Rushton Ruling: Arbitration Provision Violates Public Policy
A panel of the Michigan Court of Appeals recently reversed its position on whether a provision requiring arbitration of prospective civil rights claims is enforceable. In Rushton v. Meijer, the court held that Michigan employers cannot require employees to waive their right to pursue future civil rights claims in court because such a measure violates public policy. (Rushton v. Meijer, Inc., Court of Appeals Docket No. 199684, Slip. Op. August 19, 1997.)
This decision is notable for several reasons. First, it contradicts the Court of Appeals earlier decision in Heurtebise v. Reliable Computers, Inc., 207 Mich. App. 305 (1994). In that case, a different panel of the same court held that provisions requiring arbitration of civil rights claims are enforceable. (The Heurtebise decision was later reversed on other grounds by the Michigan Supreme Court.)
Secondly, the Court of Appeals in Rushton was not required to address the broad public policy issue involving the validity of arbitrating prospective civil rights claims, but it chose to do so. The Supreme Court had sent Rushton back to the Court of Appeals for review in light of Heurtebise, which held that an employer's handbook did not create a binding contract -- but did not address the broader public policy issue. The Court of Appeals could have reasonably interpreted the Supreme Court mandate simply to review whether there was a mutually enforceable arbitration agreement under contract law. The court chose to go further, however, and address the public policy issue even after it found the arbitration provision enforceable.
Finally, the Court of Appeals took a very narrow view of the meaning of "commerce" under the Federal Arbitration Act, holding that plaintiff Rushton's employment relationship did not constitute a contract involving commerce and, therefore, state law, rather than the more broadly enforced federal act, should apply.
The Rushton case will undoubtedly be appealed to the Michigan Supreme Court but in the meantime, it seems to have already influenced the Michigan Court of Appeals in other pending cases. For example, in Stewart v. Fairlane Community Mental Health Centre, Court of Appeals Docket No. 19140, Slip. Op. September 16, 1997, the court cited both Heurtebise and Rushton in holding that the defendant's personnel policy manual did not create an enforceable arbitration agreement. Although purporting to "save for another date the public policy issue of whether defendant, as a condition of employment, can require its employees to prospectively waive their rights to pursue WPA (Whistleblower's Protection Act) claims in a judicial forum," the court pointedly likened the WPA to the Michigan Civil Rights Act in terms of protecting similar statutorily recognized interests and deserving similar treatment. In a recent unpublished opinion, Arslanian v. Oakwood United Hospital, the Michigan Court of Appeals held that a prior arbitration could not act to bar, under the doctrine of res judicata, an employee's suit for gender discrimination.
Courts Outside Michigan Also Finding Arbitration Process Unfair
Earlier this summer, the California Supreme Court, which had previously expressed a strong policy favoring arbitration, decided a case that raises important issues that could affect the legal validity of many contractual arbitration programs. In Engalla v. Permanente Medical Group Inc., 64 Cal. Rptr. 2nd 843 (1997), the court held that there was sufficient evidence to support a lower court finding that the defendant had engaged in fraud in the inducement of its contract formation and as such, its petition to compel arbitration of a medical malpractice claim under contract terms could be denied. (The defendant was an HMO and the plaintiff was an immigrant to the United States who worked for a company that offered enrollment in the HMO's health program. The HMO plan provided for binding arbitration of any claims asserted for personal injury.) The court also held that the HMO's actions in relation to the arbitration clause might be construed to constitute a waiver of its right to compel arbitration. Although the California Supreme Court did not find the arbitration clause itself unconscionable, it clearly disapproved of the defendant's arbitration program and suggested that the arbitration process -- established by a party with superior bargaining power -- would be closely scrutinized. The court noted that arbitration agreements which were offered on a "take-it-or-leave-it" basis posed the risk of becoming instruments for injustice.
Finally, in Nelson v. Cyprus Bagdad Copper Corp, 119 F.3d 756 (1997), the Ninth Circuit Federal Court of Appeals held that the arbitration provision in an employee handbook did not constitute a waiver of an employee's rights to a judicial determination of his claims under the Americans with Disabilities Act and the Arizona Civil Rights Act. The opinion also suggests that a unilateral act by an employer is not sufficient to waive such rights.
In summary, the pendulum which had been swinging towards the automatic acceptance of arbitration clauses is beginning to change direction, as courts recognize that the arbitration process can be unfair when imposed upon employees and consumers. It is too early to predict whether the outright ban on arbitration of civil rights claims in Rushton will stand, but courts are definitely taking a closer look at whether the process provided by arbitration provisions is fair and reasonable considering the unequal bargaining power of the parties.