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WASHINGTON -- Securities firms may rethink requiring mandatory arbitration in employment discrimination claims in the wake of a giant stockbroker's agreement last week to abandon that practice, according to an attorney who hammered out the deal.

As part of the proposed settlement for sexual harassment and discrimination claims, New York-based Smith Barney Inc. agreed to handle employee discrimination claims differently and accept liability for past sexual discrimination and harassment.

Rather than go through a one-time mandatory arbitration process, claimants would have three chances to prove their claims of discrimination, with Smith Barney paying for "reasonable" attorneys fees. Smith Barney would also be liable for any punitive damages awarded in addition to actual damages by mediators and arbitrators.

The proposal places no cap on the amount of punitive damages that can be awarded to any individual claimant. The final cost to the Travelers Group unit could be considerable, given that approximately 20,000 present and former employees are eligible to file claims.

"One of the things we are concerned about is the spread of mandatory arbitration beyond the securities industry," said Mary Stowell, a partner in the Chicago law firm Leng Stowell Friedman & Vernon.

Ms. Stowell represented a group of 25 current and former employees of Smith Barney Inc. in their suit charging widespread sexual harassment and discrimination. The suit, filed last year, alleged that women were denied promotions and were the victims of unwanted sexual advances. The suit contended that Smith Barney management either ignored their claims or handled them in a prejudicial manner.

Mandatory arbitration led to the situation that brought about the Smith Barney suit, she contends.

"The small number of women and minorities in top management, as well as the occasional locker room atmosphere, is a logical upshot of employees not being able to take their claims to court," she said. In many cases, employees must agree to accept mandatory arbitration as the sole way to settle employment disputes as a condition of employment.

"The problem with the use of arbitration in securities industry cases is it has been alleged that the use of arbitration in the securities industry is not truly impartial," said Karen Ludington, president of the Ludington Co. Inc., a Holden, Mass.-based employment consultant.

"I think Smith Barney shows us that risk managers, CEOs and general counsels are certainly sensitive to what Texaco went through with its $176 million settlement of an employment discrimination class action. So this recent proposed settlement once again demonstrates the huge transactional costs of trying to litigate a large employment discrimination class action," said Gerald L. Maatman Jr., a partner with Baker & McKenzie in Chicago in charge of the firm's employment law practice.

"It shows a company now has to take into account the concerns of consumers, shareholders and the media in being branded as a company that discriminates against its workforce," he said.

Under the proposed settlement, which still must be approved by U.S. District Court Judge Constance Motley, claims would be resolved through a three-step process. First the claim would go to Smith Barney, which could respond and settle if both parties agree.

If the parties don't agree, the matter would go to non-binding mediation before a neutral mediator chosen from a pre-approved pool. Smith Barney would pay up to $5,000 of the claimants' attorneys fees whether the matter is settled or not, unless the mediator finds the claim to be frivolous.

If mediation fails, the dispute would go to a three-person alternative dispute resolution panel. At least one panel member must be a woman, at least one must be knowledgeable and experienced in dispute resolution, and at least two shall be knowledgeable and experienced in employment-related claims. Smith Barney will pay the cost of the arbitration and up to $5,000 of the claimants' attorneys fees. The ADR panel's finding would be final and binding and could only be appealed under grounds allowed by the Federal Arbitration Act, such as an award being fraudulently procured.

The ADR panel can award claimants the same relief they would have been entitled to in court, plus other fees. Claimants also can receive unlimited punitive damages if they prove by "clear and convincing evidence" that any one in a variety of specified management positions "acted, or failed to act with willfulness or reckless indifference."

"At both levels, if she accepts the settlement at the mediation or wins at the arbitration, she gets all reasonable fees," said Ms. Stowell.

Ms. Ludington said she hopes the review panels that would be created under the Smith Barney settlement would be "fair and independent bodies. It would be wrong to go from an allegedly pro-employer system to an allegedly pro-employee system, because then you would once again have unfairness."

"Certainly the idea of ADR is not new to discrimination and harassment cases. I'm a big believer in ADR. I think this is, in my experience, at least, a very unusual agreement," said Ms. Ludington.

Despite the price tag, the company's head announced that Smith Barney is "pleased to have entered into settlement" to resolve the sexual harassment and discrimination claims.

"The settlement is entirely consistent with our commitment to provide all of you -- regardless of race, gender, religion or sexual orientation -- with the means and opportunity to advance to your full potential. We are particularly pleased that the settlement is designed to effect real change and progress in an industry in which women and minorities have historically been unrepresented, rather than simply to deliver monetary rewards to plaintiffs," wrote Chairman and Chief Executive Officer James Dimon in a Nov. 18 letter to Smith Barney employees announcing the proposal.

A Smith Barney spokesman said there is no way to estimate how much the settlement will cost. He was not certain what insurance would cover any portions of the settlement. Ms. Stowell also said she was unsure whether insurance would respond to the claims.

The proposal sets out a variety of safeguards for claimants, including that the claimant doesn't have the burden of proof for gender-based claims, that no claimant can be required to undergo a physical or psychological exam, and that no evidence of the sexual history of either party can be introduced other than sexual contact between the claimant and the accused.

In addition, Smith Barney would establish a database to track complaints of harassment and discrimination, spend $15 million over four years on diversity programs, meet specific percentage goals for the recruitment and advancement of women in management positions and training programs, and award an aggregate $2.05 million in bonuses to the class representatives who brought the initial action. Finally, Travelers Group will guarantee Smith Barney's financial condition.

Not surprisingly, the settlement won praise from the leader of one of the nation's most influential women's rights groups.

"Smith Barney executives have agreed to a landmark departure from the onerous practice of employment discrimination complaints. For the next two years, an estimated 20,000 women will have access to an alternative dispute resolution process with an unlimited fund to compensate them for losses, with damages, including punitive damages, available against the firm for complaints going back to May 1993. Although the process falls short of a jury trial in federal court, it is better than industry arbitration and a first step in reforming employment practices on Wall Street," Patricia Ireland, the president of the Washington-based National Organization for Women, said in a prepared statement.

The case, however, has not drawn much attention from employer groups such as the National Assn. of Manufacturers or the U.S. Chamber of Commerce because making prospective employees agree to mandatory arbitration of disputes as a prerequisite of employment is not a common practice in many industries outside securities. A call to the National Assn. of Securities Dealers seeking comment was not returned.