Topic: "Arbitration Lessons" | Main
Arbitration Lesson #9 - The 5 Cole v. Burns factors
August 31, 2006 by Ross Runkel at LawMemo
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:
- a neutral arbitrator
- more than minimal discovery
- a written award
- availability of all remedies that would be available in court
- 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
- provides for neutral arbitrators
- does not limit statutory remedies
- provides some discovery
- provides for written awards
- 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
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:
- 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.
- 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.
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.
- 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.
Arbitration Lesson #6 - History part 4
July 13, 2006 by Ross Runkel at LawMemo
What has the US Supreme Court said about applying the Federal Arbitration Act (FAA) to individual arbitration agreements between employers and employees?
The Supreme Court decided its first employer-employee FAA case In 1991 - 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.
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.
Gilmer did not decide one big question: Whether the FAA applies when the agreement to arbitrate is contained in a contract between an employer and employee. The Gilmer Court didn't need to decide that issue because Gilmer's arbitration agreement was contained in his NYSE registration rather than in an employment contract.
The FAA has 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 legal issue was whether the FAA's exclusion clause excluded all employment contracts, or only those involving transportation workers.
In 2001 the Supreme Court decided 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, interpreting this exclusion narrowly.
As a legal matter, the Gilmer and Circuit City decisions simply 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.
Arbitration Lesson #5 - History part 3
July 12, 2006 by Ross Runkel at LawMemo
The Federal Arbitration Act (FAA) is the main legal engine behind enforcement of individual agreements to arbitrate.
Passed by Congress in 1925, the FAA was intended to put arbitration agreements on the same footing as other contracts. The translation: Agreements to arbitrate must be enforced by the courts on the same basis that courts enforce any other contract. Likewise, any normal reason for not enforcing a contract (unconsionability, for example) applies equally to arbitration agreements.
The most significant FAA section is Section 2:
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 US Supreme Court has ordered enforcement of agreements to arbitrate claims arising under a variety of federal statutes, including anti-trust statutes, RICO, and the Equal Credit Opportunity Act.
The Supreme Court also decided that the FAA preempts any state law that is hostile to arbitration. Southland Corporation v. Keating, 465 U.S. 1 (1984).
What has the Supreme Court said about arbitrating employment law claims that normally would go to court? For example, the Age Discrimination in Employment Act (ADEA), Title VII, and others. That's the topic for the next lesson.
Arbitration Lesson #4 - History part 2
July 11, 2006 by Ross Runkel at LawMemo
In the unionized sector, it's the unions that really love arbitration. In the non-union sector, it is the employers who seek individual arbitration agreements.
Employees, organized labor, and pro-employee groups typically oppose pre-dispute agreements to arbitrate, especially when they are required by an employer as a condition of employment.
Employment litigation has changed a lot in 40 years.
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.
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.
Employers worried about the increase in employment litigation, the risk of large jury verdicts, and the related unfavorable publicity. One response was requiring non-union employees to sign agreements that all future employment disputes would be resolved through arbitration.
A lot of the history had little or nothing to do with employees and employers. 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 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 application of the FAA to the employment arena will be covered in a later lesson.
Arbitration Lesson #3 - History part 1
July 10, 2006 by Ross Runkel at LawMemo
Today: The history of collective bargaining arbitration, or traditional labor arbitration. Next: The history of individual agreements to arbitrate.
Organized labor has long demanded that collective bargaining agreements contain arbitration clauses. One hundred years ago labor unions distrusted judges and the court system. Judges has issued injunctions against peaceful strikes and picketing, blocked their efforts to organize employees, and jailed their leaders. They did not want judges interpreting their hard-won labor contracts.
Many employers resisted arbitration, mostly because they didn't want outsiders second-guessing their decisions. 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 almost every collective bargaining agreement has 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.
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.
During the 20th century the law changed dramatically. 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. That meant unions could get a court to force an employer to arbitrate.
Arbitration Lesson #2 - Contract
July 09, 2006 by Ross Runkel at LawMemo
Without a contract agreeing to arbitrate, there is no legal duty to arbitrate. That's the main rule.
If there is an agreement to arbitrate, then courts will enforce that agreement and make the parties arbitrate rather than litigate a dispute.
Because arbitration is controlled by the law of contracts, it is important to know (1) whether there is an agreement to arbitrate and (2) what the arbitration agreement provides.
Is there an agreement to arbitrate?
In a unionized workplace, with a collective bargaining agreement (CBA), there is almost always an agreement to arbitrate disputes that arise out of the CBA. Disputes about wages, demotions, suspensions, and discharge get resolved in arbitration rather than in the court system.
In a non-unionized workplace, some employers (certainly not all) require that employees agree to arbitrate disputes. The arbitration agreement might be found in an employment application form, in a hiring letter, in an employee handbook, in a separate employment agreement, or in a separate agreement dealing only with arbitration. The agreement typically says that all disputes that arise in the future have to be resolved through arbitration.
Both federal and state statutes say that courts must enforce written agreements to arbitrate. The statutes say "written." They don't say "signed." Although most arbitration agreements are in fact signed, there is no requirement that they be signed so long as there has been an agreement.
Even though an employer requires an employee to agree to arbitration in order to get hired, that is still an agreement.
Some agreements are so unfair that a court will not enforce them, and we'll cover that in a later lesson. But courts do not consider the agreement to arbitrate, all by itself, to be unfair.
Sometimes employees try to avoid arbitration by saying that they did not get a copy of the arbitration agreement, or did not read the agreement, or did not understand the agreement. Most courts say a person is bound by a contract if they signed it, even though they didn't read it or understand it. On the other hand, courts often overturn arbitration agreements that are obtained though trickery, or when an employee didn't get a chance to read it.
What does the arbitration agreement provide?
Arbitration agreements are not all the same. They often spell out in detail what disputes are covered, who the arbitrator will be or how the arbitrator will be selected, and some of the procedures to be followed. More on this in later lessons.
Arbitration Lesson #1 - What is it?
July 08, 2006 by Ross Runkel at LawMemo
This is the first in a series of lessons on the law of arbitration.
Arbitration is not mediation. Don't mix them up.
- An arbitrator is like a private judge who listens to both sides and then makes a decision that is final and binding.
- A mediator is a person who helps disputing parties work out their own solution to a dispute, and has no power to compel them to agree to anything.
When two parties have a dispute, they can get that dispute resolved by an arbitrator rather than going to court. There are many ways to conduct an arbitration. The following example is fairly typical.
- Contract. The parties sign a contract to arbitrate. The arbitration agreement can be entered into either before or after a dispute arises. Almost all collective bargaining agreements have arbitration clauses. Many non-union employers require their employees to arbitrate disputes, by entering into an arbitration agreement before any disagreement or dispute exists.
- Selecting an arbitrator. Usually the parties agree to have some outside agency help them select an arbitrator. Often the agency will send a list of available arbitrators, the parties take turns crossing off names, and the person remaining on the list becomes the arbitrator.
- Setting a hearing. The arbitrator works with the parties to find a good time and place to hold the arbitration.
- The hearing. An arbitration hearing can be somewhat informal (no robes; no courtrooms; no jury). Formal rules of evidence are rarely followed. Yet the hearing proceeds in a way that it similar to a court trial. Each side makes an opening statement describing the situation. Each side calls witnesses and presents documents. Witnesses get cross-examined. At the end, each side makes closing arguments - sometimes orally and sometimes by written briefs.
- The decision. The arbitrator's job is to make a decision based on the evidence presented at the hearing. The decision usually is in writing, and explains how and why the arbitrator reached a particular result.
- Final and binding. Because an arbitrator's decision (called an award) is final and binding, there is no appeal process. Courts have extremely limited power to overturn an arbitration award, and it rarely happens.
- Enforcing the award. Usually the losing party will comply with what the arbitrator says. If not, then the winning party can file a suit and get a court to enforce the award.
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