal proceedings.” In re Blakeman, 326 Mich App 318, 333; 926 NW2d 326 (2018). However, “the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them: the amendment does not preclude the inference where the privilege is claimed by a party to a civil cause.” Id. at 334 n 4 (quotation marks and citation omitted). While plaintiff is correct that certain witnesses that did not testify were defendants, individuals associated with plaintiff also refused to testify at the hearing. Moreover, contrary to plaintiff’s assertion, the arbitrator did not rely solely on the adverse inferences when he made his determination that the businesses were operating in an illegal fashion. Accordingly, the arbitrator did not err when it applied the adverse interest rule. Emphasis added.

Lustig v Dep’t of Health and Human Services, unpublished per curiam opinion of the Michigan Court of Appeals, issued March 12, 2020, Docket No. 346447, lv den ___ Mich App ___ (2020). Defendant employer argued plaintiff employee’s due process rights were not violated by the employer’s failure to produce all of the requested documentation because he had the opportunity to be heard and to defend himself by subpoenaing the testimony of other employees to provide the information he sought. Plaintiff employee argued he was unable to present an adequate defense because he lacked requested documentation regarding his work requirements and objectives in comparison to other similarly situated employees and thus he was denied procedural due process. The Court of Appeals agreed with defendant, reversed the Circuit Court’s order, and reinstated the Michigan Civil Service Commission’s decision upholding the Hearing Officer’s determination that defendant had just cause to terminate plaintiff’s employment. The Court of Appeals indicated: “[T]he record belie[d] plaintiff’s contention that he was not afforded a fair opportunity to present an adequate defense without receiving all of the documentation that he had requested.”

In Santamauro v Pultegroup, Inc, unpublished per curiam opinion of the Michigan Court of Appeals, issued December 20, 2016, Docket No. 328404, the plaintiff employee agreed to arbitrate claims arising from his employment. He was discharged. He initiated an employment arbitration alleging wrongful discharge. The arbitrator found the plaintiff employee had deliberately spoiled evidence by removing the hard drive of his employer-owned laptop computer before returning it to the employer and dismissed the action. The Circuit Court ruled the parties’ arbitration agreement intended the arbitrator could exercise the same powers as a judge and found no basis for disturbing the arbitrator’s award. The Court of Appeals affirmed the Circuit Court’s confirmation of the award. The Court of Appeals indicated plaintiff was placed on notice that a discovery sanction was sought, was afforded ample opportunity to submit evidence on his own behalf, and no due process violation occurred.

The Common Law of the Workplace (2d ed., St. Antoine)

The Common Law of the Workplace has helpful discussions concerning adverse inferences. The Common Law of the Workplace indicates the following concerning adverse inferences.

• 1.14. Subpoenas

Arbitrators, the AAA under its rules, and, in some jurisdictions, attorneys can sign subpoenas for persons and things to demand their presence at the arbitration hearing.

 Comment:

… If subpoenaed material is not turned over by a party, or if a subpoenaed witness controlled by a party-such as a supervisor or management official-does not appear, the other party can either enforce the subpoena in court or ask the arbitrator to draw adverse inferences against the offending party. … Id. at pp. 12-13. Emphasis in original.

• 1.45. Nonappearance of Subpoenaed Witnesses … 

Comment:

… [I]f the witness is within the control of a party, an alternative method of “enforcing” a subpoena is to ask the arbitrator to draw adverse inferences against the party that did not bring the witness after it is proven a subpoena was properly served. Id. at p. 30. Emphasis in original. 

Abrams, Inside Arbitration (2013)

Inside Arbitration reviews adverse inference issues in labor arbitration and states:.

If a witness refuses to answer a proper question, a party can ask the arbitrator to direct the witness to answer. The arbitrator cannot order the witness to answer and hold him or her in contempt for not answering, as would a trial judge. If the witness still refuses to answer, the arbitrator properly presumes that the testimony would not have been favorable to the party who called the person as a witness. Id., p. 139. … 

… If the missing witness appears to the arbitrator to have played a critical role in the events raised in the grievance, the neutral will draw a negative inference that the missing witness would not have testified in support of the claim. Id., p. 147. …

… [A]rbitrators will generally draw an adverse inference from the fact that the grievant does not offer his or her side of the story directly to the arbitrator. That does not mean that management must prevail if the grievant does not testify. It means, rather, that an arbitrator expects to hear from the accused party. … Id., p. 215. Emphasis added. 

Nolan, Labor and Employment Arbitration (1998)

Labor and Employment Arbitration contains a helpful discussion concerning adverse inferences. Id., p. 225-226. Nolan indicates, in part:

As a practical matter, arbitrators cannot force a reluctant employee to testify. They may issue a subpoena but enforcing a subpoena requires court action. Arbitrators can and frequently do draw adverse conclusions from a failure to testify  … . Id., p. 225.

… Most arbitrators do draw negative inferences… . They are particularly likely to do so when the reluctant employee faces no risk of a subsequent criminal proceeding.  … Id.

Conclusion

The use of adverse inferences is alive and well in labor arbitration. Adverse inference issues can arise from failure to call a relevant witness, produce relevant documentation, silence, or the destruction of evidence.

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About the Author

Lee Hornberger is a member of the National Academy of Arbitrators.

He is former Chair of Alternative Dispute Resolution Section of State Bar of Michigan, Editor Emeritus of The Michigan Dispute Resolution Journal, former member of SBM Representative Assembly, former President of Grand Traverse-Leelanau-Antrim Bar Association, and former Chair of Traverse City Human Rights Commission.

He is member of Professional Resolution Experts of Michigan (PREMi) and Diplomate Member of The National Academy of Distinguished Neutrals. He is Fellow of American Bar Foundation; and Fellow of Michigan State Bar Foundation.

He has received Distinguished Service Award from SBM ADR Section in recognition of significant contributions to field of dispute resolution and George Bashara Award from ADR Section in recognition of exemplary service. He has received Hero of ADR Awards from ADR Section.

He holds his B.A. and J.D. cum laude from University of Michigan and his LL.M. in Labor Law from Wayne State University.

He can be contacted at leehornberger@leehornberger.com and 231-941-0746. His website is https://www.leehornberger.com/  .