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Arbitration Lesson #9 - The 5 Cole v. Burns factors
August 31, 2006 by Ross Runkel at LawMemo

This is #9 in the Arbitration Lessons Series: The 5 Cole v. Burns factors

The Federal Arbitration Act (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 the Supreme Court's Gilmer case 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
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 might 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.

The California Supreme 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
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

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