SOME OBSERVATIONS ON ARBITRATION AS A
METHOD OF ALTERNATIVE DISPUTE RESOLUTION
David L. Gordon
JACKSON LEWIS LLP
1900 Marquis One Tower
245 Peachtree Center Avenue, N.E.
Atlanta, GA 30303-1226
T: (404) 525-8200
F: (404) 525-1173
gordond@jacksonlewis.com
Mr. Gordon is a partner in the Atlanta office of Jackson Lewis.
He received his undergraduate and law degrees from the
University of North Carolina at Chapel Hill. He also received
a Master of Arts degree in Legislative Affairs from The
George Washington University. He has practiced in the area
of labor and employment law for over 20 years.
I.
INTRODUCTION: ALTERNATIVE DISPUTE RESOLUTION . . . WHAT IS IT?
Due to the increased number of employment lawsuits, the cost of legal services in
defending them, the potential for large judgments and the delay in litigating a claim, employers
are looking for resolutions without resort to the court system. As a result, use of alternative
dispute resolution (“ADR”) programs is increasing. There are many different types of ADR
programs an employer can adopt including internal mechanisms, such as use of peer review
programs, and an ombudsman, as well as mechanisms which require a third party, such as
mediation and arbitration. The program best suited to the employer will depend upon numerous
factors.
II.
ARBITRATION
Arbitration is a formalized alternative to court adjudication of a dispute.
Generally, parties present their case to a neutral third party who is empowered to render a
decision. The arbitrator, who must be independent and impartial, makes the decision after both
sides have presented evidence and legal arguments at a hearing. There is no jury and arbitration
results in a final binding decision which cannot be overturned by the courts except in rare
circumstances. One of the most hotly-debated topics in labor and employment law is the
enforceability of agreements which require arbitration to resolve employment disputes.
A.
SOME RECENT UNITED STATES SUPREME COURT DECISIONS
REGARDING ARBITRATION
The United States Supreme Court has issued two relatively recent decisions
pertaining to arbitration of employment disputes which employers should be aware of before
implementing an arbitration policy.
1.
Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001): Employers
Can Enforce Arbitration Agreements In Federal Court Under The
Federal Arbitration Act.
a.
Background: The Federal Arbitration Act
Congress passed the Federal Arbitration Act (“FAA”) in 1925. The purpose
behind the FAA was to stop historical judicial hostility to arbitration and to encourage arbitration
of certain disputes.
b.
What Was Circuit City About?
St. Clair Adams worked as a sales counselor at a Circuit City store in Santa Rosa,
California.
When Adams was hired, Circuit City required him to sign an employment
application that contained an arbitration clause. Adams sued Circuit City in state court for
discrimination under the California Fair Employment and Housing Act and various state tort
claims. Circuit City sued Adams in federal court to compel arbitration relying on the FAA. The
United States District Court ordered Adams to arbitration, but the Ninth Circuit found the FAA
did not apply to employment contracts of any kind.
Circuit City took the case to the Supreme Court. Disagreeing with the Ninth
Circuit, the Supreme Court decided the FAA applies to all employment contracts, except
employees working in interstate transportation, such as seamen and railroad employees. Because
Adams was not involved in transportation, the FAA applied, and the arbitration agreement he
entered into was valid and enforceable.
c.
The Effect of the Supreme Court's Decision in Circuit City:
What Does FAA Coverage Mean?
Though the Supreme Court in Circuit City left open many questions about
mandatory arbitration of workplace disputes, the Court’s decision enhances the enforceability of
agreements to arbitrate between employers and employees. This is because:
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•
Under the FAA, enforcement of agreements is streamlined and awards are
confirmed.
•
The FAA authorizes a court to suspend a lawsuit when an issue in the case is
subject to arbitration.
•
The FAA may preempt state laws aimed at limiting or restricting arbitration
agreements.
•
The FAA imposes a strong presumption in favor of arbitration.
2.
EEOC v. Waffle House, Inc., 534 U.S. 279 (2002): The EEOC Is Not
Bound By An Employee’s Agreement To Arbitrate.
On January 15, 2002, the Supreme Court in EEOC v. Waffle House upheld the
EEOC’s right to seek all available remedies for job discrimination regardless of an employeremployee agreement to resolve their disputes through binding arbitration. In Waffle House, the
employee, Eric Baker, signed an agreement to arbitrate all employment disputes. After Baker
was discharged, he filed a charge of discrimination with the EEOC and did not attempt to
arbitrate his claim. The EEOC in turn filed suit against Waffle House seeking injunctive relief to
stop Waffle House’s alleged past and present unlawful employment practices, as well as victimspecific relief such as back pay, reinstatement, compensatory damages and punitive damages.
Waffle House argued that due to the arbitration agreement, the EEOC could not seek victimspecific remedies on behalf of the employee. The Supreme Court disagreed and held that the
arbitration agreement did not bar the EEOC from pursuing victim-specific judicial relief in an
ADA enforcement action. The Court reasoned that the EEOC’s statutory enforcement powers
authorized the EEOC to obtain the relief that it sought. The Court further noted that no statutory
language existed to suggest that an arbitration agreement between private parties materially
changed the EEOC’s statutory function to vindicate the public interest.
After Waffle House, arbitration agreements will still prevent employees from
going to court, but arbitration agreements will not prevent the EEOC from seeking victim-
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specific remedies. However, because the EEOC files suit in less than one percent of all charges,
the situation presented by Waffle House may be extremely rare. Nonetheless, after Waffle
House, the possibility exists that an employer will have to defend against both an employeeinitiated arbitration proceeding and an EEOC-initiated court proceeding.
B.
WHAT ARE THE REMAINING LEGAL ISSUES WHICH AFFECT
ENFORCEABILITY OF ARBITRATION AGREEMENTS?
Unfortunately, Circuit City and Waffle House did not resolve all of the
outstanding legal issues relating to the enforceability of mandatory, pre-dispute arbitration
agreements. A brief discussion of some of the remaining questions follows.
1.
The Older Workers’ Benefit Protection Act May Have To Be
Followed In Implementing A Mandatory Arbitration Program
The Older Workers’ Benefits Protection Act imposes a number of requirements
on waivers of substantive rights under the Age Discrimination in Employment Act (“ADEA”).
Courts have not fully resolved whether an arbitration clause is subject to this law because an
employee would be waiving his/her rights to a jury trial under the ADEA.
2.
Implementing Mandatory Arbitration Of Statutory Rights Where
Employees Are Covered By A Collective Bargaining Agreement
Courts also remain divided over whether a union contract can require arbitration
of statutory claims, such as for employment discrimination.
3.
Unique Fair Labor Standards Act Issues
Before Circuit City there was some authority for the argument that claims under
the Fair Labor Standards Act (“FLSA”) could not be arbitrated. While Circuit City appears to
have resolved this issue, there are other problems with FLSA claims. An FLSA claim can only
be resolved with court approval or Department of Labor (“DOL”) supervision. It is unclear how
arbitration fits into this scenario. The DOL also pursues enforcement actions on FLSA claims.
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This leaves the unresolved issue of whether an arbitration agreement is a defense to a DOL
enforcement action.
4.
Class Actions
Class actions also may present difficult issues, particularly if only some of the
class members signed arbitration agreements.
5.
Payment of Arbitration Fees
An additional open question is whether an arbitration agreement may require an
employee to share in the costs of the arbitration process. The circuits are split on this issue. One
circuit has ruled that an arbitration agreement is unenforceable if the employee is required to pay
any of the arbitrator’s fees or expenses. Other circuits adopt a case-by-case approach and look to
see if the particular employee could afford to pay the fee, the expected cost differential between
arbitration and litigation in court and whether the cost differential is so substantial as to deter the
bringing of claims. The closest the United States Supreme Court has come to determining
whether an arbitration agreement could be invalidated due to a potential payment of fees was
Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000). Green Tree Financial dealt with a
claim brought pursuant to the Truth In Lending Act. Essentially, the Supreme Court held that
where a party seeks to invalidate an arbitration agreement upon the ground that arbitration would
be prohibitively expensive, that party bears the burden of showing the likelihood of incurring
such burdensome costs. The Supreme Court has not yet addressed the issue with respect to
statutory discrimination claims.
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6.
Ability to Bind The EEOC
In light of Waffle House, it is unclear if the EEOC will be bound by: (1) an
employee’s execution of a signed settlement agreement; or (2) an arbitration award or judgment.
7.
Contract Defenses: State Law Issues
After Circuit City and Waffle House, employers wishing to adopt a uniform
arbitration agreement still must take into consideration individual states’ common law applicable
to the enforcement of any contract. The FAA does not preempt traditional contract defenses
under state law, such as lack of consideration, mutuality, unconscionability, fraud, and duress.
a.
Offer And Acceptance: Not Clear Or Unmistakable
An employer seeking to enforce an arbitration agreement must be able to establish
offer and acceptance of the arbitration agreement. Several courts view arbitration agreements of
statutory employment claims with hostility. Consequently, they scrutinize whether the offer and
acceptance of the offer to arbitrate were clear and unmistakable. Accordingly, when designing a
program, the employer should make the agreement to arbitrate a separate document that is
written in “plain” English. Likewise, the agreement to arbitrate should not be included in a
handbook. Handbooks typically state they are not binding contracts.
b.
Lack Of Consideration
Generally, an offer of employment contingent upon execution of an arbitration
agreement is sufficient consideration. Some states, however, do not consider continued
employment as adequate consideration in the context of arbitration. Accordingly, to ensure that
an agreement to arbitrate satisfies the consideration requirement for a current employee, the
employer should do more than offer continued employment. Some employers link arbitration to
bonuses, promotions, or other benefits conferred on existing employees. Finally, the employer
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must consider whether arbitration will be mandatory for current employees: i.e., is it willing to
terminate and/or deny benefits to long-term and productive employees because they refuse to
agree to arbitrate, and, if so, what will the effect be on productivity and morale?
c.
Unconscionability And Mutuality
Several courts have struck down arbitration agreements because they have sought
to limit the remedies and/or damages which the employee could recover. Similarly, agreements
which shift risks to employees which otherwise do not exist have been struck down: e.g., an
agreement to arbitrate which requires the loser to pay attorneys’ fees. Agreements providing that
the employer may modify or amend the program have been ruled unlawful. Further, agreements
that take away rights from the employee without taking them away from the employer may be
found unconscionable. (i.e. an arbitration clause requires arbitration only of the employee’s
claims and not the employer’s claims). In fact, on remand from the Supreme Court, in Circuit
City, the Ninth Circuit found the arbitration agreement signed by Adams was unconscionable
because it forced employees to arbitrate all claims against Circuit City but did not require Circuit
City to arbitrate all claims against the Company.
d.
Duress, Coercion Or Adhesion
An applicant or employee may attempt to void an already executed arbitration
agreement based upon the defenses of duress, coercion or adhesion.
For applicants and
employees, refusal to sign a mandatory arbitration agreement can have but one consequence unemployment. This result and the hardships of unemployment will form the underpinnings of a
duress or coercion claim.
These arguments have even greater appeal when a long-term
employee, on pain of termination, is suddenly compelled to sign an individual arbitration
agreement.
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C.
SHOULD THE EMPLOYER REQUIRE ARBITRATION OF
EMPLOYMENT DISPUTES: TO ARBITRATE OR NOT TO
ARBITRATE?
1.
What Are the Benefits?
Some of the potential benefits of arbitration are:
•
A private rather than a public forum;
•
Quicker and more efficient dispute resolution;
•
Some argue awards by arbitrators are lower than jury awards for comparable
claims;
•
Arbitration usually is procedurally simpler and less costly than going to
court;
•
Arbitrators are believed to be “expert” decision-makers bringing specific
knowledge and experience to the table, as opposed to jurors, who are not;
•
Arbitrators are not as easily swayed as juries by passionate arguments and
sympathy;
•
Employers believe they may benefit from being “repeat players” before
arbitrators;
•
Lower costs of litigation may mean lower employment practices liability
insurance premiums; and
•
Access to a dispute resolution procedure such as arbitration can lower the
risks of unionization.
2.
What Are the Risks?
Some of the potential risks of arbitration are:
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•
Limited likelihood of summary disposition;
•
Defense costs still may be high, and the employer likely will have to pay the
fees and expenses of the arbitrator;
•
Easier access to arbitration may mean a proliferation of employee disputes
over relatively minor matters that would not be heard in court;
•
Courts have given arbitrators virtually unrestricted discretion to decide issues
of law, including evidentiary rulings, without interference by courts. In
addition, under the FAA, appeal of an award is very limited: the limited
grounds include corruption, fraud, actual bias, violation of public policy;
•
Arbitrators are known to “split the baby,” appeasing both sides of a dispute
by awarding part of the relief requested, and making it more likely the
employee will “win”;
•
Arbitrators are not accountable to the electorate, the press, or politics;
•
Political or public relations concerns as arbitration is viewed with disdain by
civil rights groups and plaintiffs’ lawyers; and
•
Arbitrators’ records are often unknown.
D.
WHAT SHOULD THE EMPLOYER CONSIDER BEFORE
IMPLEMENTATION
Before implementing an arbitration program, an employer should analyze its
history of employment disputes over a three to five year period to decide whether the advantages
of requiring arbitration outweigh the risks. The review should include the following:
•
defense costs;
•
the number of lawsuits;
•
the number of settlements and settlement value;
•
the cost of implementation of the program, including administering the
agreement and cost of consideration for current employees; and
•
the effects implementation will have on employee morale and public
relations.
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E.
IMPLEMENTING AN ARBITRATION PROGRAM
The factors an employer should consider in implementing and designing a
mandatory arbitration program include:
•
should the program be for all employees or some subset of employees: e.g.,
non-exempt employees; employees of a particular division. The employer
may wish to “test market” the program before rolling it out for the entire
company;
•
should the program be limited to new hires;
•
should the program be voluntary for existing employees;
•
should there be required steps before arbitration: e.g., grievance procedures,
peer review, mediation;
•
what procedural rules should govern the arbitration and appeal of the
arbitrator’s decision;
•
how should the costs for the arbitration be handled; and
•
who will bear the costs.
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