SOME OBSERVATIONS ON ARBITRATION AS A METHOD OF ALTERNATIVE DISPUTE RESOLUTION
David L. Gordon JACKSON LEWIS LLP 1900 Marquis One Tower 245 Peachtree Center Avenue, N.E.
Atlanta, GA 30303-1226 T: (404) 525-8200 F: (404) 525-1173 gordond@jacksonlewis.com
Mr. Gordon is a partner in the Atlanta office of Jackson Lewis. He received his undergraduate and law degrees from the University of North Carolina at Chapel Hill. He also received a Master of Arts degree in Legislative Affairs from The George Washington University. He has practiced in the area of labor and employment law for over 20 years.
I. INTRODUCTION: ALTERNATIVE DISPUTE RESOLUTION . . . WHAT IS IT? Due to the increased number of employment lawsuits, the cost of legal services in defending them, the potential for large judgments and the delay in litigating a claim, employers are looking for resolutions without resort to the court system. As a result, use of alternative dispute resolution (“ADR”) programs is increasing. There are many different types of ADR programs an employer can adopt including internal mechanisms, such as use of peer review programs, and an ombudsman, as well as mechanisms which require a third party, such as mediation and arbitration. The program best suited to the employer will depend upon numerous factors.
II. ARBITRATION
Arbitration is a formalized alternative to court adjudication of a dispute. Generally, parties present their case to a neutral third party who is empowered to render a decision. The arbitrator, who must be independent and impartial, makes the decision after both sides have presented evidence and legal arguments at a hearing. There is no jury and arbitration results in a final binding decision which cannot be overturned by the courts except in rare circumstances. One of the most hotly-debated topics in labor and employment law is the enforceability of agreements which require arbitration to resolve employment disputes.
A. SOME RECENT UNITED STATES SUPREME COURT DECISIONS REGARDING ARBITRATION
The United States Supreme Court has issued two relatively recent decisions pertaining to arbitration of employment disputes which employers should be aware of before implementing an arbitration policy.
1. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001): Employers Can Enforce Arbitration Agreements In Federal Court Under The Federal Arbitration Act.
a. Background: The Federal Arbitration Act
Congress passed the Federal Arbitration Act (“FAA”) in 1925. The purpose behind the FAA was to stop historical judicial hostility to arbitration and to encourage arbitration of certain disputes.
b. What Was Circuit City About?
St. Clair Adams worked as a sales counselor at a Circuit City store in Santa Rosa, California. When Adams was hired, Circuit City required him to sign an employment application that contained an arbitration clause. Adams sued Circuit City in state court for discrimination under the California Fair Employment and Housing Act and various state tort claims. Circuit City sued Adams in federal court to compel arbitration relying on the FAA. The United States District Court ordered Adams to arbitration, but the Ninth Circuit found the FAA did not apply to employment contracts of any kind.
Circuit City took the case to the Supreme Court. Disagreeing with the Ninth Circuit, the Supreme Court decided the FAA applies to all employment contracts, except employees working in interstate transportation, such as seamen and railroad employees. Because Adams was not involved in transportation, the FAA applied, and the arbitration agreement he entered into was valid and enforceable.
c. The Effect of the Supreme Court's Decision in Circuit City: What Does FAA Coverage Mean?
Though the Supreme Court in Circuit City left open many questions about mandatory arbitration of workplace disputes, the Court’s decision enhances the enforceability of agreements to arbitrate between employers and employees. This is because:
• Under the FAA, enforcement of agreements is streamlined and awards are confirmed.
• The FAA authorizes a court to suspend a lawsuit when an issue in the case is subject to arbitration.
• The FAA may preempt state laws aimed at limiting or restricting arbitration agreements.
• The FAA imposes a strong presumption in favor of arbitration.
2. EEOC v. Waffle House, Inc., 534 U.S. 279 (2002): The EEOC Is Not Bound By An Employee’s Agreement To Arbitrate.
On January 15, 2002, the Supreme Court in EEOC v. Waffle House upheld the EEOC’s right to seek all available remedies for job discrimination regardless of an employer-employee agreement to resolve their disputes through binding arbitration. In Waffle House, the employee, Eric Baker, signed an agreement to arbitrate all employment disputes. After Baker was discharged, he filed a charge of discrimination with the EEOC and did not attempt to arbitrate his claim. The EEOC in turn filed suit against Waffle House seeking injunctive relief to stop Waffle House’s alleged past and present unlawful employment practices, as well as victim-specific relief such as back pay, reinstatement, compensatory damages and punitive damages. Waffle House argued that due to the arbitration agreement, the EEOC could not seek victim-specific remedies on behalf of the employee. The Supreme Court disagreed and held that the arbitration agreement did not bar the EEOC from pursuing victim-specific judicial relief in an ADA enforcement action. The Court reasoned that the EEOC’s statutory enforcement powers authorized the EEOC to obtain the relief that it sought. The Court further noted that no statutory language existed to suggest that an arbitration agreement between private parties materially changed the EEOC’s statutory function to vindicate the public interest.
After Waffle House, arbitration agreements will still prevent employees from going to court, but arbitration agreements will not prevent the EEOC from seeking
victim-specific remedies. However, because the EEOC files suit in less than one percent of all charges, the situation presented by Waffle House may be extremely rare. Nonetheless, after Waffle House, the possibility exists that an employer will have to defend against both an employee-initiated arbitration proceeding and an EEOC-employee-initiated court proceeding.
B. WHAT ARE THE REMAINING LEGAL ISSUES WHICH AFFECT ENFORCEABILITY OF ARBITRATION AGREEMENTS?
Unfortunately, Circuit City and Waffle House did not resolve all of the outstanding legal issues relating to the enforceability of mandatory, pre-dispute arbitration agreements. A brief discussion of some of the remaining questions follows.
1. The Older Workers’ Benefit Protection Act May Have To Be Followed In Implementing A Mandatory Arbitration Program
The Older Workers’ Benefits Protection Act imposes a number of requirements on waivers of substantive rights under the Age Discrimination in Employment Act (“ADEA”). Courts have not fully resolved whether an arbitration clause is subject to this law because an employee would be waiving his/her rights to a jury trial under the ADEA.
2. Implementing Mandatory Arbitration Of Statutory Rights Where Employees Are Covered By A Collective Bargaining Agreement
Courts also remain divided over whether a union contract can require arbitration of statutory claims, such as for employment discrimination.
3. Unique Fair Labor Standards Act Issues
Before Circuit City there was some authority for the argument that claims under the Fair Labor Standards Act (“FLSA”) could not be arbitrated. While Circuit City appears to have resolved this issue, there are other problems with FLSA claims. An FLSA claim can only be resolved with court approval or Department of Labor (“DOL”) supervision. It is unclear how arbitration fits into this scenario. The DOL also pursues enforcement actions on FLSA claims.
This leaves the unresolved issue of whether an arbitration agreement is a defense to a DOL enforcement action.
4. Class Actions
Class actions also may present difficult issues, particularly if only some of the class members signed arbitration agreements.
5. Payment of Arbitration Fees
An additional open question is whether an arbitration agreement may require an employee to share in the costs of the arbitration process. The circuits are split on this issue. One circuit has ruled that an arbitration agreement is unenforceable if the employee is required to pay any of the arbitrator’s fees or expenses. Other circuits adopt a case-by-case approach and look to see if the particular employee could afford to pay the fee, the expected cost differential between arbitration and litigation in court and whether the cost differential is so substantial as to deter the bringing of claims. The closest the United States Supreme Court has come to determining whether an arbitration agreement could be invalidated due to a potential payment of fees was Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000). Green Tree Financial dealt with a claim brought pursuant to the Truth In Lending Act. Essentially, the Supreme Court held that where a party seeks to invalidate an arbitration agreement upon the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such burdensome costs. The Supreme Court has not yet addressed the issue with respect to statutory discrimination claims.
6. Ability to Bind The EEOC
In light of Waffle House, it is unclear if the EEOC will be bound by: (1) an employee’s execution of a signed settlement agreement; or (2) an arbitration award or judgment.
7. Contract Defenses: State Law Issues
After Circuit City and Waffle House, employers wishing to adopt a uniform arbitration agreement still must take into consideration individual states’ common law applicable to the enforcement of any contract. The FAA does not preempt traditional contract defenses under state law, such as lack of consideration, mutuality, unconscionability, fraud, and duress.
a. Offer And Acceptance: Not Clear Or Unmistakable
An employer seeking to enforce an arbitration agreement must be able to establish offer and acceptance of the arbitration agreement. Several courts view arbitration agreements of statutory employment claims with hostility. Consequently, they scrutinize whether the offer and acceptance of the offer to arbitrate were clear and unmistakable. Accordingly, when designing a program, the employer should make the agreement to arbitrate a separate document that is written in “plain” English. Likewise, the agreement to arbitrate should not be included in a handbook. Handbooks typically state they are not binding contracts.
b. Lack Of Consideration
Generally, an offer of employment contingent upon execution of an arbitration agreement is sufficient consideration. Some states, however, do not consider continued employment as adequate consideration in the context of arbitration. Accordingly, to ensure that an agreement to arbitrate satisfies the consideration requirement for a current employee, the employer should do more than offer continued employment. Some employers link arbitration to
must consider whether arbitration will be mandatory for current employees: i.e., is it willing to terminate and/or deny benefits to long-term and productive employees because they refuse to agree to arbitrate, and, if so, what will the effect be on productivity and morale?
c. Unconscionability And Mutuality
Several courts have struck down arbitration agreements because they have sought to limit the remedies and/or damages which the employee could recover. Similarly, agreements which shift risks to employees which otherwise do not exist have been struck down: e.g., an agreement to arbitrate which requires the loser to pay attorneys’ fees. Agreements providing that the employer may modify or amend the program have been ruled unlawful. Further, agreements that take away rights from the employee without taking them away from the employer may be found unconscionable. (i.e. an arbitration clause requires arbitration only of the employee’s claims and not the employer’s claims). In fact, on remand from the Supreme Court, in Circuit City, the Ninth Circuit found the arbitration agreement signed by Adams was unconscionable because it forced employees to arbitrate all claims against Circuit City but did not require Circuit City to arbitrate all claims against the Company.
d. Duress, Coercion Or Adhesion
An applicant or employee may attempt to void an already executed arbitration agreement based upon the defenses of duress, coercion or adhesion. For applicants and employees, refusal to sign a mandatory arbitration agreement can have but one consequence -unemployment. This result and the hardships of unemployment will form the underpinnings of a duress or coercion claim. These arguments have even greater appeal when a long-term employee, on pain of termination, is suddenly compelled to sign an individual arbitration agreement.
C. SHOULD THE EMPLOYER REQUIRE ARBITRATION OF EMPLOYMENT DISPUTES: TO ARBITRATE OR NOT TO ARBITRATE?
1. What Are the Benefits?
Some of the potential benefits of arbitration are: • A private rather than a public forum;
• Quicker and more efficient dispute resolution;
• Some argue awards by arbitrators are lower than jury awards for comparable claims;
• Arbitration usually is procedurally simpler and less costly than going to court;
• Arbitrators are believed to be “expert” decision-makers bringing specific knowledge and experience to the table, as opposed to jurors, who are not; • Arbitrators are not as easily swayed as juries by passionate arguments and
sympathy;
• Employers believe they may benefit from being “repeat players” before arbitrators;
• Lower costs of litigation may mean lower employment practices liability insurance premiums; and
• Access to a dispute resolution procedure such as arbitration can lower the risks of unionization.
2. What Are the Risks?
• Limited likelihood of summary disposition;
• Defense costs still may be high, and the employer likely will have to pay the fees and expenses of the arbitrator;
• Easier access to arbitration may mean a proliferation of employee disputes over relatively minor matters that would not be heard in court;
• Courts have given arbitrators virtually unrestricted discretion to decide issues of law, including evidentiary rulings, without interference by courts. In addition, under the FAA, appeal of an award is very limited: the limited grounds include corruption, fraud, actual bias, violation of public policy; • Arbitrators are known to “split the baby,” appeasing both sides of a dispute
by awarding part of the relief requested, and making it more likely the employee will “win”;
• Arbitrators are not accountable to the electorate, the press, or politics;
• Political or public relations concerns as arbitration is viewed with disdain by civil rights groups and plaintiffs’ lawyers; and
• Arbitrators’ records are often unknown.
D. WHAT SHOULD THE EMPLOYER CONSIDER BEFORE
IMPLEMENTATION
Before implementing an arbitration program, an employer should analyze its history of employment disputes over a three to five year period to decide whether the advantages of requiring arbitration outweigh the risks. The review should include the following:
• defense costs;
• the number of lawsuits;
• the number of settlements and settlement value;
• the cost of implementation of the program, including administering the agreement and cost of consideration for current employees; and
• the effects implementation will have on employee morale and public relations.
E. IMPLEMENTING AN ARBITRATION PROGRAM
The factors an employer should consider in implementing and designing a mandatory arbitration program include:
• should the program be for all employees or some subset of employees: e.g., non-exempt employees; employees of a particular division. The employer may wish to “test market” the program before rolling it out for the entire company;
• should the program be limited to new hires;
• should the program be voluntary for existing employees;
• should there be required steps before arbitration: e.g., grievance procedures, peer review, mediation;
• what procedural rules should govern the arbitration and appeal of the arbitrator’s decision;
• how should the costs for the arbitration be handled; and • who will bear the costs.
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