The May 1998 issue of Workforce included an article entitled "Pre-Dispute Arbitration Agreements and Their Application to Statutory Discrimination Claims." In addition to providing the general historic framework of the debate over the enforceability of such arbitration agreements, that article focused on then-recent developments calling into question an employer's ability to enforce such agreements including: the cases of Duffield v. Robertson Stephens & Co.(9th Cir.) and Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith Inc. (D. Mass. 1998); and the Equal Employment Opportunity Commission's (the EEOC) Policy Statement on Mandatory Arbitration (July 11, 1997). Over the course of the last eight months, the landscape has continued to develop rapidly.
The Ninth Circuit Minefield
The Ninth Circuit (West Coast) has placed itself at the center of the debate with its decisions in Duffield and, more recently, Craft v. Campbell Soup Co., 161 F.3d 1199 (9th Cir. 1998).
As previously reported, Duffield held that pre-dispute arbitration agreements that are made a condition of employment are unlawful under the Civil Rights Act of 1991 (the 1991 CRA) to the extent that they compel individuals to waive their Title VII right to a judicial forum. The Court purported to rely on the legislative history of the 1991 CRA in coming to this conclusion. It determined that despite the fact that the Supreme Court upheld the use of arbitration agreements in the context of an age discrimination claim in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), shortly before the passage of the 1991 CRA, that fact was not dispositive. The Court explained that Section 118 of the Act "encourag[ing]" arbitration where "appropriate and to the extent authorized by law" was drafted prior to Gilmer and was based on the pre-Gilmer state of the law seemingly prohibiting any form of compulsory arbitration of Title VII claims. Accordingly, the Ninth Circuit reversed the district court's order compelling arbitration of the Title VII and state discrimination claims. Last November the Supreme Court denied certiorari. As explained below, Duffield lives on for now.
In Craft, the Ninth Circuit went even further on the anti-arbitration continuum by holding that "the Federal Arbitration Act (FAA) does not apply to labor or employment contracts." Looking primarily to extrinsic sources including legislative history, historical context and "suggestions gleaned" from case law, the Court refused to reverse the lower court's denial of summary judgment on the plaintiff's race discrimination and retaliation claims under Title VII. The Court held that when read together, sections one and two of the FAA create a sufficient degree of ambiguity as to what Congress intended to cover under the FAA requiring an analysis of Congressional intent at the time of passage. The Court concluded that Congress never intended the FAA to apply to labor contracts of any sort to the extent that such contracts "were seen as having the potential to elicit the forced agreement to arbitrate that the enactors of the FAA so disliked." As the FAA was not applicable to the plaintiff's collective bargaining agreement, the Court dismissed defendant's interlocutory appeal as not within its jurisdiction.
Pro-Arbitration Victories
While Duffield and Craft give many employers pause, the fact remains that other circuit courts addressing this issue in recent months have continued to support the use of arbitration for statutory claims. This includes decisions by the First, Second, Third and Fifth Circuits. The most noteworthy was the much anticipated appeal of the District of Massachusetts' decision in Rosenberg. See Rosenberg, 1998 WL 880910 (1st Cir. Dec. 22, 1998). Despite ultimately affirming the denial of the defendant's motion to compel arbitration, the Court reversed the two most troubling aspects of the lower court's holdings:
The first being that the 1991 CRA and Older Workers Benefit Protection Act preclude application of pre-dispute arbitration agreements to federal claims arising under Title VII and the Age Discrimination in Employment Act (ADEA), respectively, and the second being that the NYSE arbitration system is structurally biased. Rather, the Court affirmed on far narrower "disclosure" grounds including failure to adequately define the range of claims subject to arbitration and failure to provide the plaintiff a copy of the NYSE rules upon which the agreement was based. The Court specifically said that if Merrill Lynch "had taken the modest effort required to make relevant information . . . available . . . it would have been able to compel Rosenberg to arbitration."
The Supreme Court Chimes In (Softly)
Rather than address these issues head on, the last several months have seen the Court make more news for what it did not do than for what it did. Two of these "developments" are addressed below.
First, in Wright v. Universal Maritime Service Corporation, 119 S. Ct. 391 (1998), the Court held that a union member could not be compelled under a broad arbitration agreement within a union-negotiated collective bargaining agreement to arbitrate a statutory discrimination claim. The Court did not even address the much larger issues of the ultimate validity of a union-negotiated waiver and the extent that an employee can be required to arbitrate his or her own individual employment agreement to forego a judicial forum. It focused on much narrower, case-specific issues including whether the waiver was "clear and unmistakable." Finding the plaintiff's agreement to arbitrate "matters under dispute" insufficiently clear, the Court refused to compel arbitration.
Even more surprising than its narrow decision in Wright, was the Court's denial of certiorari in Duffield. In fact, the defendants in Duffield did not seek en banc review by the Ninth Circuit seemingly because they wanted to make the case as "cert.-worthy" as possible, and feared that a more moderate Ninth Circuit judge would be able to "fix" the original opinion to make it less glaring. However, review was not forthcoming and, at least for now, Duffield survives.
So why did the Court fail to take Duffield? We will likely never know. However, Paul Cane, a PHJ&W employment law partner, former clerk of the Supreme Court and frequent Court watcher, posits several theories:
- As a securities case involving industry-wide arbitration mandates, the Court wanted to wait for a case with "better" facts;
- Recent developments in the industry specifically, the widely known decisions of both the NASD (post January 1, 1999) and NYSE (pending approval) to discontinue industry-wide mandatory arbitration of employment claims minimized the need to address Duffield;
- The petition was poor and/or a clerk missed the issue;
- Duffield was so obviously wrong, the Court thought it would be overruled en banc by the Ninth Circuit the next time the issue came up.
Regardless, the chances that the Court's denial represents agreement on the merits is extremely slight in light of Gilmer and the Court's unwavering general support of the arbitration mechanism. (See Footnote 1.)
What Happens From Here
While it is impossible to predict the future, the fact remains that arbitration remains a thriving, cost-efficient alternative to court litigation. Despite the Ninth Circuit's holdings in Duffield and Craft, adamant opposition by the EEOC and Plaintiffs' bar and the failure of the Supreme Court to provide definitive guidance, pre-dispute agreements covering employment claims appear to be here to stay. For those employers who currently use pre-dispute agreements -- continue to do so. For those who are considering this option -- implement it with the understanding that the law remains unsettled.
Arbitration makes good economic sense. It reduces transaction costs and presents an effective alternative to expensive court litigation. Except in the Ninth Circuit, their is no indication that an unambiguous agreement that is knowingly and voluntarily entered into and provides for general procedural fairness, will not be fully enforceable. Third, even with respect to those with operations in the Ninth Circuit, there is little if any harm in staying the course until the Supreme Court chooses to act. Eliminating the use of such agreements at this point will only result in the unenviable position of being forced to re-implement them post-hiring with the concomitant problems this presents for both morale and overall enforceability.
1/ As this newsletter was going to press, the Supreme Court refused to grant review of the Third Circuit's decision in Seus v. John Nuveen & Co., Inc., 146 F.3d 175 (3d Cir1998) granting the employee's motion to compel arbitration based on the employee's signing a pre-dispute arbitration agreement at the commencement of her employment. This development suggests that the Court's decision to let Duffield stand does not reflect concurrence on the merits of that decision.