Pre-Dispute Arbitration Agreements and Their Application to Statutory Discrimination Claims

Pre-dispute arbitration agreements are those agreements between an employer and an employee that require an employee to arbitrate disputes against an employer which have not yet arisen. These agreements allow both employers and employees to overcome the problems of administrative and judicial delays which now accompany traditional litigation of employment claims. In addition, arbitration provides employers the additional benefits of reduced time burden on management, reduced exposure to emotional distress and punitive damages, and fewer forced settlements.

While the benefits of pre-dispute agreements are clear, the enforceability of these agreements with respect to statutory discrimination claims remains controversial. Despite recent criticism of these agreements, however, it appears that the rationale of earlier court decisions enforcing arbitration agreements continues to apply and carefully drafted arbitration agreements should be enforceable.

Background

Until the mid-1980s, it was presumed that employees with a statutory claim of discrimination would have access to a court, regardless of whether or not they had entered into an arbitration agreement with their employer. In the mid-1980s, in a trilogy of cases, the Supreme Court emphasized the "strong federal policy" in favor of arbitration, agreements to arbitrate were thus presumed enforceable. Nevertheless, the enforceability of arbitration agreements in the context of statutory discrimination claims remained unclear. This issue was resolved -- at least in part -- by the U.S. Supreme Court in Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20, 24, 111 S.Ct. 1647, 1651 (1991).

In Gilmer, the Supreme Court enforced an arbitration agreement with respect to an employee's Age Discrimination in Employment Act ("ADEA") claim. The Court found that arbitration of an ADEA claim did not contravene the purposes of the ADEA. Additionally, the Court found that the procedures governing arbitration were not so inadequate as to make the arbitration agreement unenforceable. The Court also found that unequal bargaining power between an employer and an employee, in general, did not make arbitration agreements unenforceable.

The Court in Gilmer left open two issues. First, the Court reasoned that the Federal Arbitration Act (the "FAA") was intended to give arbitration agreements the same force as other agreements; therefore arbitration agreements would be enforceable unless there was a showing of coercion or fraud as in other contract cases. However, the Act includes an exemption that "[n]othing 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 Court left unresolved the issue of the effect of the FAA on contracts of employment. Second, the Court did not reach the issue of arbitrability of discrimination claims under Title VII.

The Law After Gilmer

With respect to the first question left unresolved by Gilmer, circuit courts have used two different approaches in determining whether the FAA exemption applies to employment contracts. The Fourth Circuit is the only circuit which has adopted a broad construction of the meaning of "interstate commerce" so that virtually all employment contracts fall within the exclusion. The majority of circuits construe the term "interstate commerce" more narrowly. These courts have used one of three approaches: a "movement of goods" approach, a "class of workers" approach and a "transportation industry approach." Generally, the law has developed in this area after Gilmer so that courts will use one of these approaches and analyze each arbitration agreement to determine whether the exclusion applies.

With respect to the second question left open by Gilmer, the Fifth, Sixth, Tenth and Eleventh Circuits, as well as judges in the Southern, Eastern and Western Districts of New York, have upheld the arbitrability of Title VII claims. In examining the statute, courts have found that Congress did not intend to preclude arbitration. However, courts have found that the statutory language of Title VII creates an additional requirement that such waivers be knowing and voluntary. Until recently, the clear trend was toward the enforceability of pre-dispute arbitration agreements with respect to Title VII claims.

The Recent Controversy

Opposition to pre-dispute arbitration agreements that are applied to statutory discrimination claims has grown in recent years. In July, 1997 in Nelson v. Cypress Bagdad Copper Corporation, the Ninth Circuit considered the enforceability of a pre-dispute arbitration agreement in the context of the Americans with Disabilities Act (ADA). The Ninth Circuit found that while arbitration agreements were enforceable under the ADA, an employee's agreement to arbitrate must be knowing and voluntary. The Court found that the employee did not knowingly agree to arbitrate his ADA claim by signing a form acknowledging receipt of the revised employee handbook, where nothing in the form notified the employee either that the handbook contained an arbitration clause or that the acceptance of the handbook was a waiver of a judicial forum for a possible ADA claim.

Earlier this year, the United States District Court for the Middle District of Massachusetts refused to compel arbitration as provided for in the securities industry registration Form U-4 signed by Plaintiff Susan Rosenberg. In Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith Inc., (D. Mass 1998), the court found (1) mandatory arbitration agreements are unenforceable as to Title VII claims because of Congress' intent found in the Civil Rights Act of 1991 that amended Title VII and (2) the New York Stock Exchange's arbitration system was inadequate in providing Rosenberg with a forum to effectively vindicate her rights. The Court did not reach the question of whether the agreement was involuntary or unconscionable.

Likewise, on May 8, 1998, a three-judge panel of the Ninth Circuit in Duffield v. Robertson Stephens & Co. held "that under the Civil Rights Act of 1991, employers may not . . . compel individuals to waive their Title VII right to a judicial forum."

Other criticism of pre-dispute arbitration agreements comes from the Equal Employment Opportunities Commission (the EEOC). In a 1997 Policy Statement, the agency which enforces various federal anti-discrimination statutes stated that "agreements that mandate binding arbitration of discrimination claims as a condition to employment are contrary to the fundamental principles evinced in these laws." Policy Statement on Mandatory Arbitration, (July 11, 1997). Similarly, in a recent speech, the Associate General Counsel of the EEOC called employment agreements to arbitrate future statutory discrimination claims the "greatest threat" to civil rights enforcement and said that Gilmer was no longer "relevant" because a pre-dispute waiver of a court trial could not be "knowing and voluntary."

The Current Enforceability of Agreements to Arbitrate Future Statutory Employment Disputes

It remains unclear whether Rosenberg, Duffield and the EEOC Policy Statement are merely aberrations or a growing trend. Given the Supreme Court's clear statement in Gilmer that the procedures of arbitration are not so inadequate as to make arbitration unenforceable, and that unequal bargaining power between an employee and an employer in general does not make arbitration agreements unenforceable, it should be possible to draft an arbitration agreement that will be upheld.

Employers should take into account the concerns expressed in Rosenberg, Duffield and Nelson with respect to enforceability of arbitration agreements. At a minimum, arbitration agreements must not be unconscionable of their face, waivers must be knowing and voluntary, and arbitration procedures must be adequate to provide redress to the employee. Employers should further consider:

  • obtaining a signed stand-alone agreement to arbitrate (rather than merely including an arbitration clause in an employee handbook)

  • drafting the agreement so that it is not ambiguous

  • removing overreacting provisions such as those that purport to foreclose or limit remedies or statutes of limitations

  • not attempting to preclude resort to certain administrative agencies that have an independent statutory mandate

  • providing for equitable apportionment of costs and fees

  • reserving certain appellate rights

  • ensuring fairness in the selection of the arbitration forum.