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Arbitration
of Employment Disputes:
The New Privatization of the Judicial System
By Ross Runkel
Bio email
Editor, Employment Law Memo
April 1, 2004
This article will not be updated. For recent court decisions:
Arbitration is coming of age as a preferred method for deciding legal disputes between employers and non-union employees. Encouraged by a series of pro-arbitration court decisions, employers are including arbitration clauses in individual employment contracts, employee policy manuals and handbooks, and employment application forms. At the same time, the drafting of such clauses is being shaped by a number of court decisions that place limitations on an employer's ability to force employees to arbitrate their legal disputes.
Arbitration is a simple concept. Parties who have a dispute with each other submit the matter to another person, who then decides it. The arbitrator resolves all disputes as to the facts and law. The arbitrator's decision is both final and binding, and there is no appeal from the arbitrator's decision. Because arbitration is a process that is established by contract, it can take a variety of forms. One form is the "post-dispute" agreement that is entered into after the parties are aware that they have a dispute. Post-dispute agreements rarely lead to legal controversy, and courts have a history of enforcing them by ordering the parties to proceed to arbitration. It is "pre-dispute" arbitration agreements that have resulted in extensive controversy. A pre-dispute arbitration agreement is an agreement that is signed before the parties have a dispute that needs resolving. The agreement provides that any future dispute will be resolved through arbitration.
Properly drafted, a pre-dispute arbitration clause will cover all legal disputes (federal and state, statutory and common law), will prevent the dispute from being litigated in court, and will shift the decision-making to a private arbitrator. One simple form of pre-dispute arbitration agreement formerly provided by the American Arbitration Association is as follows:
Any controversy or claim arising out of or relating to this [employment application; employment ADR program; employment contract] shall be settled by arbitration administered by the American Arbitration Association under its National Rules for the Resolution of Employment Disputes and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
Arbitration proponents view arbitration as vastly superior to court litigation, arguing that it is faster, simpler, cheaper, and confidential. Opponents argue that it is unfair for employers to force employees to agree to arbitrate legal claims that otherwise would be decided by a judge and jury, that for employees arbitration it is more expensive than litigation, and that they give up important procedural advantages. In addition, opponents argue that disputes involving claimed violations of important civil rights statutes should be resolved in the courts in full view of the public. In response to such criticisms, a Task Force on Alternative Dispute Resolution in Employment promulgated a Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising out of the Employment Relationship. Task Force on Alternative Dispute Resolution in Employment, Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising out of the Employment Relationship. Also, this clash of views has resulted in a significant amount of litigation dealing with the enforceability of pre-dispute arbitration agreements. Ironically, the courts are now called upon to pass judgment on arbitration clauses that were drafted with a view toward staying out of court.
There are two histories of the arbitration of employment disputes. One covers arbitration in connection with collective bargaining agreements in the unionized sector, usually called "traditional labor arbitration" or simply "labor arbitration." The other deals with individual agreements to arbitrate in the non-union sector, usually called "employment arbitration." These histories are remarkably different. Labor arbitration has existed longer, is favored by organized labor, and finds its legal support in federal labor statutes. Employment arbitration is a more recent phenomenon, is favored by employers, and finds its legal support in arbitration statutes that have no particular focus on employment. The histories are the same, however, in that they both have solid legislative and judicial support.
A. Traditional Labor Arbitration
Organized labor has a long history of demanding that collective bargaining agreements contain arbitration clauses. During the decades preceding the Great Depression labor unions developed a deep distrust of judges and the court system. They saw judges as being responsible for issuing injunctions against peaceful strikes and picketing, blocking their efforts to organize employees, and jailing their leaders. They did not want these same judges to be in charge of enforcing their hard-won labor contracts.
Many employers resisted the notion of arbitration, primarily because they did not wish to have outsiders second-guessing their decisions. They also understood that litigation was a better forum for them because the cost of litigation would keep down the number of claims and because many judges had pro-management leanings.
Today nearly every collective bargaining agreement contains an arbitration clause. The main reasons are that agreeing to arbitration is necessary in order to settle contract negotiations, the employer gains a trade-off when the union agrees not to go on strike during the term of the agreement, and the employer gains advantages from arbitration.
It is important to understand that in the unionized portion of the private sector the alternative to arbitration is not litigation, it is the strike. Unions see the strike, not litigation, as the alternative method of enforcing their labor agreements. Therefore, the costs and benefits of labor arbitration must be weighed against the costs and benefits of strikes.
The
legal approach to labor arbitration changed dramatically during the 20th
century. Prior to the Taft-Hartley
Act of 1947, the enforcement of collective bargaining agreements was a matter
for state courts, and they applied state law.
In many states pre-dispute agreements to arbitrate could not be enforced
at all. In some states an
employer's refusal to honor an arbitration agreement resulted in an award of
money damages, but the union still could not force the employer to actually
engage in arbitration.
In
1947, the Taft-Hartley Act gave unions the right to sue in federal court to
enforce their collective agreements. Labor Management Relations Act of
1947 § 301, 29 U.S.C. § 185.
In the ensuing years the United States Supreme Court decided a number of
important points.
Interpretation of collective agreements, including
arbitration clauses, is a matter of federal law.
State courts can still be used, but must apply federal law.
Textile Workers Union v.
Lincoln Mills, 353 U.S. 448 (1957); Charles
Dowd Box Co. v. Courtney, 368 U.S. 502 (1962); Local
174, Teamsters v. Lucas Flour Co., 369 U.S. 95 (1962).
Arbitration clauses are enforceable, and the remedy for
refusing to arbitrate is a court order to engage in arbitration. Textile
Workers Union v. Lincoln Mills, 353 U.S. 448 (1957).
An employer must arbitrate all disputes, including frivolous ones.
United Steelworkers of
America v. American Mfg. Co. , 363 U.S. 564 (1960).
A court's role is merely to decide whether the parties
agreed to arbitrate, not to get involved in the merits. United
Steelworkers of America v. Warrior & Gulf Nav. Co, 363 U.S. 574
(1960).
A court must enforce an arbitrator's award so long as it
"draws its essence" from the labor contract. United
Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S.
593 (1960).
It is up to the arbitrator, not the court, to determine
what the facts are in a particular case. A
court cannot reject an arbitrator's findings of fact simply because it disagrees
with them. United
Paperworkers International Union v. Misco, 484 U.S. 29 (1987).
It is up to the arbitrator, not the court, to interpret the contract. A court must affirm the arbitrator's interpretation so long as the arbitrator is "even arguably construing or applying the contract." A court must enforce an award even if the arbitrator committed "serious error."
It is for the arbitrator, not the court, to decide matters of procedure. United Paperworkers International Union v. Misco, 484 U.S. 29 (1987).
It is possible
to overturn an award on the ground that it violates "public policy,"
W.R. Grace & Co. v. Rubber
Workers, 461 U.S. 757 (1983), but that will be difficult to do. United
Paperworkers International Union v. Misco, 484 U.S. 29 (1987).
A unanimous Supreme Court recently upheld an award in which the
arbitrator reinstated a truck driver who had twice tested positive for
marijuana. Eastern
Associated Coal Corp v. United Mine Workers of America, 531 U.S. 57
(2000).
Meanwhile, in the 1950s the National
Labor Relations Board (NLRB) began developing a policy of "deferral"
to arbitration. Although the NLRB
does not enforce arbitration agreements or enforce arbitrators' awards, the
Board routinely allows the arbitration process to substitute for its own
administrative processes in unfair labor practice cases.
If a union files an unfair labor practice charge against an employer, and
there is a collective agreement containing an arbitration clause, then the Board
usually will decline to exercise jurisdiction and await the outcome of the
arbitration. Collyer Insulated Wire, 192 N.L.R.B. 837 (1971).
After the arbitration takes place, the Board usually will dismiss the
unfair labor practice charge. Spielberg Manufacturing Company, 112
N.L.R.B. 1080 (1955).
It
is customary in drafting collective bargaining agreements to write the
arbitration clause so that the arbitrator is given only the power to interpret
and apply the agreement. Indeed,
an award that strays into holding that an employer has violated a statute risks
being invalidated for not drawing its essence from the contract.
But labor arbitrators frequently decide employees' claims of employment
discrimination because the contracts contain "just cause" clauses and
clauses forbidding discrimination. Once
the arbitrator decides such a case, it is final and binding as between the union
and the employer. That leaves the
question of whether the decision is final and binding as between the employee
and the employer.
In Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974), a discharged employee claimed he had been fired without just cause and in violation of the employer's contractual promise not to discriminate on the basis of race. His union took the matter to arbitration as provided in the collective agreement. After the employee lost in arbitration, he sued the employer claiming a Title VII violation. The employer argued that the employee's Title VII claim was barred by the fact that it had already been arbitrated, but the Supreme Court disagreed. The employee was allowed to proceed in court with his Title VII claim. The result is not surprising because it was the union (not the employee) who signed the agreement to arbitrate, the actual parties in the arbitration were the employer and the union (not the employee), and the arbitrator was sitting to decide a contractual issue (not a Title VII issue). The net result is that the award in a traditional labor arbitration binds the union as to the contractual issue, but does not bind the employee as to the statutory issue.
Although it seems unlikely that a union would have the authority to waive an individual's right to sue under federal civil rights statutes, only the Fourth Circuit has held that a union has the power to waive an individual employee's right to sue for violation of federal civil rights statutes. Austin v. Owens-Brockway Glass Container, Inc., 78 F.3d 874 (4th Cir. 1996). The Supreme Court has refused to address that issue head-on. The court has said that, assuming a union has such a power, the waiver must be done in "clear and unmistakable" language. Wright v. Universal Maritime Svcs. Corp., 525 U.S. 70, 82 (1998).
B. Individual Agreements To Arbitrate
In
the non-union sector the roles of the advocates are reversed.
It is the employers who seek individual arbitration agreements.
Employees, organized labor, and pro-employee groups oppose pre-dispute
agreements to arbitrate, especially when they are required by an employer as a
condition of employment.
The
employment litigation landscape has changed dramatically in the past 40 years.
Between 1963 and 1993, Congress enacted a series of employment
discrimination statutes (Equal Pay Act, Title VII, ADEA, ADA) and other
employment statutes such as the Family and Medical Leave Act.
In 1991 Congress allowed for jury trials in Title VII cases, and expanded
available remedies to include compensatory damages and punitive damages.
Civil Rights Act of 1991, 42 U.S.C. § 1981a.
In the past 25 years state courts have become more hospitable to employee
claims such as wrongful discharge, and many courts have turned the legal notion
of "at-will employment" into little more than a slogan.
Thus, employees have available a greater number of statutory and
common-law claims than ever before.
Employers
sought ways to respond to the increase in employment litigation, the risk of
large jury verdicts, and the related unfavorable publicity.
One of the responses was to require non-union employees to sign
agreements that all future disputes relating to the employment relationship
would be resolved through arbitration.
Much
of the important legal history had little or nothing to do with the employment
relationship. States began to adopt
pro-arbitration statutes in the 1920s. In
1955 the National Conference of Commissioners on Uniform State Laws
promulgated the Uniform
Arbitration Act. Thirty-five
jurisdictions have adopted the Uniform Act, and 14 have adopted substantially
similar legislation. In 2000 the
Commissioners put forth a Revised
Uniform Arbitration Act
Revised Uniform Arbitration Act, that addresses a number of issues that arise in modern
arbitrations.
In
1925 Congress enacted the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et.
seq., in
response to the needs of commercial interests that were frustrated by the
unwillingness of American courts to enforce their arbitration agreements.
The basic purpose of the FAA was to put arbitration agreements on the
same footing as other contracts.
The
two most significant sections of the FAA are:
Section 1. "Maritime Transactions" And "Commerce" Defined; Exceptions To Operation Of Title.
"Maritime transaction", as herein defined, means charter parties, bills of lading of water carriers, agreements relating to wharfage, supplies furnished vessels or repairs to vessels, collisions, or any other matters in foreign commerce which, if the subject of controversy, would be embraced within admiralty jurisdiction; "commerce", as herein defined, means commerce among the several States or with foreign nations, or in any Territory of the United States or in the District of Columbia, or between any such Territory and another, or between any such Territory and any State or foreign nation, or between the District of Columbia and any State or Territory or foreign nation, but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce. 9 U.S.C. § 1.
Section 2. Validity, Irrevocability, And Enforcement Of Agreements To Arbitrate.
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2.
The
Supreme Court has had several opportunities to interpret the FAA in the
commercial context, and has ordered enforcement of agreements to arbitrate
claims arising under a variety of federal statutes, including the Sherman
Antitrust Act, Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), the Securities Exchange Act, Shearson/American
Express, Inc. v. McMahon, 482 U.S. 220 (1987), the Securities Act of 1933, Rodriguez
de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989)
(overruling Wilko v. Swan,
346 U.S. 427 (1953)),
the Racketeer Influenced and Corrupt Organizations Act (RICO), Shearson/American
Express, Inc. v. McMahon, 482 U.S. 220 (1987), and the Equal Credit Opportunity Act, Green
Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).
The Court also decided that the FAA preempts any state law that is
hostile to arbitration. Southland
Corporation v. Keating, 465 U.S. 1 (1984).
In
1991 the Supreme Court took up its first employer-employee FAA case, Gilmer
v. Interstate/Johnson Lane Corp, 500 U.S. 20 (1991).
Robert Gilmer was employed in the securities industry, and his
registration with the New York Stock Exchange provided that he would arbitrate
any claim between himself and his employer.
When Gilmer sued his former employer claiming a violation of the Age
Discrimination in Employment Act (ADEA), the employer responded by asking the
court to compel arbitration of the ADEA claim.
The Supreme Court held that Gilmer must arbitrate his ADEA claim.
The Court had already held that federal statutory claims could be subject
to arbitration under the FAA. The
only question left was whether there was anything in the ADEA itself that would
preclude arbitration, and the Court found none.
"By agreeing to arbitrate a statutory claim, a party does not forgo
the substantive rights afforded by the statute; it only submits to their
resolution in an arbitral, rather than a judicial, forum." Gilmer
v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991), quoting from Mitsubishi
Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985).
Following Gilmer, lower courts quickly began enforcing arbitration
agreements in a wide variety of employment cases involving federal and state
statutory claims and claims under state common law.
Gilmer left open one significant
legal issue, whether the FAA applies when the agreement to arbitrate is
contained in a contract between an employer and employee.
The Gilmer
Court was able to ignore that issue because Gilmer's arbitration agreement was
contained in his NYSE registration rather than in an employment contract.
The FAA contains a clause that excludes
from its coverage "contracts of employment of seamen, railroad employees,
or any other class of workers engaged in foreign or interstate commerce."
9 U.S.C. § 1.
The unresolved issue was whether the FAA's exclusion clause excluded all
employment contracts, or only those involving transportation workers.
By 2001, nearly every court that had addressed the issue had given that
clause a narrow reading, holding that the FAA applied to all cases except when
an arbitration clause was contained in the employment contract of a
transportation worker. However, the Ninth Circuit had held that the FAA did not
apply if the arbitration agreement was contained in an employment contract.
Circuit City
Stores, Inc. v. Adams, 194 F.3d 1070 (9th Cir. 1999); Craft
v. Campbell Soup Co., 177 F.3d 1083 (9th Cir. 1999).
In
2001 the Supreme Court overruled the Ninth Circuit in Circuit
City Stores, Inc. v. Adams, 532 U.S. 105 (2001), holding that the FAA applies to contracts signed
by most employees, and excludes from its coverage only the employment contracts
of seamen, railroad employees, and other transportation workers.
The Court split 5 to 4 on three core issues.
First, was the extent to which Congress exercised its commerce
clause power in the FAA. In 1925,
when the FAA was enacted, it was widely understood that Congress had rather
limited authority to regulate commerce. FAA
§ 2 applies to a contract "involving commerce," so the Court had to
decide whether to interpret "involving commerce" narrowly as it was
understood in 1925 or broadly as it was understood in 2001.
The majority decided for the broad interpretation, and rejected an
analysis that would "depend[ ] upon the date of adoption."
Second, was whether FAA § 2's
phrase "transaction involving commerce" is limited to commercial and
maritime transactions, and the Court held that it is not.
Third, was the meaning of FAA § 1's
exclusion from coverage of "contracts of employment of seamen, railroad
employees, or any other class of workers engaged in foreign or interstate
commerce." The Court
interpreted this exclusion narrowly so that the "other class" of
excluded workers must be similar to seamen and railroad workers, that is,
transportation workers.
As
a legal matter, the Gilmer and Circuit City decisions merely take
a long-standing federal statute and apply it in the employment context.
Although opponents of arbitration have a number of good arguments, the
policy judgment was made by Congress in 1925: written agreements to arbitrate
must be enforced by the courts. The
practical results of the Supreme Court's decisions are more profound.
Arbitration opponents have lost the major legal battles.
The remaining legal issues are matters of detail, albeit important
detail. The publicity given to the
Supreme Court's decisions, together with the prestige that goes with that
Court's imprimatur, have created a higher level of interest in arbitration as an
alternative to litigation.
III. Anatomy Of A Typical Employment Arbitration
Bearing in mind that every situation is unique, a
typical arbitration case will proceed along the following lines.
The employer and the employee sign an agreement that any future dispute
between them will be resolved through arbitration. The agreement provides that any arbitration will be conducted
according to the rules of an independent agency such as the American Arbitration
Association (AAA), a private, non-profit group.
Later, a dispute arises in which the employee claims that she has been
sexually harassed and lost out on a promotion because of her sex.
The employee sends a written notice (a demand for arbitration) and a
filing fee to the agency, the agency gives the employer a short time for a
response, and the employer responds (perhaps adding a counter-claim).
The agency then arranges for the appointment of an arbitrator.
The arbitrator schedules a hearing date and may also hold a pre-hearing
conference, probably by telephone. The
two parties exchange relevant documents and a list of witnesses.
The hearing is in a meeting room at a hotel or on the employer's
premises, and everyone sits at one table. There
might be a stenographer present. If
not, the arbitrator might announce that the hearing will be recorded but only
the arbitrator will have access to the tapes.
The rest of the day looks a lot like a trial in a courtroom.
Each party makes an opening statement, each party calls witnesses and
cross-examines the other's witnesses, and documents are presented.
At the end of the hearing, either each party makes an oral closing
argument, or there will be filing of written briefs at a later date.
About 30 days after the hearing ends (or the arbitrator receives the
briefs), the arbitrator mails to each party a written opinion and award and a
fee for services and expenses. The
dispute is now resolved, and there is no appeal.
IV. The EEOC - Objector And Litigator
In 1997 the EEOC issued a Policy Statement stating that a mandatory arbitration provision that is required as a condition of employment is inconsistent with the civil rights statutes enforced by the EEOC. Equal Employment Opportunity Commission, Policy Statement on Mandatory Binding Arbitration of Employment Discrimination Disputes as a Condition of Employment (July 10,1997). That Policy Statement has not been persuasive in the court system, Borg-Warner Protective Services Corp. v. EEOC, 245 F.3d 831 (D.C. Cir. 2001), and cases collected. Although one federal district court issued an injunction prohibiting an employer from requiring employees to sign arbitration agreements, EEOC v. Luce, Forward, Hamilton & Scripps, 122 F.Supp.2d 1080 (C.D. Cal. 2000), that decision was expressly overruled in EEOC v. Luce, Forward, Hamilton & Scripps (9th Cir 09/03/2002).
The
EEOC can bring its own suits, and obviously an employee cannot waive the EEOC's
right to sue. There had been a
split of authority on whether the EEOC can recover damages and obtain other
relief on behalf of an employee who signed an agreement to arbitrate.
Compare EEOC
v. Waffle House, Inc., 193 F.3d 804 (4th Cir. 1999); EEOC
v. Kidder, Peabody & Co., 156 F.3d 298 (2nd Cir. 1998), EEOC
v. Frank's Nursery & Crafts, Inc., 177 F.3d 448 (6th Cir. 1999). In EEOC
v. Waffle House, Inc., 534 U.S. 279 (2002),
the Supreme Court decided that issue in favor of the EEOC. In Waffle House
job applicant Eric Baker filled
out a job application which included an arbitration clause. After he
suffered a seizure, the employer discharged him. Baker filed a charge with
the EEOC, and the EEOC brought suit in its own name against the employer.
The Fourth Circuit held that the arbitration agreement restricted the EEOC's
judicial remedies, and the Supreme Court reversed. The EEOC has
independent statutory authority to sue and obtain remedies (e.g.,
reinstatement, back pay, front pay, compensatory and punitive damages) on behalf
of an employee without regard to whether the employee agreed to arbitrate.
V. Pre-Arbitration Legal Issues
A. Compelling The Employee To Agree
Increasingly, employers are asking employees to sign
arbitration agreements, and are discharging those who do not. For employees, this is perhaps the most distasteful feature
of the current trend toward shifting from litigation to arbitration.
Typically, the employer is in the driver's seat and can offer an
arbitration agreement on a take-it-or-leave-it basis.
The employee or prospective employee either signs or looks for another
job. This practice raises two legal questions.
First, if the employee signs the agreement under these
circumstances, will the courts enforce it?
Second, if the employee refuses and is discharged, will the
employee have a claim for wrongful discharge?
An agreement signed under take-it-or-leave-it conditions is called an
"adhesion contract" because the employee must either adhere to the
offer or reject it. Although the
term "adhesion contract" is often used as a pejorative, the vast bulk
of all contracts are adhesion contracts, and they are nevertheless enforceable.
In order for adhesion contracts to be unenforceable, there must be some
provision in the contract that is so one-sided as to be unfair or oppressive. Agreements to arbitrate are no different.
In Gilmer, the Supreme Court specifically rejected Gilmer's
argument that unequal bargaining power should make his agreement unenforceable.
Later court decisions uniformly hold that an arbitration agreement is not
rendered unenforceable merely because it is an adhesion contract. Lagatree
v. Luce, Forward, Hamilton & Scripps, 74 Cal.App.4th 1105 (Cal. App. 1999), and cases
collected.
Donald Lagatree was a legal secretary employed by a law firm. When Lagatree refused to sign an arbitration agreement, the firm discharged him. Lagatree sued alleging that this was a wrongful discharge in violation of public policy under California law. The California Court of Appeal disagreed. Lagatree v. Luce, Forward, Hamilton & Scripps, 74 Cal.App.4th 1105 (Cal. App. 1999). In order to succeed in a claim of violation of public policy in California, an employee must show that the employer has interfered with some policy of the public. The court said that Lagatree had a right to a jury trial and a right to a judicial forum, but that these rights were subject to being bargained away and waived. Because the rights could be waived by agreement, they were not rooted in public policy. Therefore, the discharge was not wrongful under California law. (In a related case, EEOC v. Luce, Forward, Hamilton & Scripps (9th Cir 09/03/2002), discussed below, the EEOC sued Mr. Lagatree's employer and obtained an injunction against the use of arbitration agreements, but the Ninth Circuit reversed.)
B. Legal Claims Subject To Arbitration
A well-drafted arbitration clause should keep practically every employee-employer dispute out of court. This includes cases involving federal discrimination statutes (e.g., Title VII, ADA, ADEA), federal wage and hours laws, state common law claims involving contract rights and torts (e.g., wrongful discharge), state statutes, and state constitutional provisions. Unlike waivers in collective bargaining agreements, courts should give broad effect to broad language in individual contracts, and not require a laundry list of specific statutes. See Brown v. ITT Consumer Financial Corp., 211 F.3d 1217 (11th Cir 2000). But see, Prudential Insurance Co. of Amer. v. Lai, 42 F.3d 1299 (9th Cir. 1994). The clause can also capture disputes based on events that took place prior to signing the agreement.
For a period of four years the Ninth Circuit took the position that an employer cannot require, as a condition of employment, that an employee sign an agreement to arbitrate Title VII cases. Duffield v. Robertson Stephens & Co. 144 F.3d 1182 (9th Cir.) cert. denied, 525 U.S. 982 (1998). The Duffield case was expressly overruled in EEOC v. Luce, Forward, Hamilton & Scripps (9th Cir en banc 09/30/2003) by an 8-3 vote.
C. Enforceability Of The Agreement
Although most current litigation involves attempts to enforce arbitration agreements by invoking the Federal Arbitration Act, agreements to arbitrate also may be enforceable by virtue of state statutes or state common law. Nearly all states have arbitration statutes that require courts to enforce arbitration agreements. These statutes vary from state to state, and typically are different from the FAA. For example, most state statutes are modeled on the Uniform Arbitration Act and specifically apply to all written employment agreements, and do not contain the FAA's exclusion of contracts signed by transportation workers. In many states an agreement to arbitrate is enforceable as an ordinary contract without the need to resort to statutory authority.
Before examining the enforceability of an arbitration agreement, it is important to understand the "separability" doctrine outlined by the United States Supreme Court in Prima Paint Corp. v. Flood & Conklin Manufacturing Co. 388 U.S. 395 (1967). This case makes a distinction between arguments that the agreement to arbitrate is unlawful and arguments that the underlying agreement containing the arbitration clause is unlawful. In Prima Paint two commercial parties signed a contract in connection with the sale of a business, and the contract contained an arbitration agreement. The plaintiff sued to rescind the contract on the ground that it was fraudulently induced by the defendant's misrepresentation of solvency, and the defendant moved to compel arbitration. The Court separated the issues of alleged fraud as to the underlying contract and alleged fraud as to the arbitration clause itself. Because there was no claim of fraud as to the arbitration clause, the Court held that the arbitration agreement must be enforced. Any challenges to the enforceability of the underlying contract are to be decided by the arbitrator and not by a court. Thus, if the disputed issue is within the scope of the arbitration clause, the arbitrator rather than the court will decide whether the underlying contract is tainted by fraud, illegality, mistake, duress, unconscionability, ultra vires and the like. The court's job is to focus on the enforceability of the agreement to arbitrate.
In cases arising under state arbitration statutes most courts have followed the Prima Paint separability doctrine, but a significant minority have not. Revised Uniform Arbitration Act § 6, Comment 4 (collecting cases). The Revised Uniform Arbitration Act codifies the Prima Paint rule as follows:
The court shall decide whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate. Revised Uniform Arbitration Act § 6(b).
An arbitrator
shall decide whether a condition precedent to arbitrability has been fulfilled
and whether a contract containing a valid agreement to arbitrate is enforceable.
Revised
Uniform Arbitration Act § 6(c).
In Howsam v. Dean Witter Reynolds, Inc. (12/10/2002), the US Suprme Court held that it is for the arbitrator, not the court, to decide whether a contractual statute of limitations barred arbitration. [This is not an employment case, but should have an impact on employment cases.]
When analyzing whether an arbitration agreement is enforceable, there usually are two separate questions. First, there is the question of whether arbitration (or the specific arbitration agreement) is compatible with the underlying legal claim being raised by the employee. This question arises most dramatically when the underlying claim is that the employer has violated a federal civil rights act. Second, there is the question of whether the specific agreement is enforceable as a matter of state law. This question involves issues such as offer, acceptance, consideration, and unconscionability.
The Supreme Court has had several occasions to decide whether to enforce agreements to arbitrate claims arising under federal statutes. Without exception, the Court has found that arbitration under the FAA was compatible with the other federal statutes. One of those decisions involved a federal civil rights statute dealing with employment, the Age Discrimination in Employment Act (ADEA). In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Court found nothing in the ADEA's text or legislative history that explicitly precluded arbitration, and found no "inherent conflict" between arbitration and the ADEA's underlying purposes.
In Gilmer the Court gave short shrift to several of the employee's objections to the specific arbitration system set up by the New York Stock Exchange (NYSE). In doing so, the Court made the following points: (1) The NYSE rules provide protections against biased arbitrators by requiring disclosure of arbitrators' backgrounds, requiring disclosure of circumstances that might preclude arbitrators from being objective and impartial, and providing for peremptory and for-cause challenges. FAA § 10 allows courts to overturn awards that are tainted by partiality or corruption. (2) Although NYSE rules allow less discovery than is allowed in federal court, they allow for production of documents, requests for information, depositions, and subpoenas. (3) NYSE rules require written awards that include a summary of issues and a description of the award. These awards are available to the public. (4) There are no restrictions on the types of relief an arbitrator may award. (5) "[S]o long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991), quoting from Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985).
The FAA itself does not spell out any specific requirements for an
enforceable arbitration clause. Nevertheless,
some courts require specific safeguards, saying that they are necessary in order
for arbitration to be consistent with federal civil rights statues.
The District of Columbia Circuit Court has taken the lead. Cole v.
Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997). interpreted Gilmer as
requiring five safeguards when an employer, as a condition of employment,
requires arbitration of future disputes involving federal civil rights statutes:
(1) a neutral arbitrator, (2) more than minimal discovery, (3) a written
award, (4) availability of all remedies that would be available in court, and
(5) no requirement for the employee to pay either unreasonable costs or
any of the arbitrator's fees or expenses. Although
it is often said that an arbitration agreement must provide these
safeguards, there is probably no requirement that the agreement spell out each
one. It should be enough that the agreement does not affirmatively
take them away.
The Cole safeguards should not be required in an FAA case
involving a claim arising under state law, as the court that decided the Cole
case has recognized. In both Gilmer
and Cole the courts were asking whether Congress intended to preclude
compulsory arbitration under the ADEA or other federal statues.
The FAA preempts state laws that are hostile to arbitration, so it will
not matter whether the state legislature intended to preclude arbitration.
In Brown
v. Wheat First Securities, Inc., 257 F.3d 821 (D.C. Cir. 2001),
a former employee went to arbitration on a claim that his discharge from
employment was in violation of District of Columbia law.
The arbitration panel ruled against the employee and also assessed him a
fee of $6,365, which included costs that would be considered arbitrators' fees
under the Cole decision. Meanwhile,
he brought a lawsuit alleging the same claim, and sought to vacate the
arbitration award. The court
confirmed the arbitration award, and announced that it would not extend the Cole
logic to cases involving arbitration of state law claims.
(Although the Cole safeguards may be unnecessary to the validity
of an arbitration agreement when the underlying dispute involves state law, the
same safeguards may be necessary to avoid unconscionability, as discussed
below.)
In Armendariz
v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000), the California Supreme Court
addressed the five Cole safeguards.
The big differences between Armendariz and Cole are that Armendariz
arose under the California Arbitration Act (CAA) rather than the FAA, and the
underlying claim involved the state anti-discrimination statute rather than a
federal statute. Therefore, it was
proper for the California court to ask whether arbitration was inconsistent with
the state anti-discrimination statute. Young v. Ferrellgas, L.P., 21
P.3d 334 (Wash. App. 2001) (Arbitration inconsistent with specific state
statutory and common law claims).
The court concluded that a pre-dispute arbitration agreement would be
enforced if it (1) provides for neutral arbitrators, (2) does not limit
statutory remedies, (3) provides some discovery, (4) provides for written
awards, and (5) does not require the employee to bear any type of expense that
the employee would not be required to bear if he or she were free to bring the
action in court. (The Armendariz
court discussed two other safeguards under the heading of unconscionability,
discussed below.)
FAA §2 creates one exception to the rule that arbitration agreements are
enforceable: "such grounds as
exist at law or in equity for the revocation of any contract."
This will include all grounds that either involve contract formation (e.g.,
defective offer, lack of acceptance, and lack of consideration) or allow one
party to set aside or avoid a contract (e.g., fraud, duress, mistake, and
unconscionability). All of these
grounds are matters of state law, First
Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995),
and the details will vary from state to state.
However, the FAA language is "such grounds as exist . . . for . . . any
contract." [Emphasis added.]
Therefore, there is a federal requirement that the state law grounds be
even-handedly administered, and not impose special burdens on arbitration
agreements. Doctor's
Associates, Inc. v. Casarotto, 517 U.S. 681 (1996).
So, for example, state doctrines of consideration should be applied in
arbitration cases in the same way they are in other cases, not in a way that
creates special hurdles for arbitration agreements.
The first Cole safeguard is a neutral arbitrator. As a practical matter, the "neutral arbitrator" issue will come before a court at the point when the employer has filed a motion to compel arbitration. At that point, it is unlikely that an individual arbitrator will have been selected. Therefore, the court really will be asking whether the system for selecting the arbitrator is likely to result in selection of a neutral person. Although courts should be wary of a system in which the employer has sole control over the makeup of a panel of arbitrators from which one will be selected, Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999), courts generally approve systems that are administered by recognized agencies such as a securitie