Chapter 1. By David J. Laurent Brandon D. Coneby Babst, Calland, Clements and Zomnir Pittsburgh, Pennsylvania

Transcription

1 CITE AS 23 Energy & Min. L. Inst. ch. 1 (2003) Chapter 1 Mandatory Arbitration of Employment Claims after Circuit City v. Adams and EECO v. Waffle House: When Is an Arbitration Agreement Valid and Enforceable? By David J. Laurent Brandon D. Coneby Babst, Calland, Clements and Zomnir Pittsburgh, Pennsylvania Synopsis Introduction Recent Supreme Court Decisions Reasons to Use Mandatory Pre-Dispute Arbitration Agreements Common Issues that Arise with Respect to the Validity of Mandatory Pre-Dispute Arbitration Agreements... 5 [1] Form of the Agreement to Arbitrate... 6 [a] Employment Applications and Related Documents...6 [b] Handbooks and Related Documents...7 [c] Signed Handbook Acknowledgement Forms...10 [2] Consideration for the Agreement to Arbitrate...12 [3] Claims to be Arbitrated...15 [4] Collective Bargaining Agreements...17 [5] Statute of Limitations...19 [6] Fees and Expenses...21 [7] Limiting Relief...24 [8] Unconscionable Agreements...25 [9] Severing Invalid Provisions...29 [10] Parties to the Agreement Conclusion... 31

2 1.01 ENERGY & MINERAL LAW INSTITUTE Introduction. In an effort to reduce the high cost of litigating claims for wrongful discharge, discrimination, defamation and other employment-related matters, and to limit potential exposure, many employers have begun to require their employees to agree, in advance, to arbitrate all such claims. The increased use of pre-dispute mandatory arbitration agreements in the employment context, however, has generated substantial litigation related to the validity of such agreements and the means by which they can be enforced. Twice the United States Supreme Court has resolved issues related to the use and scope of mandatory arbitration agreements in the employment context, and the lower courts are issuing new decisions weekly. In general, courts endorse the concept of pre-dispute mandatory arbitration agreements in the employment context; however, the Equal Employment Opportunity Commission (EEOC) can trump an arbitration agreement and pursue a claim in court on an employee s behalf for victimspecific relief. In addition, many arbitration agreements have been found to be unenforceable because they were invalid under state law contract principles. This chapter will discuss the current state of federal case law regarding the use and enforceability of pre-dispute mandatory arbitration agreements in the employment context. 1 More specifically, this chapter will focus on the issues most frequently raised when considering the contractual validity of mandatory arbitration agreements, and will offer drafting and implementation suggestions for achieving an enforceable pre-dispute mandatory arbitration program Recent Supreme Court Decisions. In Circuit City v. Adams, 2 the United States Supreme Court held that the Federal Arbitration Act (FAA) 3 provides federal court jurisdiction 1 Although many of the issues discussed concern state law-contract principles, and many state courts also are issuing decisions concerning the validity of arbitration agreements, for the sake of brevity, this chapter will discuss only federal court decisions. 2 Circuit City v. Adams, 532 U.S. 105 (2001). 3 9 U.S.C. 1 et seq. 2

3 ARBITRATION AGREEMENTS 1.02 over claims to enforce arbitration agreements in most employment contracts, even if they require arbitration of statutory claims. Justice Kennedy, writing for the majority, concluded that the FAA applied to all employment contracts (oral and written) other than those involving transportation workers. Accordingly, employers can now use the FAA to enforce their rights under arbitration agreements in federal court. While the Circuit City decision marked a victory for the use of arbitration agreements in the employment context, the Supreme Court narrowed the scope of that broad ruling in EEOC v. Waffle House. 4 In Waffle House, a minimum wage grill operator at a Waffle House restaurant in South Carolina signed an employment application that contained a provision requiring him to submit any dispute concerning his employment to binding arbitration. 5 Upon his termination 16 days after he began work, Baker filed a charge with the EEOC alleging that he had been discriminated against due to his disability (Baker suffered a seizure while operating the grill). After accepting Baker s case and attempting unsuccessfully to resolve the dispute with Waffle House, the EEOC filed suit in federal court under the Americans With Disabilities Act 6 reinstatement. The United States Supreme Court, however, reversed the Fourth Circuit. Justice Stevens, writing for a majority of the Court, reasoned that because the 4 EEOC v. Waffle House, 122 S. Ct. 754 (2002). 5 The arbitration provision stated as follows: The parties agree that any dispute or claim concerning Applicant s employment with Waffle House, Inc., or any subsidiary or Franchisee of Waffle House, Inc., or the terms, conditions or benefits of such employment, including whether such dispute or claim is arbitrable, will be settled by binding arbitration. The arbitration proceedings shall be conducted under the Commercial Arbitration Rules of the American Arbitration Association in effect at the time a demand for arbitration is made. A decision and award of the arbitrator made under the said rules shall be exclusive, final and binding on both parties, their heirs, executors, administrators, successors and assigns. The costs and expenses of the arbitration shall be borne evenly by the parties. Waffle House, 122 S. Ct. at C.F.R et seq. 3

4 1.03 ENERGY & MINERAL LAW INSTITUTE EEOC was not a party to the agreement between Baker and Waffle House, the EEOC remained free to seek victim-specific relief for Baker and hence could seek legal relief, such as reinstatement, back wages and damages (including punitive damages) on Baker s behalf. Accordingly, with the exception of transportation workers, it is now well settled that the FAA can be used to enforce mandatory arbitration agreements in federal court, including those that require arbitration of statutory employment claims. Nonetheless, the EEOC remains free to ignore such agreements in particular cases and to purse victim-specific relief even if an employee has agreed to arbitrate such disputes Reasons to Use Mandatory Pre-Dispute Arbitration Agreements. Notwithstanding the EEOC s right to trump arbitration agreements under Waffle House, employers should continue to use mandatory predispute arbitration agreements. Although Waffle House undermines an employer s ability to achieve the full benefit of a mandatory arbitration program, its actual impact is likely to be rather limited given the relatively few cases the EEOC actually litigates. For example, in fiscal year 2001, the EEOC received 80,840 charges of employment discrimination. Despite finding reasonable cause to believe that discrimination occurred in 8,924 charges, the EEOC only filed 386 lawsuits and intervened in 67 others. 7 In short, the EEOC actually litigated less than one percent of the cases filed in fiscal year Thus, although the EEOC can trump an arbitration agreement, the odds are that it will not. Therefore, Waffle House should not be a significant impediment to the use of mandatory pre-dispute arbitration agreements in the employment context. Moreover, arbitration offers the following benefits over the traditional litigation of employment claims: (1) Arbitration awards generally are smaller than damages awarded in traditional litigation; 7 See EEOC, Enforcement Statistics and Litigation, enforcement.html (as visited August 20, 2002). 4

5 ARBITRATION AGREEMENTS 1.04 (2) Arbitration is somewhat easier for both sides given the relaxed rules of evidence and the control the parties can exert over the process; (3) Arbitration generally involves little or no publicity; (4) The parties can select an arbitrator who is knowledgeable in the field of employment law; (5) The scope of review of arbitration awards is quite limited, meaning that disputes generally end with the arbitration decision; and (6) Arbitration generally is less expensive in terms of attorney s fees and company time. Nonetheless, to successfully implement an enforceable arbitration program, an employer must be careful to comply with state law contract principles. In many cases, arbitration agreements have been rejected because the employers sought to do more than require employees to arbitrate claims; they sought to tilt the playing field in their favor. In other cases, arbitration agreements have been rejected because the employers simply failed to comply with basic contract law principles. As a result, while federal courts will enforce binding arbitration agreements under the FAA, they will closely scrutinize arbitration agreements to ensure that they are enforceable under traditional state law contract principles Common Issues that Arise with Respect to the Validity of Mandatory Pre-Dispute Arbitration Agreements. A court will begin its analysis by looking to whether the parties have executed a valid arbitration agreement and, if so, whether the dispute falls within the scope of that agreement. 8 Although the FAA provides federal jurisdiction over claims to enforce arbitration agreements, courts 8 See generally, Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001); Floss v. Ryan s Family Steak Houses, Inc., 211 F.3d 306, (6th Cir. 2000). 5

6 1.04 ENERGY & MINERAL LAW INSTITUTE generally look to state contract law principles to determine the validity of the agreement to arbitrate, such as whether both parties manifested an intent to be bound; whether the agreement is supported by adequate consideration; whether the terms are sufficiently definite to be enforced; and whether there are grounds for revoking or otherwise refusing to enforce the agreement. 9 Consequently, an employer will be able to reap the benefits of a mandatory pre-dispute arbitration program only if the arbitration agreement itself passes judicial scrutiny. The following is a survey of the most common issues that arise with respect to the validity of mandatory pre-dispute arbitration agreements in the employment context. [1] Form of the Agreement to Arbitrate. Pre-dispute arbitration agreements take many forms. For example, employers have sought to obtain a binding arbitration agreement by adding language to that effect to employment applications, to employee handbooks (for which the employee may or may not sign an acknowledgement), and to separate documents signed by employees. The method that the employer selects, however, may impact the validity of the agreement to arbitrate. [a] Employment Applications and Related Documents. Statements in signed employment applications and offer letters, which provide that the employee must arbitrate all claims, generally create a binding agreement to arbitrate. For example, in McWilliams v. Logicon, Inc., 10 the Court of Appeals for the Fourth Circuit found that a signed acceptance of employment letter, which provided that the employee agreed to submit all claims arising from his employment to arbitration, established a binding agreement to arbitrate See generally, Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002); Hooters of America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999). 10 McWilliams v. Logicon, Inc., 143 F.3d 573 (10th Cir. 1998). 11 In the employment letter, the employee agreed that any controversies, claims, and/ or disputes arising out of the termination of [his] employment with [Logicon] shall be 6

7 ARBITRATION AGREEMENTS 1.04 The Court of Appeals for the Third Circuit reached a similar conclusion in Great Western Mortgage Corp. v. Peacock 12 where, at the time of her application, but before employment, the plaintiff signed a certification agreeing to submit any dispute related to her employment (or the termination of her employment) to final and binding arbitration. 13 The District Court for the Southern District of New York also reached a similar conclusion in Starwood Hotels and Resorts Worldwide, Inc., 14 where the plaintiff countersigned an offer letter which provided that any disputes with respect to your employment by the Company... shall be resolved through binding arbitration [b] Handbooks and Related Documents. Courts disagree as to whether simply informing employees that the employer intends to use a written arbitration procedure to resolve disputes is enough to demonstrate mutual assent to an arbitration agreement. Most courts have held that an employee s awareness of an employer s intent to implement an arbitration program, coupled with continued employment, creates a binding agreement to arbitrate; however, at least one has found that such facts are not enough to create a binding agreement to arbitrate. A good example of the former line of cases is Hightower v. GMRI, Inc. 16 In that case, Hightower began employment in June 1988 as a settled exclusively through binding arbitration... pursuant to the Federal Arbitration Act. McWilliams, 143 F.3d at 574. Furthermore, when the employee later accepted a transfer, he signed a similar acceptance letter containing the same arbitration clause. McWilliams, 143 F.3d at Great Western Mortgage Corp. v. Peacock, 110 F.3d 222 (3d Cir. 1997). 13 Specifically, by signing the certification she agreed [t]o submit any dispute related to my employment, or the termination of my employment, to final and binding arbitration (thus waiving any right to pursue any other administrative and/or legal proceeding), and, as a condition of my employment, I agree to sign Great Western s Arbitration Agreement upon commencement of my employment, and to abide by the Arbitration Agreement and Great Western s Binding Arbitration Policy and Procedures. Great Western Mortgage Corp., 110 F.3d at Starwood Hotels and Resorts Worldwide, Inc., 2001 WL (S.D. N.Y. 2001). 15 Starwood, 2001 WL at *1. 16 Hightower v. GMRI, Inc., 272 F.3d 239 (4th Cir. 2001). 7

8 1.04 ENERGY & MINERAL LAW INSTITUTE manager of an Olive Garden restaurant (owned and operated by the defendant GMRI). In August 1998, at a weekly staff meeting, GMRI provided Hightower with information regarding a new four-step dispute resolution policy that GMRI was implementing. 17 Hightower signed a form acknowledging that he attended the meeting and that, as a manager, he would be responsible for informing employees that by continuing to work after August 3, 1998 (the effective date of the new policy), they were accepting the terms of the policy. 18 Nearly three months after the policy went into effect, however, Hightower filed a discrimination suit against GMRI. In response to GMRI s motion to compel arbitration, the Court of Appeals for the Fourth Circuit held that Hightower had to arbitrate his claim in accordance with the policy. The court reasoned that by continuing to work for nearly three months after learning of the existence of the policy, Hightower could be considered to have agreed to the policy. Similarly, in Tinder v. Pinkerton Security, 19 the Court of Appeals for the Seventh Circuit found that an arbitration program that was announced to the employees via a brochure that was included with payroll checks sufficiently established a binding agreement to arbitrate for those employees who continued to work for the company after having received the brochure. In response to Tinder s claim that the arbitration program did not bind her since she never signed anything acknowledging the program, the court observed the FAA requires arbitration agreements to be written, it does not require them to be signed. 20 Likewise, in Hamilton v. Travelers Property and Casualty Corp., 21 the District Court for the Eastern District of Pennsylvania held that 17 GMRI s Dispute Resolution Procedure consists of four steps: (1) open door policy for informal review of work-related disputes; (2) peer review; (3) mediation; and (4) binding arbitration. Hightower, 272 F.3d at The form Hightower signed stated: I have attended a DRP meeting and have received the information in regards to the DRP. Hightower, 272 F.3d at Tinder v. Pinkerton Security, 2002 WL (7th Cir. 2002). 20 Tinder, 2002 WL at *7. 21 Hamilton v. Travelers Property and Casualty Corp., 2001 WL (E.D. Pa. 2001). 8

9 ARBITRATION AGREEMENTS 1.04 Hamilton was bound by the terms of an arbitration agreement in an employee handbook. Hamilton had received the handbook upon the commencement of his employment in February of The handbook, entitled Travelers Property Casualty Highlights Your Work Life: A Handbook for Employees, contained an appendix which provided for compulsory arbitration of all employment disputes (with certain exceptions). 22 In November 1998, Travelers fired Hamilton. Hamilton later filed suit against Travelers alleging that his termination was racially motivated. The district court dismissed Hamilton s claim on the grounds that he did not seek mandatory arbitration of his claims. The district court reasoned that an enforceable arbitration agreement existed because Hamilton had received a copy of the employee handbook, had knowledge of the implementation of the arbitration policy, and had continued to work for Travelers after having such knowledge. In contrast with the foregoing cases, the District Court for the Northern District of Illinois ruled that an arbitration program discussed as part of a training session did not establish a binding agreement to arbitrate where the employer could not prove that the employee also actually received a copy of the arbitration program. In Owen v. MBPXL Corp., 23 the employer adopted a dispute resolution plan that outlined an internal grievance procedure for pursing employment-related claims. 24 After Owen was 22 The Handbook Appendix provided that arbitration is [t]he required, and exclusive, forum for the resolution of all employment disputes based on legally protected rights (i.e., statutory, contractual or common law rights) that may arise between an employee or former employee and the Travelers Group or its affiliates, officers, directors, employees and agents (and which are not resolved by the internal resolution procedure), including claims, demands or actions under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866,... and any other federal, state or local statute, regulation or common law doctrine, regarding employment discrimination, conditions of employment or termination of employment. Hamilton, 2001 WL at *1. 23 Owen v. MBPXL Corp., 173 F. Supp. 2d 905 (N.D. Ill. 2001). 24 The employer presented the dispute resolution program (which the employees were deemed to have accepted if they continued employment for 30 days after its presentation) to its employees in October Owen, 173 F. Supp. 2d. at

10 1.04 ENERGY & MINERAL LAW INSTITUTE terminated, he filed a discrimination claim in federal district court. In response, the employer filed a motion to compel arbitration on the grounds that Owen had agreed to arbitrate all employment-related claims by virtue of his continued employment with the company for thirty days after a summary of the dispute resolution plan was presented to the employees. In addressing the validity of the agreement to arbitrate, however, the district court was troubled by the fact that the employer could not present any solid evidence that Owen actually received a full copy of the dispute resolution plan. Using the basic contract rule that an offer is not effective until it reaches the offeree, the district court reasoned that Owen could not possibly have agreed to the terms of the dispute resolution program if he did not actually receive a copy of it. Consequently, the district court denied the employer s motion to compel arbitration on the grounds that the employer failed to establish the existence of a binding agreement to arbitrate. [c] Signed Handbook Acknowledgement Forms. Signed handbook acknowledgement forms generally establish a binding agreement to arbitrate. For example, in O Neil v. Hilton Head Hospital, 25 O Neil sued her former employer, Hilton Head Hospital, alleging that she had been discharged in violation of the Family and Medical Leave Act (FMLA). 26 Hilton Head moved for a stay pending arbitration, relying upon a form O Neil had signed acknowledging receipt of an employee handbook and agreeing to submit all employment disputes to arbitration. 27 In response, O Neil argued, in part, that the arbitration agreement was not binding given that AMI (the successor to Hilton Head) 25 O Neil v. Hilton Head Hospital, 115 F.3d 272 (4th Cir. 1997). 26 See generally 42 U.S.C et seq. 27 The relevant arbitration clause stated I understand that AMI [the successor to Hilton Head] makes available arbitration for resolution of grievances. I also understand that as a condition of employment and continued employment, I agree to submit any complaints to the published process and agree to abide by and accept the final decision of the arbitration panel as ultimate resolution of my complaints for any and all events that arise out of my employment or termination of employment. O Neil, 115 F.3d at

11 ARBITRATION AGREEMENTS 1.04 did not agree to be bound by the arbitration agreement. The Court of Appeals for the Fourth Circuit rejected this argument, noting that it ignored the multiple references in the AMI employee handbook indicating the arbitration process was binding. 28 As a result, the court ordered O Neil to arbitrate her FMLA claim prior to seeking relief in a judicial forum. In Patterson v. Tenet Healthcare, 29 the Court of Appeals for the Eighth Circuit reached a similar conclusion. Patterson began working in 1989 as a medical technologist at Columbia Regional Hospital (owned and operated by Tenet). In March 1993, Patterson received a copy of Tenet s employee handbook and signed an arbitration clause set forth on the last page of the handbook. After Patterson exhausted the internal grievance procedure, she filed a claim in district court. Believing that a valid agreement to arbitrate existed, Tenet requested arbitration in accordance with the terms specified on the final page of the employee handbook that Patterson had signed. Patterson resisted, arguing that a valid agreement to arbitrate did not exist because, under Missouri law, employee handbooks are not considered contracts. The Court of Appeals for the Eighth Circuit, however, rejected this argument, noting that the arbitration clause, which was set forth on a separate page of the handbook and introduced by the heading IMPORTANT! Acknowledgment Form, must be viewed as separate and distinct from the handbook. Consequently, the court found that a valid arbitration agreement existed between the parties. 30 In sum, so long as it is in writing, an agreement to arbitrate can take many forms. Nevertheless, simply notifying employees of the employer s intent to use an arbitration program, without some clear proof that the employees knew of and agreed to it in one way or another, may not be enough to create a binding agreement to arbitrate. 28 O Neil, 115 F.3d at 275. For example, a clause in the handbook read: As regards to the Fair Treatment Procedure, AMI is committed to accept the obligation to support and assure access to the binding arbitration procedure for solving disputes if necessary. O Neil, 115 F.3d at 275. (emphasis added). 29 Patterson v. Tenet Healthcare, 113 F.3d 832 (8th Cir. 1997). 30 Courts also found that signed handbook acknowledgement forms were sufficient to establish a binding agreement to arbitrate in Circuit City v. Ahmed, 283 F.3d 1198 (9th Cir. 2002) and Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002). 11

12 1.04 ENERGY & MINERAL LAW INSTITUTE [2] Consideration for the Agreement to Arbitrate. A preliminary inquiry regarding the validity of an agreement to arbitrate is whether it is supported by consideration. This inquiry frequently turns on whether both parties to the agreement had sufficient knowledge of its terms and are mutually bound by the duty to arbitrate. For example, consideration may be lacking if the arbitration agreement s terms are too vague to enforce. In Penn v. Ryan s Family Steak House, 31 the Court of Appeals for the Seventh Circuit concluded that an arbitration agreement was invalid for lack of consideration on these grounds. The court reasoned that the agreement Penn had signed when he applied for his job, which provided that he would use a service selected by Ryan to arbitrate any employment-related disputes in return for which the service agreed to provide an arbitration forum, rules, procedures, hearing and decision, was unenforceable given that it contained an unascertainable, illusory promise on the part of the arbitration service. 32 In short, the court expressed concern that the arbitration 31 Penn v. Ryan s Family Steak House, 269 F.3d 754 (7th Cir. 2001). 32 Penn never actually signed an arbitration agreement with Ryan but instead signed an agreement agreeing to use an arbitration service with which Ryan had a relationship. Before Penn ever arrived on the scene, Ryan s had entered into a contract with a company called Employment Dispute Services, Inc. (EDS) to have EDS provide an arbitration forum for all employment-related disputes between Ryan s and its employees. When Penn applied for a job at Ryan s, Ryan s required him to execute a contract with EDS. That contract in turn expressed Penn s agreement to use EDS s services to arbitrate any employment-related claims he might have against Ryan s. The document went on to state explicitly that it was a contract with EDS, not with Ryan s although it added that Ryan s was a third-party beneficiary of the contract. EDS s sole business is apparently the provision of arbitration services for employment disputes according to this model: EDS contracts with employers to provide an arbitration forum for any claims the company s employees bring against it, and the companies that contract with EDS then require their employees to enter into separate contracts with EDS. Penn, 269 F.3d at

13 ARBITRATION AGREEMENTS 1.04 agreement did not sufficiently define a framework for the arbitration process. An arbitration program also may be unenforceable if it is part of a handbook that contains disclaimers stating that the handbook is not a contract. In Gourley v. Yellow Transportation, LLC, 33 the district court denied Yellow Cab s motion to compel arbitration on the grounds that the arbitration clause in the employee handbook created an illusory contract. The court reasoned that since the handbook explicitly disclaimed that it constituted a contract, 34 there was no binding agreement to arbitrate. 35 A court also may find an arbitration agreement to be unenforceable for lack of consideration where an employee signs the agreement after employment has commenced and no additional consideration is provided for entering into the agreement. For example, in Gibson v. Neighborhood Health Clinics, 36 the Court of Appeals for the Seventh Circuit denied a request for an order compelling arbitration of an employee s discrimination suit against her former employer because the alleged arbitration agreement was void for lack of consideration. 37 The court noted that the employer 33 Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196 (D. Colo. 2001). 34 The Yellow Cab Handbook contained the following language: THE PROVISIONS IN THIS HANDBOOK, INDIVIDUALLY AND COLLECTIVELY, DO NOT, IN ANY WAY, CONSTITUTE A CONTRACT OF EMPLOYMENT, A COVENANT, OR AN AGREEMENT, WHETHER EXPRESS OR IMPLIED. NOTHING CONTAINED IN THIS HANDBOOK SHOULD BE CONSTRUED AS A GUARANTEE OF CONTINUED EMPLOYMENT OR A GUARANTEE THAT EMPLOYEES WILL NOT BE DISCHARGED WITHOUT A HEARING. ALL EMPLOYEES ARE AT-WILL EMPLOYEES UNDER STATE LAW. THIS MEANS THAT THE EMPLOYMENT RELATIONSHIP MAY BE TERMINATED AT ANY TIME BY EITHER THE EMPLOYEE OR THE COMPANY WITH OR WITHOUT CAUSE AND WITH OR WITHOUT NOTICE. Gourley, 178 F. Supp. 2d at See also Snow v. BE and K Construction Co., 126 F. Supp. 2d 5 (D. Me. 2001). 36 Gibson v. Neighborhood Health Clinics, 121 F.3d 1126 (7th Cir. 1997). 37 An employee manual included the following language: I agree to the grievance and arbitration provisions set forth in the Associates Policy Manual. I understand that I am 13

14 1.04 ENERGY & MINERAL LAW INSTITUTE never communicated to the employee that signing the agreement was required for continued employment or that if the agreement was not signed, the employee s status would become uncertain. Thus, according to the Seventh Circuit, the mere fact of continued employment was not consideration for an employee s promise to submit all employment-related claims to arbitration. 38 In addition, a court may find consideration lacking where an employer retains an unfettered right to amend an arbitration agreement. For example, in Floss v. Ryan s Family Steak Houses, Inc., 39 two employees brought independent employment-related claims against Ryan. Ryan responded by filing a motion to compel arbitration with the respective district courts, alleging that each employee had signed an agreement to arbitrate. After the district courts issued conflicting decisions, the cases were consolidated for appeal and the Court of Appeals for the Sixth Circuit denied Ryan s motion to compel arbitration. The court reasoned that the agreement to arbitrate was defective because the rules and procedures governing the arbitration process permitted Ryan to amend them without providing notice to the employees covered by the agreement. The court concluded that the waiving my right to a trial, including a jury trial, in state or federal court of the class of disputes specifically set forth in the grievance and arbitration provisions on pages 8-10 of the Manual. Gibson, 121 F.3d at The opening two paragraphs of the Manual also included the following language: Neighborhood Health Clinics reserves the right at any time to modify, revoke, suspend, terminate or change any or all terms of this Manual, plans, policies, or procedures, in whole or in part, without having to consult or reach agreement with anyone, at any time, with or without notice. While Neighborhood Health Clinics intends to abide by the policies and procedures described in this Manual, it does not constitute a contract nor promise of any kind. Therefore, employees can be terminated at any time, with or without notice, and with or without cause. Gibson, 121 F.3d at This decision is at odds with the cases discussed above which hold that inserting arbitration agreements in handbooks, coupled with continued employment after knowledge of the same, is sufficient to establish a binding agreement. Unfortunately, this type of inconsistency exists throughout the decisions discussed in this chapter. 39 Floss v. Ryan s Family Steak Houses, Inc., 211 F.3d 306 (6th Cir. 2000). 14

15 ARBITRATION AGREEMENTS 1.04 ability to amend without notice to the other party demonstrated a lack of mutuality between the parties which, in turn, rendered them unenforceable. The Court of Appeals for the Tenth Circuit reached a similar conclusion in Dumais v. American Golf Corp. 40 There, the handbook stated that the employees agreed to arbitrate all disputes; however, the handbook acknowledgement form the employee signed stated that the employer could amend, supplement, or revise everything in the handbook at any time. The court noted that it was joining other circuits which have held that allowing one party the unfettered right to alter the arbitration agreement s existence or its scope is illusory. 41 Nonetheless, the District Court for the Northern District of Ohio has held that retaining a limited right to amend does not make an agreement to arbitrate illusory. In Morrison v. Circuit City Stores, Inc., 42 the agreement to arbitrate provided that the employer could unilaterally modify or terminate it at a certain time each year by providing thirty days advance notice to the employees. The court concluded that this narrow right to modify or terminate was not enough to show a lack of mutuality of obligation. In short, consideration can be a troublesome issue, particularly where the arbitration agreement is found in a handbook that provides it is not a contract, or the document gives the employer the unilateral right to change it at any time. [3] Claims to Be Arbitrated. Although employers generally want to have all employmentrelated claims submitted to arbitration, the wording of the agreement may cause the agreement to fall short of meeting that objective. In general, for an arbitration agreement to require an employee to arbitrate statutory claims, it must clearly inform the employee that such claims are included. In Prudential Insurance Co. of America v. Lai, 43 a prospective employee signed an agreement to arbitrate any dispute, claim, or 40 Dumais v. American Golf Corp., 299 F.3d 1216 (10th Cir. 2002). 41 Dumais, 299 F.3d at Morrison v. Circuit City Stores, Inc., 70 F. Supp. 2d 814 (S.D. Ohio 1999). 43 Prudential Ins. Co. of America v. Lai, 42 F.3d 1299 (9th Cir. 1994). 15

16 1.04 ENERGY & MINERAL LAW INSTITUTE controversy. 44 When signing the form, the employee was told to simply sign on the line, was not told anything about the arbitration agreement, and was never given an opportunity to fully examine the contents of the form. After the district court compelled the employee to arbitrate a sexual harassment claim against Prudential, the employee appealed. The Court of Appeals for the Fourth Circuit reversed, noting that even if the employee would have been told about the arbitration agreement and given a chance to review it, the sexual harassment claim still would not be subject to arbitration because the agreement did not describe the types of disputes that were to be subject to arbitration and, therefore, was not broad enough to encompass a statutory sexual harassment claim. Specifically, the Fourth Circuit noted that Congress intended that Title VII disputes be arbitrated only when such a procedure was knowingly accepted, and that since the arbitration agreement did not specifically state that Title VII claims were subject to arbitration, Lai could not possibly have agreed to submit such claims to arbitration. The Court of Appeals for the Eleventh Circuit reached a similar conclusion in Paladino v. Avent Computer Technologies, Inc. 45 Paladino had signed a handbook acknowledgement form that included a consent to arbitration. 46 After Paladino was fired, she filed suit in federal court 44 Specifically, the employee signed a form agreeing to arbitrate any dispute, claim or controversy that... is required to be arbitrated under the rules, constitutions, or bylaws of the organizations with which I register. Lai, 42 F.3d at Paladino v. Avent Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998). 46 The arbitration agreement stated: I recognize that during the course of my employment differences can arise between the Company and me. To that end, the Company and I consent to the settlement by arbitration of any controversy or claim arising out of or relating to my employment or the termination of my employment. Arbitration shall be in accordance with the commercial rules of the American Arbitration Association before a panel of three arbitrators in or near the city where I am principally employed. The Company and I further consent to the jurisdiction of the highest court of original jurisdiction of the state where I am principally employed, and of the United States District Court in the District where the arbitration takes place, for all purposes in connection with the arbitration, 16

17 ARBITRATION AGREEMENTS 1.04 alleging violations of Title VII. 47 Avent responded with a motion to stay and to compel arbitration that was denied by the district court. On appeal, the Court of Appeals for the Eleventh Circuit reversed. First, the Eleventh Circuit noted that an arbitration agreement must authorize the arbitrator to resolve federal statutory claims; an agreement that an arbitrator can resolve contract claims, even if factual issues arising from those claims overlap with statutory issues, was not enough. Because the agreement Paladino signed only authorized the arbitrator to award damages for breach of contract, it could not pass this test. Second, the Eleventh Circuit held that in order to fall within the FAA s ambit,... an arbitration agreement that purports to cover statutory claims must contain terms that generally and fairly inform the signatories that it covers statutory claims. 48 Since the agreement Paladino signed did not generally and fairly inform her of the statutory claims that would be covered, she could not be possibly be expected to know which claims were subject to arbitration and which claims were not. Hence, the Eleventh Circuit concluded that the entire arbitration agreement was void and that Paladino could pursue her claims against Avent in federal court without first proceeding through arbitration. Accordingly, arbitration agreements should specifically identify the claims to be arbitrated and, in particular, make an explicit reference to all possible statutory claims an employee could assert, with the exception of workers compensation and unemployment claims, both of which have their own administrative schemes that most likely would not permit separate arbitration of claims. [4] Collective Bargaining Agreements. Generally, collective bargaining agreements are subject to the same standards as individual employer/employee arbitration agreements with including the entry of judgment on any award. The arbitrator is authorized to award damages for breach of contract only, and shall have no authority whatsoever to make an award of other damages. Paladino, 134 F.3d at See generally, 42 U.S.C. 2000e et seq. 48 Paladino, 134 F.3d at

18 1.04 ENERGY & MINERAL LAW INSTITUTE respect to claims covered. That is, for a collective bargaining agreement s arbitration provisions to require employees to arbitrate statutory claims, it must expressly state that such claims are covered. In Wright v. Universal Maritime Service Corp., 49 a longshoreman filed suit alleging that stevedore companies discriminated against him in violation of the Americans With Disabilities Act when they refused to employ him following his settlement of a claim for permanent disability benefits. The district court dismissed the case on the ground that the longshoreman had failed to pursue an arbitration procedure provided in the collective bargaining agreement, and the Court of Appeals for the Fourth Circuit agreed. The United States Supreme Court, however, reversed. The majority expressed concern that the collective bargaining agreement did not clearly and unmistakably waive the longshoreman s right to a judicial forum for his claim of employment discrimination under the ADA. 50 Applying the Supreme Court s rationale in Wright, the Court of Appeals for the Fourth Circuit recently forced an employee to arbitrate a Title VII claim because the employee s collective bargaining agreement explicitly stated that Title VII claims were subject to binding arbitration. In Safrit v. Cone Mills Corp., 51 Safrit was subject to a collective bargaining agreement that gave the union the exclusive option to proceed to arbitration with certain employment-related disputes. The collective bargaining agreement, however, also stated that the company and the union agreed that they will not discriminate against any employee with regard to race, color, religion, age, sex, national origin or disability.... The parties further agreed that they will abide by all the requirements of Title VII of the Civil 49 Wright v. Universal Maritime Serv. Corp., 119 S. Ct. 391 (1998). 50 The Court stated: The CBA in this case does not meet that standard. Its arbitration clause is very general, providing for arbitration of matters under dispute, which could be understood to mean matters in dispute under the contract. And the remainder of the contract contains no explicit incorporation of statutory anti-discrimination requirements. 119 S. Ct. at 391 (1998). 51 Safrit v. Cone Mills Corp., 248 F.3d 306 (4th Cir. 2001). 18

19 ARBITRATION AGREEMENTS 1.04 Rights Act of Consequently, when Safrit filed suit in federal district court alleging that Cone Mills had denied her certain job opportunities due to her sex, Cone Mills responded by urging the district court to dismiss the case on the grounds that the collective bargaining agreement clearly and unmistakably required Title VII claims to be arbitrated. The Fourth Circuit agreed with Cone Mills. The court reasoned that the collective bargaining agreement showed that the parties agreed to abide by the requirements of Title VII and that failure to do so would authorize the aggrieved party to seek redress through arbitration. Thus, the court found that given the language of the collective bargaining agreement, the parties clearly and unmistakably agreed to submit all employment related claims (including Title VII claims) to arbitration. Consequently, collective bargaining agreements can waive an employee s right to file suit to enforce statutory discrimination rights if they make it clear that they encompass such rights. [5] Statute of Limitations. Courts differ as to whether provisions that shorten the period within which an employee may bring a claim are enforceable. For example, the District Court for the District of Minnesota recently held that an arbitration agreement cannot shorten the statute of limitations for vindicating federal rights. In Bailey v. Ameriquest Mortgage Co., 53 a group of employees filed an action under the Fair Labor Standards Act 54 against Ameriquest Mortgage Company to recover unpaid overtime compensation. Ameriquest moved to dismiss or to stay the proceedings on the grounds that the employees had signed an agreement to arbitrate any employment-related claims as a condition of their employment. While the employees admitted to signing such agreements, they argued that the agreements were invalid, partly because they provided for a shorter limitations period than that provided by statute. The district court agreed with the employees, 52 Safrit, 248 F.3d at 306 (4th Cir. 2001). 53 Bailey v. Ameriquest Mortgage Co., 2002 WL (D. Minn. 2002) U.S.C. 201 et seq. 19

20 1.04 ENERGY & MINERAL LAW INSTITUTE concluding that by shortening the limitations period to one year, the arbitration agreements denied the employees access to a remedy that Congress made available to ensure violations of the statute are effectively remedied and deterred. 55 Nonetheless, an arbitration agreement may be able to shorten the statute of limitations for non-statutory claims. In Soltani v. Western and Southern Life Insurance Co., 56 Soltani sold life insurance for Western-Southern. Soltani s employment contract consisted of a Sales Manager s Agreement, which stated that any employment-related claim had to be brought within six months after the termination of employment. 57 In September of 1998, nearly 10 months after his termination, Soltani filed suit against Western-Southern alleging that he was wrongfully terminated. Western-Southern responded by moving for summary judgment on the grounds that Soltani s suit was time-barred given that it was not brought within the six-month period required under the Sales Manager s Agreement. Soltani argued that the provision in the Sales Manager s Agreement shortening the statute of limitations was unconscionable and hence could not be enforced. The Ninth Circuit disagreed. Relying upon established precedent in California and other jurisdictions in commercial cases, the court held that parties can agree to shorten the statute of limitations for non-statutory claims. In sum, shortening the statute of limitations is enforceable only insofar as it applies to common law claims. 55 Bailey, 2002 WL at *5 (D. Minn. 2002)(citing Perez v. Globe Airport Security Serv., Inc., 253 F.3d 1280, 1287 (11th Cir. 2001). 56 Soltani v. Western and Southern Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001). 57 Specifically, the Sales Manager s Agreement stated: You agree:... B. Not to commence any action or suit relating to your employment with Western-Southern until ten days after services upon the Chairman, President or Secretary of a written statement of the particulars and amount of your claim. C. Not to commence any action or suit relating to your employment with Western-Southern more than six months after the date of termination of such employment, and to waive any statute of limitation to the contrary Soltani, 258 F.3d at

21 ARBITRATION AGREEMENTS 1.04 [6] Fees and Expenses. The American Arbitration Association s (AAA) Rules for the Resolution of Employment Disputes (which can be found at the AAA s web site, provide that the initiating party must pay the filing fee, that the parties shall split the costs and expenses of conducting the arbitration (unless they agree otherwise or the arbitrator directs otherwise), and that the parties shall split the arbitrator s compensation (unless the parties agree otherwise or the law provides otherwise). The courts, however, are divided as to the validity of provisions requiring employees to pay some or all of the arbitrator s fees and/or all of his or her own attorneys fees. The United States Supreme Court addressed the validity of costsharing provisions in a commercial context in Green-Tree Financial Corp. v. Randolph, 58 which involved an arbitration agreement entered into between the purchaser of a mobile home and the lender that financed the purchase. The plaintiff alleged that the defendant violated the Truth in Lending Act by failing to identify the insurance requirements as a finance charge, and violated the Equal Credit Opportunity Act by requiring her to arbitrate her statutory causes of action. On appeal, the Court of Appeals for the Eleventh Circuit ruled that the agreement to arbitrate was unenforceable because it was silent with respect to arbitration expenses, but the United States Supreme Court reversed. Justice Rehnquist, writing for a majority of the Court, concluded that an arbitration agreement was not invalid simply because it was silent with respect to costs and fees. Justice Rehnquist reasoned that holding otherwise would undermine the liberal federal policy favoring the use of arbitration agreements. Following Green-Tree, some courts have held that fee-splitting provisions in the employment context should be examined on a case-bycase basis and upheld unless the employee can demonstrate that payment of arbitration costs would prevent a full opportunity for vindication of employee claims. For example, in Bradford v. Rockwell Semiconductor 58 Green-Tree Financial Corp. v. Randolph, 121 S. Ct. 513 (2000). 21

22 1.04 ENERGY & MINERAL LAW INSTITUTE Systems Inc., 59 the Court of Appeals for the Fourth Circuit concluded that a fee-splitting provision that required an employee to share the costs of arbitration did not render the arbitration agreement invalid per se. Instead, the court advocated a case-by-case approach to handling feesplitting arrangements in arbitration agreements. Applying this case-bycase approach, the court concluded that the plaintiff failed to demonstrate that he was unable to pay the required arbitration fees or that the feesplitting provision deterred him from pursuing his statutory claim (or would have deterred others similarly situated). The Court of Appeals for the Third Circuit reached a similar conclusion in Blair v. Scott Specialty Gases. 60 Blair brought suit alleging sexual harassment and discrimination. In response, Scott filed a motion to dismiss on the ground that Blair had agreed to submit all employment-related claims to binding arbitration. While Blair acknowledged signing the arbitration agreement, she argued that (1) the arbitration agreement was unenforceable on its face because it contained a fee-sharing provision, and (2) that even if the arbitration agreement were enforceable, it would effectively preclude her from pursuing her claims in arbitration given her financial situation. Applying Green-Tree, the court refused to render the entire arbitration agreement unenforceable. Instead, the court held that Blair should be entitled to present evidence that her financial situation would preclude her from paying half of the arbitration fees (and hence would deny her a forum to vindicate her statutory rights). 61 In contrast, other courts have held that provisions requiring employees to pay their own attorneys fees and/or costs render the agreement unenforceable. For example, in Perez v. Globe Airport Security Services, 59 Bradford v. Rockwell Semiconductor Systems Inc., 238 F.3d 549 (4th Cir. 2001). 60 Blair v. Scott Specialty Gases, 283 F.3d at 595 (3d Cir. 2002). 61 See also Williams v. Cigna Financial Advisors, Inc., 197 F.3d 752 (5th Cir. 1999)(where the Fifth Circuit upheld an arbitrator s order that an employee pay half the costs of arbitration on the grounds that the employee failed to present specific evidence of an inability to pay or evidence that payment of such fees precluded him from obtaining relief). 22

23 ARBITRATION AGREEMENTS 1.04 Inc., 62 Perez was required to sign a pre-dispute resolution agreement as a condition of employment with Globe. Perez subsequently sued Globe under Title VII for gender discrimination. When Globe moved to compel arbitration under the FAA, Perez argued that the pre-dispute agreement resolution agreement was unenforceable because it contained an unlawful fee-splitting provision, which rendered the agreement unenforceable. 63 The Court of Appeals for the Eleventh Circuit agreed with Perez. According to the court, such an arbitration provision would prevent the arbitrator from granting effective relief by mandating equal sharing of fees and costs of arbitration despite the award of fees permitted by a prevailing party by Title VII. 64 The Courts of Appeal for the Seventh and Second Circuits and a district court in Minnesota also have issued decisions which indicate that they agree with the notion that any provisions which limit the possibility that an employee can recover attorneys fees deprive the employee of federally protected rights and, therefore, render an arbitration agreement unenforceable. 65 In short, requiring employees to share the costs of arbitration or pay his or her own attorneys fees may render any agreement to arbitrate unenforceable, particularly where the employee can show that, based on his or her economic situation, such provisions prevent him or her from vindicating their federally protected rights. 62 Perez v. Globe Airport Security Serv., Inc., 253 F.3d 1280 (11th Cir. 2001). 63 The arbitration agreement stated: Despite any rule providing that any one party must bear the cost of filing and/or the arbitrator s fees, all costs of the American Arbitration Association and all fees imposed by any arbitrator hearing the dispute, will be shared equally between you and the Company. Perez, 253 F.3d at Perez, 253 F.3d at See generally 42 U.S.C. 2000e-5(k)(providing that a prevailing party in a Title VII action may be awarded reasonable attorneys fees, including expert fees and costs). 65 McCaskill v. SCI Management Corp., 298 F.3d 677 (7th Cir. 2002); Brooks v. Travelers Ins. Co., 297 F.3d 167 (2d Cir. 2002); Bailey v. Ameriquest Mortgage Co., 2002 WL (D. Minn. 2002). 23