of Employment Disputes:
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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.
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.
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.
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
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
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.
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
Associated Coal Corp v. United Mine Workers of America, 531 U.S. 57
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).
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).
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.
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.
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.
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
1925 Congress enacted the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et.
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.
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.
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).
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.
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.
Stores, Inc. v. Adams, 194 F.3d 1070 (9th Cir. 1999); Craft
v. Campbell Soup Co., 177 F.3d 1083 (9th Cir. 1999).
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,
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.
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.
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).
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.
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.
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
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.)
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.
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).
shall decide whether a condition precedent to arbitrability has been fulfilled
and whether a contract containing a valid agreement to arbitrate is enforceable.
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.
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
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,
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
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 securities exchange, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the American Arbitration Association, or other similar organizations. In one case the United States Supreme Court upheld an arbitration agreement in which a corporation in Puerto Rico was required to arbitrate a dispute regarding a United States statute in Japan before a panel of three Japanese arbitrators. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985).
In Mercuro v. Superior Court, 96 Cal.App.4th 167 (2002), the agreement provided for the arbitrator to be selected by the National Arbitration Forum (NAF) in the federal district where the employee worked. There were only eight potential arbitrators under this provision. The California Court of Appeal expressed concern about the "repeat player effect," and clearly did not like the fact that the employee could not participate in selecting the arbitrator. Applying California's unconscionability doctrine, the court summarized: "[G]iven the low threshold of substantive unconscionability in this case we find the lack of mutuality as to arbitrable claims together with the disadvantages to the employee in using NAF as the arbitration provider renders the ... arbitration agreement substantively unconscionable."
FAA §10 lends support to the argument that arbitrator neutrality is an issue that should be addressed after an arbitration is completed rather than before the arbitrator has been selected. Section 10 is the only place where the FAA addresses arbitrator neutrality, and it provides for post-arbitration relief in cases of "evident partiality." 9 U.S.C. § 10(a)(2).
During 2002 California enacted a series of statutes designed to enhance the neutrality of arbitrators. The statutes are aimed at private arbitration companies that arrange arbitrations or provide panels of arbitrators. The statutes, among other things, require the companies to make extensive disclosures to the public, prohibit the companies from having a financial interest in the parties or their attorneys (and vice versa)
Another Cole safeguard is "more than minimal" discovery, although the court did not
explain what it meant by the term "more than minimal."
One of the advantages of
arbitration is its relative simplicity, and one key simplification is a
relaxation of the discovery practice (depositions, interrogatories, requests for
production) that is used in litigation and has been the subject of much
criticism. For example, in traditional labor arbitrations it is customary for discovery to be
limited to pre-hearing disclosure of relevant documents and a list of witnesses.
Labor arbitrations usually are preceded by meetings and negotiations between the
parties, thus making formal discovery less important.
Gilmer the NYSE rules allowed considerable discovery: production of documents,
requests for information, depositions, and subpoenas. The Court addressed the question of limited discovery in one sentence: "Nor
is there merit to his argument that the limited discovery permitted in
arbitration will make it difficult to prove age discrimination, since it is
unlikely that such claims require more extensive discovery than RICO and
antitrust claims, and since there has been no showing that the NYSE discovery
provisions will prove insufficient to allow him a fair opportunity to prove his
v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31 (1991).
It would seem that the Supreme Court is not troubled by limited
discovery, probably because it is a typical aspect of arbitration.
In any event, the rules of the arbitration agencies typically authorize
the arbitrator to order whatever discovery is necessary.
Cole requires a written award. Nothing in the FAA or the federal civil rights statutes specifies that an arbitrator must issue a written award, and the Supreme Court has not said that one is required. Of course, an arbitrator usually will provide a written award, and one is handy if one of the parties has to go to court to get the award enforced. The real bone of contention should be whether an arbitrator must issue an opinion that sets forth the findings of fact and the arbitrator's legal reasoning. Without those things in writing, it will be nearly impossible to tell whether the arbitrator paid any attention to the statutory provisions or common law that governed the case. In the Gilmer case the argument was made that lack of written awards will negate the possibility of effective appellate review. The Court responded by pointing out that the arbitration rules governing Gilmer's case did provide "that all arbitration awards be in writing, and that the awards contain the names of the parties, a summary of the issues in controversy, and a description of the award issued." The Court did not address whether the arbitration rules required that an award spell out the arbitrator's reasoning process, the very thing that would be necessary in order to know whether the arbitrator correctly applied the law or applied the law at all.
Cole stated that an arbitration agreement must not limit the remedies that an employee would have available in court, and it must be assumed that the Cole court would say the same thing as to limitations on substantive statutory rights. Employers sometimes draft their agreements so they not only provide for arbitration, but also place limitations on the arbitrator's power to provide remedies that would normally be available in court. Some go so far as to include limitations on the employee's substantive statutory rights. There are three ways a court might deal with such a situation. First, a court could say that this is not "arbitration" at all. The FAA does not define the term "arbitration," but the Supreme Court repeatedly has emphasized that "[b]y 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." Thus, a court could easily declare that the FAA (or its state counterpart) does not apply because the agreement does not provide for "arbitration." That seems to be the approach taken in Cole, although the Cole court was not required to face the issue head-on. Second, a court could find the pre-dispute waiver of remedies or substantive protections to be illegal, either by interpreting the relevant civil rights statute or under a state law doctrine of unconscionability. At that point, the court would face the issue of severability. The unlawful provision could be severed from the contract, leaving arbitration in place, Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001), or the entire contract could be found illegal, Perez v. Globe Airport Security Services, Inc., 253 F.3d 1280 (11th Cir. 2001). The preferred approach should be to sever the illegal provision because that would keep intact both the policy of the FAA and the policy of the relevant civil rights statute. Third, a court could leave the question of illegality to the arbitrator. Larry's United Super, Inc. v. Werries, 253 F.3d 1083 (8th Cir. 2001). After all, the parties did agree that the arbitrator would decide all legal questions. Further, under the Prima Paint severability doctrine, a court could view this form of illegality as one that relates to the underlying contract (to be decided by the arbitrator) rather than one that relates to the agreement to arbitrate (to be decided by the court).
An arbitration can involve significant costs and fees. The arbitrator's fees can be in the range of $750 to $1000 or more per day. Those fees can apply to travel time and award writing time as well as hearing time, and the arbitrator will also charge for travel expenses. In addition, the agency that arranges the arbitration will assess filing fees and other costs. Thus, in nearly every case the parties to an arbitration will have to pay more for the services of the arbitrator and the agency than they would have to pay for the services of a court.
When an arbitration agreement requires an employee to pay (and especially to pre-pay) all or some of the fees and expenses of the arbitrator or the agency, the employee can argue that the amount is so high as to block access to any forum. The Supreme Court has not directly addressed this issue in an employment context, but has commented on it in the context of a consumer case. Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), involved a mobile home financing agreement between a consumer and a financial institution. The consumer had agreed to arbitrate any dispute arising under the federal Equal Credit Opportunity Act. When the consumer attempted to litigate her statutory claim, the financial institution responded by asking the court to compel arbitration. The consumer balked on the ground that the arbitration agreement did not provide her protection from potentially substantial costs of pursuing her federal statutory claims in the arbitral forum. The Court held that the consumer must arbitrate as agreed. In fact, the agreement was silent on the question of arbitration fees and costs, and the Court said that "that fact alone is plainly insufficient to render it unenforceable." The Court also pointed out that "where . . . a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs."
Lower courts are split as to the basic approach to take in analyzing the issue. Some have drawn a bright line by saying that the employee should not have to pay any of the fees and expenses of an arbitrator when the case arises under a federal statute. Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997); Paladino v. Avnet Computer Technologies, Inc. 134 F.3d 1054 (11th Cir. 1998); Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999); Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002). See also Armendariz v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000). As the District of Columbia Circuit put it, "we are unaware of any situation in American jurisprudence in which a beneficiary of a federal statute has been required to pay for the services of the judge assigned to hear her or his case." Cole v. Burns International Security Services, 105 F.3d 1465, 1484 (D.C. Cir. 1997). The Cole court also said an employee cannot be required to pay "unreasonable costs" for filing fees, expenses, or administrative fees, but the court gave no guidance as to what would be "unreasonable." The primary difficulty with such decisions is that they find no support in the text of the FAA or other federal statutes, and have the ring of the judges' personal opinions rather than the ring of statutory interpretation. Further, most were decided prior to Green Tree, and did not take into account what the Supreme Court said in that case. Even so, at least one court has relied on Green Tree for the proposition that an arbitration agreement is invalid if there is even a likelihood that the employee will have to pay for significant arbitrator's fees or other costs which would not be incurred in a judicial forum, thus making it irrelevant that an arbitration agency might waive the fees and costs on the ground of inability to pay. Cole v. Burns International Security Services, 105 F.3d 1465, 1484 (D.C. Cir. 1997). Ferguson v. Countrywide Credit Industries (9th Cir 07/23/2002) voided an arbitration agreement partly because the agreement's fee provision required employees to bear expenses beyond the usual costs associated with bringing suit in court.
Most courts use a case-by-case analysis that focuses on the employee's personal ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation, and whether that cost differential is so substantial as to deter the bringing of claims. Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549 (4th Cir. 2001), and cases collected. These courts necessarily must inquire into the personal financial situation of each individual employee, thus ensuring more litigation that has nothing to do with the original employment dispute.
should be noted that the fountainhead for the rule against requiring an employee
to pay arbitration fees was Cole, which involved a claim that the
employer had violated a federal civil rights statute.
The same court that decided Cole later held that this rule did not
apply in a case where the employee claims a violation of a state statute.
Brown v. Wheat
First Securities, 257 F.3d 821 (D.C.
The Ninth Circuit overlooked this distinction in Circuit
City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002),
and applied the rule in a case which involved a claim of a violation of a state
a case has proceeded to arbitration, the arbitrator's award may include a
requirement that the employee pay some of the fees and expenses of the
v. Kidder, Peabody & Co., Inc.
246 F.3d 702 (D.C. Cir. 2001), arose
after the arbitration panel issued an award that assessed the employee 12
percent of the forum fees - $8,376.00. The
court upheld the award, finding that it was not in "manifest disregard of
the law." Although the total forum fees included some arbitrators'
fees, her 12 percent share may have been things other than arbitrator
compensation, and may have been attributable to her non-statutory claims.
Citing the Green Tree case, the court said, "LaPrade
makes no claim that the possibility of a large assessment arising from
arbitration of her claims prevented her from attempting to vindicate her
The question of attorney fees is subject to different analysis. Many employment statutes have fee-shifting provisions that require the employer to pay the employee's attorney fees if the employee prevails. An arbitration agreement that expressly provides that each party must bear its own attorney fees can be viewed as an illegal limitation on the employee's statutory rights or remedies. Armendariz v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000). In Brooks v. Travelers Insurance (2nd Cir 07/25/2002), following expressions of concern from the judges during oral argument, the employer abandoned its attempt to seek arbitration, and the court reversed. McCaskill v. SCI Management (7th Cir 08/05/2002) was more complex, with the court splitting three ways. One judge grabbed on to the employer's lawyer's admission at oral argument that the contract was not enforceable. One judge rejected the judicial admission theory and reversed on the merits. One judge thought the circuit court had no jurisdiction because the district court's order was not final. In a related development, the 11th Circuit on March 22, 2002 (on its own motion) vacated its opinion in Perez v. Globe Airport Security (11th Cir 2001) after the parties settled the case. The 11th Circuit had held that the arbitration agreement could not be enforced because it contained a clause requiring each party to pay its own costs and fees.
Ordinary principles of offer and acceptance would lead to a requirement that an arbitration agreement must be "voluntary" in some sense. The Ninth Circuit appears to have the most strenuous interpretation of "voluntary," derived from Title VII and the Civil Rights Act of 1991. 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." See also Renteria v. Prudential Insurance Co., 113 F.3d 1104 (9th Cir. 1997). Tinder v. Pinkerton Security (7th Cir 09/17/2002) illustrates that an agreement can be created by stuffing an announcement into payroll envelopes and telling employees that they are bound if continue on the job.
In most states an arbitration agreement will be supported by consideration if the employer agrees to do anything. For example, the employer may need to do no more than agree to be bound by the arbitration. Howard v. Oakwood Homes Corp., 516 S.E.2d 879 (N.C. App. 1999); Michalski v. Circuit City Stores, 177 F.3d 634 (7th Cir. 1999). Floss v. Ryan's Family Steak Houses, 211 F.3d 306 (6th Cir. 2000), held that there was a lack of consideration because the agreement to arbitrate was "illusory." The agreement between the employee and a third-party service provider gave the provider complete discretion over arbitration rules and procedures, along with an unlimited right to modify those rules and procedures. In Dumais v. American Golf (10th Cir 08/15/2002) held an agreement illusory because the employer retained the right to change it at will.
Unconscionability is a state law doctrine that is used frequently in attempts to have courts refuse to enforce agreements to arbitrate. The importance of the unconscionability doctrine is illustrated by the most recent twist in the Circuit City Stores v. Adams litigation. The employer won an important victory in 2001; the United States Supreme Court held that the Federal Arbitration Act (FAA) applies to individual employment contracts, the only exception being contracts of transportation workers. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001). On remand, however, the Ninth Circuit refused to enforce the arbitration agreement because it was unconscionable under California law. Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002).
One popular tool for analyzing questions of alleged unconscionability is
to require that there be both "substantive" and "procedural"
unconscionability. E. Allen Farnsworth, Contracts § 4.28 (3rd ed.,
"substantive" strand means there must be something (other than the raw
requirement of arbitration) that a court finds unfair or oppressive.
Examples might include huge fees, arbitrators selected solely by one
side, unequal rights or duties, and unequal procedures.
The "procedural" strand typically requires a showing of unfair
surprise, trickery, or abuse of grossly unequal bargaining power.
Courts applying the unconscionability doctrine in employment arbitration
cases rely on the fact that the employer has greater bargaining power than the
Agreements that take rights away from the employee without taking them
away from the employer may be unconscionable.
For example, it may be unconscionable to impose limits on the employee's
remedies but not on the employer's. Armendariz
v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000); Circuit
City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002); LeLouis
v. Western Directory Co. (D. Or. 2001).
Likewise, agreements that impose duties on the employee without imposing
corresponding duties on the employer may be unconscionable.
For example, it may be unconscionable to require arbitration of the
employee's claims but not the employer's, as in Ferguson
v. Countrywide Credit Industries (9th Cir 07/23/2002). In
states where there is a rule that arbitration agreements are unenforceable
unless both parties' claims are subject to arbitration, employers will face an
interesting practical problem. A
claim brought by an employer usually will involve allegations that the employee
or former employee is engaging in improper competition or is misusing trade
secrets or other confidential or proprietary information.
Typically the employer will want to move quickly to obtain an injunction
against such activity and will not want to wait until an arbitration proceeding
has commenced. It remains to be
seen whether the unconscionability doctrine will invalidate an arbitration
agreement that allows only the employer to seek a pre-arbitration injunction, or
whether agreements must be drafted so that both parties can seek such
injunctions. There is at least one
case in which such a one-sided clause was held unconscionable in the context of
an employer retaining the right to litigate intellectual property claims.
Mercuro v. Superior
Court, 96 Cal.App.4th 167 (2002).
Some agreements to arbitrate will be coupled with requirements that the
arbitration proceedings be commenced within a specified period of time
(essentially, a private statute of limitations) or that the employer be given
advance notice that arbitration is contemplated. One recent case addressed both of these requirements in a
litigation (not arbitration) context. A
contractual agreement that shortened the statute of limitations in a wrongful
discharge action to six months was found to be permissible under California law,
while a requirement that the employer be notified at least ten days before
filing suit was found to be unconscionable under California law. Soltani
v. Western & Southern Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001).
Once a dispute has been arbitrated and the arbitrator has issued an
award, the winning party usually is entitled to a court order that confirms and
enforces the award. 9 U.S.C. § 9.
Courts do not review an arbitration award in the same way they review a
judgment from a lower court. The
grounds for review are exceedingly narrow.
In part this is because the parties have agreed to have their dispute
decided by an arbitrator rather than a court.
It is also because FAA §10 states three specific grounds for vacating an
award: (1) The award was procured
by "corruption, fraud, or undue means," (2) the arbitrator engaged in
"evident partiality or corruption," or (3) the arbitrator engaged in
misconduct in refusing to postpone the hearing, upon sufficient cause shown, or
in refusing to hear evidence pertinent and material to the controversy, or
"any other misbehavior by which the rights of any party have been
prejudiced." In addition to
the statutory grounds, most courts are willing to overturn an award if either
the award violates public policy or the arbitrator engaged in "manifest
disregard of the law."
It is a basic concept of arbitration that courts do
not review the merits of arbitration awards.
This means that the arbitrator's decision will be final as to findings of
fact, rulings on procedural matters, interpretations of the law, and
applications of the law to the facts.
Employment arbitrations typically differ from labor arbitrations in that
employment arbitrators are asked to interpret and apply federal and state
statutes, government regulations, and state common law rules.
It can be expected that in many cases arbitrators will make legal
decisions that are different from the decisions courts would make or that are
simply incorrect. When that
happens, it is unlikely that courts will correct the errors.
"Manifest disregard of the law" is sometimes suggested as a
ground for overturning an arbitrator's award.
The concept is that a court should intervene when the arbitrator does
more than simply make a legal error, and should vacate a decision when the
arbitrator has disregarded the law. Courts
have given this concept a narrow definition, with the result that very few
awards will be overturned on this ground. Some
courts have said that an award will be overturned only if the arbitrator
understood and correctly stated the law, and then proceeded to ignore it. Pike
v. Freeman, 266 F.3d 78
(2nd Cir. 2001); LaPrade
v. Kidder, Peabody & Co., Inc., 246 F.3d 702 (D.C. Cir. 2001); Halligan v. Piper
Jaffray, Inc., 148 F.3d
197 (2d Cir. 1998); Stroh Container Co. v. Delphi Indus., 783 F.2d
743 (8th Cir. 1986). One
court has taken a more extreme position by limiting reversal to the situation
where the arbitrator directs the parties to violate the law. George
Watts & Son, Inc. v. Tiffany and Co. 248
F.3d 577 (7th Cir. 2001).
"Violation of public policy" is another possible ground for
reversal. In labor arbitration
cases, the United States Supreme Court has said that a court can overturn an
arbitration award on the basis of public policy only if the award clearly
violates a clear and dominant public policy that has been articulated in
statutes, regulations, or court decisions. United
Paperworkers International Union v. Misco, 484 U.S. 29 (1987); Eastern
Associated Coal Corp v. United Mine Workers of America, 531 U.S. 57
Courts should apply the same analysis in employment arbitration cases.
The FAA provides that a court can vacate an arbitrator's award on the
ground of "evident partiality or corruption." 9 U.S.C. §
10(a)(2). In Commonwealth
Coatings Corp. v. Continental Casualty Co. 393 U.S. 145
(1968). the Supreme Court addressed the question of "evident
partiality" by an arbitrator who had an undisclosed business interest with
one of the parties. Although the
Court held that the arbitrator's award had to be vacated under FAA standards, 9
U.S.C. § 10. the Court could not agree on the standards for disclosure.
Four judges said that the arbitrator should disclose "any dealings
that might create an impression of possible bias" or creating "even an
appearance of bias." Two
would require disclosure of "a substantial interest in a firm which has
done more than trivial business with a party."
Three dissented, arguing that an
arbitrator's failure to disclose certain relationships merely established a
rebuttable presumption of partiality. As
a result of this split of opinions, lower courts have not been able to agree on
a consistent standard.
Courts should give res judicata effect to an arbitrator's award. If the individual employee signed an agreement to arbitrate, that employee should be barred from later litigating the same claim. One often sees Alexander v. Gardner-Denver, 415 U.S. 36 (1974), cited as authority for a rule that an employee who is unhappy with the outcome of an arbitration of a Title VII dispute can later get to court. But Gardner-Denver does not apply in the context of an individual arbitration agreement. In Gardner-Denver the arbitration was conducted pursuant to a collective bargaining agreement that was signed by a union rather than the individual employee; the actual parties to the arbitration were the union and the employer, not the employee; and the issues in the arbitration were contractual, not statutory. When the employee later went to court, there were different parties and different issues; therefore, no res judicata. In an employment arbitration the arbitrator will have decided the statutory issue in a proceeding in which both the employer and the employee were parties. Therefore, under ordinary principles of res judicata, that dispute cannot be re-litigated.
Arbitration is often described as an informal process, but that description can be misleading. It is informal in the sense that it takes place in a setting that is more relaxed than a courtroom, there is no judge or jury, it is not regulated by a complex set of rules, and formal rules of evidence usually are not followed. Relaxation of the rules of evidence often leads to a more relaxed atmosphere. However, an arbitration is an adversarial process in which each side does its best to win. The hearing proceeds in a manner quite similar to a court trial without a jury. There are opening statements, witnesses are placed under oath and examined and cross-examined, exhibits are marked and submitted, and closing arguments are presented either orally or in post-hearing briefs. Sometimes hearings are tape recorded, and sometimes a court reporter prepares a verbatim transcript.
Procedures in arbitration usually are simpler than they are in litigation. There are no formal rules of pleading, usually no pre-hearing motions, and usually a limited amount of formal discovery procedures. The degree of simplicity depends on the agreement of the parties, the rules of the arbitration agency, and the rulings by the arbitrator. Arbitration procedures are inherently contractual and this feature allows the parties to control the procedures, assuming they can agree on such matters. The parties can agree to specific procedures that suit them, or agree to adopt procedures prepared by the arbitration agency, or leave it to the arbitrator to determine the procedures. For example, the parties could agree to use (or not to use) the Federal Rules of Evidence. In the absence of a specific agreement, the rules of the arbitration agency will control. If those rules are silent, then the arbitrator will decide. An arbitrator's rulings on such procedural questions are practically immune from judicial oversight. Courts view an arbitrator's procedural rulings as being part of the process of interpreting the parties' contract. Therefore, a court will not overturn such a ruling merely on the ground that the court believes that the arbitrator was wrong. The parties bargained for the arbitrator's judgment, and they must live with it. United Paperworkers International Union v. Misco, 484 U.S. 29 (1987).
One of the most significant results of procedural simplicity is that hearings almost never can be avoided by a motion for summary judgment. Although large numbers of court trials are avoided by such a motion, arbitrators almost never grant them. A motion for summary judgment is properly made only after substantial discovery has been completed. Extensive discovery is absent in most arbitrations, so the summary judgment motion is almost always premature. In litigation only about 5 percent of all cases filed actually go to trial, but most arbitration filings lead to a hearing.
Simple procedures, and the corresponding lack of a detailed set of rules, can create an element of uncertainty. Prior to the hearing, it is possible for the parties to be uncertain as to a multitude of procedural issues, such as what rules of evidence will be followed, which party will be the first to present witnesses, whether closing arguments will be oral or written, and whether exhibits will be submitted all at once or one at a time. Many advocates take these uncertainties in stride, while others find them vexing.
Simplified procedures, especially the lack of formal evidence rules, often have the result that the arbitrator receives testimony and exhibits dealing with events and conversations that would never reach the ears or eyes of a jury. Also, the absence of formal pleadings and pre-hearing motions can make it difficult for the arbitrator to know what the real issues are until the case is fully presented. Arbitrators generally lean toward including rather than excluding evidence, so it is common for "inadmissible" evidence to be admitted. Arbitrators have varied backgrounds, training, and abilities, so there will be variances in their abilities and willingness to "disregard" evidence that turns out to be irrelevant or immaterial.
Arbitration is faster than litigation, although there can be exceptions in specific cases and in specific localities. Arbitrators set their own schedules, and often can schedule a hearing within weeks or a few months. Of course, the more an individual arbitrator is in demand, the more difficult it is to get an early hearing date. Compared to litigation, pre-hearing procedures are tightly compressed. There is no formal pleading, discovery usually is not extensive, and summary judgment motions are granted only rarely. The hearing itself is shorter because there is no jury and little argument over evidentiary matters. Although post-hearing briefs may be used, a final decision can be made within a few weeks (some agencies have a 30 day limit). When the arbitrator issues the award, the case is over. The lack of opportunity to appeal to a higher authority can reduce the total time by a matter of years.
The overall cost of an arbitration will almost always be less than the cost of litigation. This is primarily because the proceedings are simpler and there is no appeal. As a result, there is less expense for attorney fees and discovery. The cost differences, however, will not be the same for the employee as they are for the employer. Many discrimination statutes provide that the employer must pay the employee's attorney fees if the employee wins. In such cases the employee's attorney fee expense will be zero in either litigation or arbitration, and the savings in arbitration will benefit only the employer. On the other hand, some arbitration agencies require both parties to make up-front deposits for administrative expenses and for the fees and expenses of the arbitrator. Although some courts have held that employees cannot be required to pay such costs, in those cases in which advance deposits are required the employee will be at a relative disadvantage.
Because arbitration is cheaper than litigation for both the employer and the employee, an employer may be losing a significant advantage by agreeing to arbitrate. In litigation it is often true that the employer has greater financial resources and is able to simply outspend the employee. In arbitration, that advantage will either be lost or significantly reduced. In addition, it is possible that the less expensive nature of arbitration will make it more likely that some employees will file claims that they would not be willing to litigate.
Both litigation and arbitration can be expensive by causing stress, distracting personnel from more productive work, and reducing morale. Arbitration usually is less expensive in these terms because it is simpler and faster. It is also possible that the availability of an arbitration system that employees perceive as being fair and impartial will improve overall morale. It is virtually certain that morale will be adversely affected if employees are compelled to agree to a system of arbitration that they perceive as being unfair, biased, or lop-sided.
In litigation the parties must deal with whatever judge is assigned to the case, and have only a modest impact on who will sit on a jury. In an arbitration the parties are free to select an arbitrator of their own choosing. Of course, that requires that they agree. More commonly, the two sides participate in a process of selecting one arbitrator from a list of potential arbitrators that has been provided by the arbitration agency. Some agencies will hand select a list of arbitrators to meet the special needs of the parties. Whatever process is used, there is the potential that the parties will have more control in arbitration than they will have in litigation.
Critics of arbitration argue that the employer will have the advantage in selecting the arbitrator. The most obvious reason is that the employer drafts the arbitration agreement which identifies how the arbitrator is selected. When the parties are engaging in the process of selecting the individual arbitrator, it is likely that the employer will have the advantage of being more sophisticated than the employee. In addition, there is a concern (usually unjustified) that an individual arbitrator may favor employers over the long run because they are "repeat players" who are likely to appear before the arbitrator multiple times and will be a potential source of future revenues.
An important aspect of arbitration is that it is a private process. There are no public records and no public hearings. Even the arbitrator's award is a private document. Therefore, it is possible for only the actual participants to know that an arbitration is taking place. This is a great advantage to a party that seeks to avoid publicity, and a great disadvantage to a party that invites publicity.
The award issued by an arbitrator is a final decision. There is no appeal to a higher tribunal. The courts will not review the merits of the award, the findings of fact, the procedural decisions, or the legal conclusions. This means that if the arbitrator makes a mistake, the parties will have to live with it rather than get it corrected. The trade-off is that the parties will not have to wait for years to get a final decision from an appellate court.
Arbitration is only one method for resolving employment disputes. It bears striking similarities to litigation in that a decision is made by an outside person rather than by the parties themselves, there is a hearing in which evidence is produced through witnesses and documents, and the parties must keep their evidence and arguments focused on specific issues.
Many employers have instituted other dispute resolution methods such as mediation. Mediation is a process in which a neutral person meets with the parties to help work out a mutually satisfactory solution to the dispute. Mediation is similar to arbitration only in the sense that an outside person, the mediator, is a participant. In other respects mediation is entirely different from arbitration. Mediation is a wholly voluntary process in that the parties are not required to engage in mediation, stay in mediation, or reach an agreement. The parties are free to walk away at any time. The role of the mediator is not to force a decision onto the parties, but to assist the parties in reaching their own decision. The discussions in the mediation sessions can range beyond the narrow issue that triggered the mediation. Once the parties reach an agreement, then that agreement can be an enforceable contract that brings an end to the dispute. If no agreement is reached, then the parties can take the dispute to litigation or arbitration.
Congress and nearly all of the states' legislatures
have enacted arbitration statutes that are intended to place arbitration
agreements on the same footing as all other contracts.
These statutes were designed to overcome historical judicial hostility
toward arbitration. Although these
statutes have no special focus on the employment relationship, they compel the
courts to enforce agreements between employers and employees when those
agreements provide for arbitration of disputes. To a large extent the courts have been faithful to the
statutory intent by giving up their traditional hostility and ordering the
enforcement of arbitration agreements. This
is especially true in the United States Supreme Court, which has relied on the
Federal Arbitration Act (FAA) to require parties to comply with their agreements
to arbitrate disputes that otherwise would be resolved in the court system.
As a result, private arbitrators are displacing judges and juries as they
make findings of fact, interpret the law, and decide what remedies are
Many lower courts, however, continue to display an ongoing hostility
toward arbitration agreements. This
is especially true when four facts converge: (1) there is a pre-dispute
agreement rather than a post-dispute agreement; (2) the agreement is between an
employer and an individual employee; (3) the employer has required the employee
to sign the agreement as a condition of employment or continued employment; and
(4) the dispute involves a federal civil rights statute. Cole v.
Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997), is a classic example.
The District of Columbia Circuit said that when the above four facts
converge the arbitration agreement will be enforceable only if five specific
safeguards are provided. Although
the Cole safeguards are intended to inject elements of fairness and
balance into the arbitration process, the court imposed most of them without
demonstrating that they are actually required by the FAA or any other federal
statute. The court's reasoning is
flawed. First, the FAA makes
no distinction between post-dispute and pre-dispute agreements, makes no special
provision for employer-employee agreements, makes no special provision for
agreements that are required as a condition of employment, and makes no
distinctions based on the nature of the underlying dispute.
Therefore, as a matter of ordinary statutory construction, there is no
ground for applying special rules for these agreements.
Second, a federal court's power in an FAA case is limited to
interpreting the statute and deciding what Congress intended.
It is for Congress to make the policy judgments, and the court lacks the
power to impose its own view of what is good policy.
The Cole decision and others like it are vestiges of judicial
hostility toward arbitration.
There are several challenges for employers. First, is to decide whether to embrace arbitration as
a substitute for litigating employment disputes.
Arbitration and litigation each have advantages and disadvantages, and
what is good for one employer is not necessarily good for another.
Second, is to draft an arbitration agreement that will pass muster
if it is challenged in court. This
requires an analysis of both federal and state law in all jurisdictions in which
the employer does business. Third,
is to draft an arbitration agreement that employees will perceive as fair and
balanced. Fourth, is to
inquire into other alternatives for resolving disputes.
Arbitration may be a good substitute for litigation, but other methods
may be better. Mediation, for
example, can be effective for both resolving the immediate dispute and also
correcting underlying problems that gave rise to the dispute.
Ross Runkel is the
founder and president of LawMemo.Com, publisher of information about employment
law, labor law, and arbitration. He
is the editor of Employment
Law Memo and NLRB
Law Memo, email services for human resources professionals, lawyers, and
union representatives. He has
written in the areas of arbitration, employment law, labor law, and employee
benefits. Several of his articles
on arbitration and employment law appear on the LawMemo.Com web site at http://www.lawmemo.com/.
Runkel is also the founder of the National Arbitration Center, which publishes
arbitrators' biographies and decisions on its web site at http://www.lawmemo.com/arb/.
He edits the Center's monthly National
Arbitration Center Memo.
Professor of Law Emeritus at Willamette University College of Law in Salem,
Oregon. His legal specialties have
been arbitration, employment law, employment discrimination, labor law, and
contracts. While at Willamette
University he was a Professor Law and served as Director of the
Willamette University Center for Dispute Resolution. He has also served
on the law faculties at Lewis and Clark College, Texas Tech University, and the
University of Washington, where he taught courses on labor law, negotiation, and
Mr. Runkel is active as a neutral arbitrator, factfinder, and mediator in labor-management and employer-employee disputes. He has served as Chair of the Oregon State Bar Section on Labor and Employment Law, Commissioner and Vice-Chair of the Oregon Dispute Resolution Commission, Chair of the Board of Directors of the Portland Branch of the Federal Reserve Bank of San Francisco, and in a number of other professional and civic positions.
received his bachelor's degree and his law degree from the University of
Washington, where he was Associate Editor of the Washington Law Review
and a member of Order of the Coif. Immediately
after law school he was a teaching fellow at Stanford University Law School, and
then practiced law in Seattle with Riddell, Williams, Voorhees, Ivie &