Background
In a trilogy of decisions handed down in the mid- to late-1980s, the United States Supreme Court adopted a general presumption in favor of arbitration agreements. However, because each of those decisions involved a commercial dispute, there was considerable uncertainty as to whether the general presumption in favor of arbitration agreements applied to pre-dispute agreements to arbitrate employment claims.
The Supreme Court eliminated that uncertainty in 1991, when it issued its decision in Gilmer. The plaintiff in that case was a securities representative whose employer had required him to register with the New York Stock Exchange ("NYSE") by signing a registration application known as a "Form U-4" that is prevalent in the securities industry. The plaintiff's Form U-4 included an arbitration provision that required him to arbitrate all claims arising out of his employment. Following his termination, the plaintiff brought a lawsuit under the Age Discrimination in Employment Act ("ADEA"), and his employer moved for an order compelling arbitration.
The Supreme Court held that the arbitration provision in the plaintiff's Form U-4 was enforceable with respect to his ADEA claim. Specifically, the Court (i) held that the plaintiff had the burden of showing that Congress intended to preclude a waiver of a judicial forum for ADEA claims and (ii) found that the plaintiff had failed to make such a showing. Additionally, the Court ruled that arbitration would not undermine the role of the Equal Employment Opportunity Commission ("EEOC") in enforcing the ADEA, and rejected the plaintiff's challenges to the adequacy of the NYSE's arbitration procedures. The Court also found that unequal bargaining power between an employer and an employee is not a sufficient reason to hold that arbitration agreements are unenforceable in the employment context.
Following Gilmer, most courts have, as a general rule, been supportive of pre-dispute agreements to arbitrate statutory discrimination claims. As discussed below, however, recent court decisions have included some victories for plaintiffs.
Recent Developments
The EEOC has consistently taken a hard line against pre-dispute arbitration agreements. For example, in a July 1997 Policy Statement, the EEOC stated that "agreements that mandate binding arbitration of discrimination claims as a condition of employment are contrary to the fundamental principles evinced in these laws." Similarly, the Associate General Counsel of the EEOC has called agreements to arbitrate future discrimination claims the "greatest threat" to civil rights enforcement. The EEOC has adopted this position despite the complete absence of statistical evidence showing that arbitrating discrimination claims favors employers.
In January of this year, the United States Court of Appeals for the Tenth Circuit ruled that an otherwise valid pre-dispute arbitration agreement was unenforceable because the agreement required the employee to pay one-half of the arbitrator's fees. Shankle v. B-G Maintenance Mgmt. of Colorado, Inc., 163 F.3d 1230 (1999). The Court reasoned that fee-sharing provisions undermine the remedial and deterrent functions of anti-discrimination laws by discouraging and, in some cases, preventing employees from challenging their employers' actions. The Courts of Appeal for the Eleventh and District of Columbia Circuits have reached similar conclusions.
In February, the First Circuit refused to enforce a mandatory arbitration provision in a Form U-4, reasoning that the employer failed to give the employee sufficient notice that the arbitration provision applied to discrimination claims. Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith Inc., 170 F.3d 1 (1st Cir. 1999). The Court based its decision on the following facts: (i) the Form U-4 did not define the range of claims that were subject to arbitration; it merely provided that the employee was agreeing to arbitrate all claims that were subject to arbitration under the rules of the NYSE; (ii) the employer never provided the employee with a copy of the NYSE's rules and never told the plaintiff that discrimination claims fell within the scope of the Form U-4. Significantly, however, the First Circuit flatly rejected the District Court's ruling that pre-dispute agreements to arbitrate Title VII claims are per se invalid and held that such agreements generally are enforceable. In fact, the Court stated that it would have had "little difficulty" ordering arbitration in Rosenberg if the Form U-4 had given the plaintiff explicit notice that she was agreeing to arbitrate statutory discrimination claims.
In E.E.O.C. v. Frank's Nursery & Crafts, Inc., 177 F.3d 448 (6th Cir. 1999), the Sixth Circuit weighed in on whether the EEOC can file lawsuits on behalf of employees who are bound by valid pre-dispute agreements. The Court held that the EEOC is not bound by pre-dispute agreements and can file lawsuits seeking both compensatory and equitable relief on behalf of such employees. The Second Circuit reached a slightly different conclusion in E.E.O.C. v. Kidder, Peabody & Co., Inc., 156 F.3d 298 (2d Cir. 1998), where the Court held that the EEOC may not seek monetary remedies on behalf of individuals who are subject to valid pre-dispute arbitration agreements, but can seek injunctive relief on behalf of such individuals.
In Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999), the Fourth Circuit refused to compel the plaintiff to arbitrate her Title VII claims on the ground that the pre-dispute agreement in question was too one-sided to be enforceable. Among other things, the agreement gave the employer complete and unlimited control over the list of potential arbitrators from which a panel of three arbitrators would be selected, required the employee to provide advance notice of her fact witnesses without imposing a reciprocal responsibility on the employer, and gave the employer, but not the employee, the option of commencing a court action to vacate or modify an arbitral award.
In May of this year, the Ninth Circuit -- a Court known for its maverick decisions -- ruled that the Federal Arbitration Act ("FAA") does not apply to any labor or employment law contracts. Craft v. Campbell Soup Co., 177 F.3d 1083 (9th Cir. 1999). The Court's decision was based on an exclusion in the FAA that provides: "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." The Supreme Court did not have to address the scope of that exemption in Gilmer because the arbitration clause in that case was contained in a registration application, not an employment contract. If other courts followed Craft, employers would lose the vital procedural advantage of using the FAA to enforce arbitration provisions in labor and employment contracts. Significantly, however, every other federal appellate court that has addressed this issue, including the Courts of Appeal for the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Tenth and District of Columbia Circuits, have held that the FAA's exclusion is narrow and applies only to seamen, railroad employees and other employees who actually transport people or goods in interstate commerce -- not employees generally, as the Ninth Circuit held.
Plaintiffs seeking to avoid pre-dispute arbitration agreements also prevailed in the following cases: Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir. 1998) (the court rejected contrary holdings by every other circuit court and held that the Civil Rights Act of 1991 prohibits all pre-dispute agreements to arbitrate Title VII claims); Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998) (the pre-dispute agreement was held unenforceable because it deprived the employee of the full panoply of damages that are available under Title VII); Phillips v. CIGNA Investments, Inc., 27 F.Supp.2d 345 (D. Conn. 1998) (holding that the plaintiff was not bound by a mandatory arbitration policy that was implemented after she began working for the defendant because she never signed a written agreement accepting the arbitration policy; significantly, the court ruled (i) that it was immaterial whether the defendant had made the plaintiff aware of the new policy, and (ii) that the plaintiff's continued employment as an at-will employee could not, as a matter of law, constitute acceptance of the new policy).
On the legislative front, Massachusetts is considering a bill that would flatly prohibit pre-dispute agreements to arbitrate statutory discrimination claims. Employers need not be overly concerned about this development, however, because the legislation likely would be struck down in the courts based on the well-established principle that the FAA precludes all "state legislative attempts to undercut the enforceability of arbitration agreements." Southland Corp. v. Keating, 465 U.S. 1, 16 (1984). For example, in Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995), the Supreme Court invalidated an Alabama statute that would have made all pre-dispute arbitration agreements unenforceable.
The Current Enforceability of Pre-Dispute Arbitration Agreements and Practical Advice for Employers
Plaintiffs have enjoyed some success challenging pre-dispute arbitration agreements. If studied in isolation, those "successes" paint a distorted picture, because most courts -- with the notable exception of the Ninth Circuit -- generally have been supportive of pre-dispute arbitration agreements. Moreover, many of the recent decisions in which the plaintiff prevailed are more didactic than alarming for employers because, in many of the cases, the employer had been overly aggressive in its arbitration policy. Indeed, many of the recent decisions that ruled against the employer conceded that the pre-dispute agreement at issue would have been enforceable if the subject agreement and/or the employer's general arbitration policy had complied with certain minimal requirements. A check list of those requirements is below.
- The pre-dispute agreement should state in clear, unambiguous language that the employee is waiving his or her right to a judicial forum and is agreeing to have an arbitrator issue a final and binding decision on any and all claims that the employee may have against the employer in the future.
- The agreement should clearly state that it applies to statutory discrimination claims and should identify all relevant federal, state and local anti-discrimination laws.
- If possible, the employer should have its pre-existing employees sign stand-alone arbitration agreements that are supported by additional consideration from the employer, such as a one-time cash bonus of $25, or eligibility for future raises and promotions.
- The employee's claims should be heard by a competent and neutral arbitrator.
- Employees should be allowed to be represented by the counsel of their choice and should be given some pre-trial discovery rights.
- The employer's arbitration policy should provide for a hearing that will be fair to both sides.
- The arbitrator should have the authority to award an aggrieved employee the same relief that would have been available in a judicial forum.
- The arbitrator should be required to issue a written decision containing his or her factual and legal findings.
- Both sides should have the right to seek limited judicial review of the arbitrator's decision.
- The arbitration policy should not shorten any limitations periods.
- The arbitration policy should not attempt to preclude access to administrative agencies such as the EEOC.
- The arbitration policy should not require the employee to pay a substantial percentage of the fees and costs associated with the arbitration. Agreements giving the arbitrator the discretion to award costs and fees to either party have been upheld.
1/ The reader should note that the scope of this article is limited to so-called "private" arbitration agreements, which include mandatory arbitration provisions in employment applications, employment contracts and employee handbooks. The article does not address arbitration provisions in collective bargaining agreements that purport to apply to statutory discrimination claims. Such provisions remain unenforceable in most jurisdictions. return
* Mr. Barreca is a former Chair of the Labor and Employment Section of the American Bar Association. Much of his recent work has been devoted to the development and application of a nationwide due process protocol for use in alternative dispute resolution.