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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

LawMemo publishes Employment Law Memo.

Farmer on food stamps must pay $27,000 to arbitrate
August 24, 2006 by Ross Runkel at LawMemo

Ouch. A farmer contracted to grow chickens, and then sued for fraud and wrongful termination of contract.

The contract had an arbitration clause.

The farmer said the arbitration clause was unconscionable under Georgia law because it would be too expensive for her to arbitrate.

Specifically, the farmer showed that she and her husband own no land, have no cash savings, are on Medicaid, get less than $1,000 per month from social security, and are on food stamps. Her share (one-half) of the cost of arbitration would be between $27,500 and $29,000.

One problem: As all first year law students know, the question of unconscionability is based on the situation at the time the contract was made - not later on. And the farmer put on no evidence of her financial situation at the time the contract was made.

Result: Not unconscionable. Ordered to proceed to arbitration.

Overstreet v. Contigroup Companies (5th Cir 08/23/2006).

I learned about this from Disputing: Fifth Circuit Rules on Cost as a Basis for Not Arbitrating.

LawMemo publishes Employment Law Memo.

National Arbitration Forum's ADR Law & Policy Update
August 22, 2006 by Ross Runkel at LawMemo

National Arbitration Forum has a nice service called ADR Law & Policy Update.

It's an email newsletter. You can sign up at this subscription page.

Quoting the Forum's web site, which contains samples issues:

The ADR Law & Policy Update is a free weekly service of the FORUM that aims to educate and inform all interested parties on current topics in alternative dispute resolution (ADR). Subscribers receive a weekly email on breaking legal developments in ADR.

A comprehensive overview of case law, legislation and regulation concerning ADR, it is our pleasure to provide this information to the legal community and others as a public service.

My main problem with the newsletter is that the links to the court cases are Westlaw links, and Westlaw charges a fee. The newsletter will be much more useful when the editors figure out how to provide free links, using either Findlaw or the official court web sites.

LawMemo publishes Employment Law Memo.

"Manifest disregard for the law" case could go to Supreme Court
August 17, 2006 by Ross Runkel at LawMemo

Back in March I spotted a 4th Circuit case - Patten v. Signator Insurance Agency - that I said was "clearly wrong."

Perhaps the US Supreme Court can fix it. There's a petition for certiorari pending.

Here is the list of "QUESTIONS PRESENTED" by the petition:

1. Whether (in conflict with the decisions of ten other federal courts of appeals) a court may vacate an arbitrator’s award for “manifest disregard of the law” on the ground that the arbitrator construed an “unambiguous” contract in a way that is “not reasonable”?

2. Whether (in conflict with the decisions of at least eight other federal courts of appeals) a court may vacate an arbitrator’s award for not “drawing its essence from the agreement” on the ground that the arbitrator construed an “unambiguous” contract in a way that is “not reasonable”?

3. Whether (in conflict with the decision of at least one other federal court of appeals) an arbitrator’s award may be vacated on the ground that it does not “draw its essence from the agreement,” even though the award was rendered under a private agreement subject to the Federal Arbitration Act rather than a collective bargaining agreement governed by the Labor- Management Relations Act?

4. Whether an arbitral award may be vacated on nonstatutory, merits-based grounds – such as that the arbitrator manifestly disregarded the law or that the award did not draw its essence from the agreement – despite the explicit requirement of 9 U.S.C. § 9 that a court “must” confirm an arbitral award unless the award is vacated or corrected as provided in 9 U.S.C. §§ 10 and 11?

(I first learned about this from Workplace Profs Blog - Cert Request Challenges Manifest Disregard Standard for Reviewing Arbitration Awards.)

LawMemo publishes Employment Law Memo.

Arbitration Lesson #8 - What claims are covered?
August 15, 2006 by Ross Runkel at LawMemo

When there is an agreement to arbitrate, one key question is "what claims are covered?"

State law tort? State law contract? State statute? State constitution? Federal statute? Federal constitution?

The usual answer: It depends on what the arbitration agreement says.

The Federal Arbitration Act (FAA) refers to "a controversy ... arising out of such contract or transaction." That's pretty broad.

So read the arbitration agreement. Here are two examples of possible agreements:

1. Any controversy or claim involving the interpretation or enforcement of this contract shall be settled by arbitration administered by the American Arbitration Association under its [______ Rules] and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
2. Any controversy or claim arising out of or relating to this [employment application; ADR program; contract] shall be settled by arbitration administered by the American Arbitration Association under its [______ Rules] and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

In #1 it looks like the parties have agreed to limit the arbitration to a "controversy or claim involving the interpretation or enforcement of this contract." That would empower the arbitrator to hear and decide only those issues that involve the contract that contained the arbitration agreement.

In #2 it looks like the parties have agreed to give the arbitrator the power to hear and decide any claim "arising out of or relating to" the contract or the transaction. In the employment context, that would likely include any contract claim and also any claim involving a federal or state statute.

So #2 should empower the arbitrator to hear and decide Title VII claims, age discrimination claims, disability discrimination claims, whistleblower claims, and so on. It should include any common-law claim, and any statutory claim, so long as it had a relationship to underlying transaction (employment).

Some arbitration agreements spell out a detailed list of statutes that are covered (such as Title VII, the ADEA, etc.), but that is probably not necessary.

The US Supreme Court has made it clear that courts should enforce arbitration agreements that provide for the arbitration of statutory claims.

The Supreme Court decided its first employer-employee FAA case In 1991 - Gilmer v. Interstate/Johnson Lane Corp, 500 U.S. 20 (1991). The Supreme Court held that Gilmer must arbitrate his claim that arose under the federal Age Discrimination in Employment Act (ADEA). After 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.

LawMemo publishes Employment Law Memo.

Arbitration Lesson #7 - Voluntary agreement
August 10, 2006 by Ross Runkel at LawMemo

An agreement to arbitrate is really a lot like any other contract. It has to be formed (created) in accordance with state law. Typically that means the employer makes an offer and the employee accepts the offer.

There has been a lot of controversy about whether employees have "voluntarily" accepted the employer's offer to enter into an arbitration agreement. This is because it often looks like the employer is "forcing" the employee to agree.

Examples:

• An employer tells a job applicant that there has to be an agreement to arbitrate, or the employer will not even consider the application. Anybody who wants to apply for the job has to either agree to arbitrate or go somewhere else.
• An employee is already working for an employer, as an "at will" employee. One day the employer announces that in order to stay on the job the employee has to sign an arbitration agreement. The employee has to either agree, or leave.

If the employee (or applicant) signs an arbitration agreement under these circumstances, most courts will say that the agreement was "voluntary." The courts see this as no different from someone going to get a car loan and being told that they get the loan only if they sign certain papers. The employee literally has a choice, even though it might look like the employee is being forced to sign.

Lawyers will often argue that being forced to agree means that the agreement is "unconscionable" and therefore not enforceable. However, most courts do not think an arbitration agreement is unconscionable unless it has some unfair clause in it, such as saying that the arbitrator cannot award the same damages that a court could award.

And what if an employee gets fired because he would not sign an arbitration agreement? A California court had such a case in which the discharged employee argued that this was a wrongful discharge in violation of public policy. The court held against him, saying there was no violation of public policy. Lagatree v. Luce, Forward, Hamilton & Scripps, 74 Cal.App.4th 1105 (California Ct App 1999).

In Prudential Insurance Co. v. Lai, 42 F.3d 1299 (9th Cir. 1994), the employee signed a "U-4 Form" that contained an agreement to arbitrate, but the document she signed did not mention employment disputes, she was not given a copy of the full arbitration agreement that was contained in a separate document, and the separate document itself did not refer to employment disputes. The court concluded that the employee "did not knowingly enter into any agreement to arbitrate employment disputes." A lot of other courts have indicated that they do not agree with this decision.

LawMemo publishes Employment Law Memo.

Consumer can't be forced to pay for arbitration
August 09, 2006 by Ross Runkel at LawMemo

A consumer mortgage loan contract has an arbitration clause. That clause will be unconscionable if:

• It requires the consumer to pay the costs of arbitration.
• It strips the arbitrator of power to award attorney fees and costs to the prevailing party.
• It requires that a party who appeals from the arbitration must bear the costs of the appeal "regardless of the outcome of the appeal."

So says the New Jersey Supreme Court today in Delta Funding Corp v. Harris (New Jersey 08/09/2006).

These provisions can be severed from the agreement, and the agreement can be enforced without them.

On another point [see Class action waiver unconscionable in consumer contract] the court found that an anti-class-action clause would not be unconscionable because the case involved a substantial amount of damages and that would give the plaintiff enough incentive to bring the claim as an individual action.

LawMemo publishes Employment Law Memo.

Class action waiver unconscionable in consumer contract
August 09, 2006 by Ross Runkel at LawMemo

New Jersey's Supreme Court today ruled that an anti-class-action clause in an arbitration agreement was unconscionable.

The clause was in a payday loan agreement. The case involved a consumer bringing a fraud claim that involved a small amount of money.

The court found that because the case involved a small amount of money, individual enforcement of the plaintiff's claim would be difficult if not impossible. A bar on class-arbitration would preclude any realistic challenge to the statutory loan agreement.

The court severed the unconscionable provision from the contract, and then enforced the agreement to arbitrate.

Muhammad v. County Bank of Rehoboth Beach (New Jersey 08/09/2006).

But hey, look at this. In a companion case involving a mortgage loan, the court said an anti-class-action clause would be OK because the case involved a substantial amount of damages and that would give the plaintiff enough incentive to bring the claim as an individual action. Delta Funding Corp v. Harris (New Jersey 08/09/2006).

LawMemo publishes Employment Law Memo.

Motion to compel acceptance of lunch invitation
August 07, 2006 by Ross Runkel at LawMemo

Some creative dispute resolution: Court orders counsel to have lunch, and talk it over.

Quoting from the court order [See full text]:

Plaintiff’s counsel extended a lunch invitation to Defendant’s counsel “to have a discussion regarding discovery and other matters.” Plaintiff’s counsel offered to “pay for lunch.” Defendant’s counsel failed to respond until the motion was filed.

I saw this first on the Volokh Conspiracy: Ruling on "Plaintiff's Motion to Compel Acceptance of Lunch Invitation"

LawMemo publishes Employment Law Memo.

NLRB refuses to defer to arbitration
August 02, 2006 by Ross Runkel at LawMemo

When will the NLRB defer to arbitration? When will they not?

Here's one case where they will not. United Cerebral Palsy of New York City (NLRB 07/27/2006).

The employer had two collective bargaining units, both represented by the same union, both with collective bargaining agreements.

The employer distributed an employee handbook to both unit and nonunit employees, with unit employees receiving a copy specifically designated for “unionized” employees. The employer gave no advance notice to the union of its intent to issue the handbook, nor did it negotiate over any handbook provisions that differed from terms and conditions specified in the collective bargaining agreements.

In its introductory section, entitled “About this Handbook,” the handbook states the following:

This handbook supersedes all previous ... Employee Handbooks, management memoranda and practices that may have been issued on subjects covered in the Handbook or in effect ... and is intended to incorporate individual policies that will be issued in the future. In case of a conflict ... , the [employer's] most recently issued policy will control.

The handbook set forth a complete set of work rules, many differing from the collective bargaining agreement.

The NLRB refused to defer to the decision of an arbitrator under Collyer Insulated Wire, 192 NLRB 837 (1971) and United Technologies Corp., 268 NLRB 557, 558 (1984), and found that the employer's unilateral changes, as set forth in the handbook, amounted to a rejection of the collective bargaining agreements.

LawMemo publishes Employment Law Memo.

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