ABA Section of Litigation 2012 Section Annual Conference April 18-20, 2012: How to Prevent a Runaway Arbitration Preventing the Runaway Arbitration: Practical Strategies and Solutions Patricia O Prey GE Capital New York, NY Deborah Hankinson Hankinson & Levenger Dallas, TX Beverly Davis National Public Radio Washington, DC Written Materials prepared by Teresa Rider Bult (Kimberly Seten & Robin Shea contributing) Constangy, Brooks & Smith, LLP Nashville, TN
I. HISTORY AND BACKGROUND OF ARBITRATION A. History of Arbitration The Federal Arbitration Act was enacted in 1925 in response to a widespread judicial hostility to arbitration agreements. The FAA demands that arbitration agreements be provided the same discretion and deference as other contracts. In other words, if the arbitration agreement at issue often, but not always, executed as part of a consumer transaction agreement contains a dispute resolution procedure, that procedure should usually be followed. The only limitations, according to several Supreme Court decisions are defenses typically used in all other contract disputes fraud, duress or unconscionability. In more recent years, with employment-related disputes dominating the court system and staggering jury verdicts crushing employers, more and more employers have sought ways to reduce the growing exposure associated with employment disputes. What better way to protect yourself against the dangers of a jury than to altogether avoid jury trials? In 1974, however, the Supreme Court specifically held that an arbitration clause included in a collective bargaining agreement did not prohibit an employee from later bringing his Title VII discrimination claims in court, since there can be no prospective waiver of an employee s rights under Title VII. Alexander v. Gardner-Denver Co., 415 U.S. 36, 51 (1974). In that case, the court found the union arbitration aggrieved a contractual right, whereas Title VII aggrieved a statutory right. The law in this area remained in flux until 1991, when the Supreme Court confirmed mandatory binding arbitration could be required in the employment environment, even for statutory claims. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (finding employee was required to arbitrate his age discrimination claim brought under the ADEA). Of course, Title VII of the Civil Rights Act of 1964 was also amended in 1991, and the language of the amendment seemed to endorse alternative dispute resolution ( ADR ). Even so, it did not explicitly mention arbitration agreements. So for a period, there was still a question as to whether arbitration agreements would be enforced in the Title VII context. B. Progression of Case Law The U.S. Supreme Court's decision in Wright v. Universal Maritime Service Corp. (1998) was the Court s next attempt to explain when a mandatory arbitration agreement will be enforced to require arbitration of a statutory claim. That case, again, like in Gardner-Denver, involved a union arbitration agreement. The court analyzed and recognized the tension between the two principles espoused in Gilmer and Gardner-Denver, and reiterated that statutory employment claims could be the subject of arbitration, so long as the waiver of the statutorily protected right was explicitly stated, or that the waiver was clear and unmistakable. Under the facts of that case, the court found the arbitration clause s language was too vague, since it broadly covered all matters affecting wages, hours, and other terms and conditions of employment. Following those cases, there continued to be legal doubts about whether unwilling workers could be forced to accept arbitration. While many employers argued the Federal Arbitration Act ( FAA ) encouraged arbitration and that this edict stretched to the employment environment, others argued the act did not apply to employment disputes because of the law s exemption language. Lower courts were divided on how to interpret the act. 2
Finally, in Circuit City Stores, Inc. v. Adams (2001), the court found that the Federal Arbitration Act ( FAA ) applies to employment disputes and that an individual who signs an agreement subjecting discrimination claims to arbitration would be required to arbitrate those claims. See EEOC v. Waffle House (2002) (seeming to generally uphold idea of arbitration, but finding the EEOC as an agency is not bound by an arbitration agreement signed by the employee and has the unfettered right to bring a discrimination claim against the company on the employee s behalf in the judicial forum). Because the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the Americans with Disabilities Act each provide for judicial relief, some contend that mandatory arbitration agreements undermine the intent of Congress. In addition, others argue that mandatory arbitration agreements support an employer's superior bargaining position as employees are forced to sign such agreements in order to obtain employment. For these reasons, the enforceability of mandatory arbitration agreements is likely to be of continuing interest to Congress, and, indeed, as discussed below, there is legislation in the works on this issue. II. MORE RECENT SUPREME COURT DECISIONS ON ARBITRATION A. Federal Courts Cannot Set Aside Legally Wrong Arbitration Awards Unfortunately, neutral arbitrators selected by the parties sometimes get the law very wrong in deciding a case. In Hall Street Assoc., LLC v. Mattel, Inc., (2008), the Supreme Court held that clear legal error by an arbitrator cannot be used by a court to set aside the award, even if the parties had expressly agreed to allow the court to review the award for clear legal error because the parties cannot expand the court s power to review private arbitration awards as granted by the Federal Arbitration Act. The grounds for challenging an arbitrator s award in the courts are narrow. For example, a court can set aside an award where it was procured by fraud or corruption, or where the arbitrator was guilty of misconduct, misbehavior or evident partiality, or exceeded his authority. B. Arbitration Clause May Be Enforceable as to Discrimination Claims In 14 Penn Plaza, LLC v. Pyett (2009), the Supreme Court held enforceable an arbitration clause in a collective bargaining agreement that clearly and unmistakably waived union members rights to a judicial forum for their statutory discrimination claims. The Court affirmed a 2007 decision from the U.S. Court of Appeals for the Second Circuit, concluding that mandatory arbitration clauses in collective bargaining agreements were enforceable to the extent they waived rights of covered workers to judicial forums for federal statutory causes of action. C. U.S. Supreme Court case of Jackson v. Rent-A-Center re Unconscionability In Jackson v. Rent-A-Center West Inc., (2009) a split panel of the Ninth Circuit had found a former account manager for a Rent-A-Center in Nevada was entitled to have a court decide whether the arbitration agreement he signed as a condition of employment is unconscionable under state contract law, even though the agreement specifies that an arbitrator would decide any enforceability issues. The court held when a party challenges an arbitration agreement as unconscionable, and thus asserts that he could not meaningfully assent to the agreement, the threshold question of unconscionability is for the court. The U.S. Supreme Court reversed (2010), holding (5-4) that under the FAA, an arbitrator will decide whether a potentially invalid arbitration agreement is enforceable unless the objecting party s challenge goes to the delegation provision (i.e. the portion of the contract that delegates the power to the arbitrator to decide unconscionablility questions). 3
D. Class Actions & Arbitration- AT&T Mobility LLC v. Concepcion Since the Supreme Court blessed the employment arbitration agreement, employers have found new ways to further reduce their exposure to liability and lower the cost of defending employment disputes, with varying degrees of success. Courts have been asked to approve arbitration agreements that limit discovery, shorten statutes of limitation, eliminate recovery of certain damages, and a host of other company-friendly provisions. With class actions becoming the most feared of employment and consumer disputes, particularly given the alarming increase in wage hour collective actions over the last decade, more companies are now seeking to force individual arbitration. In 2003, employers thought they might get an answer to that question from the U.S. Supreme Court. In Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), the Court considered whether a collection of awards in class arbitrations were appropriate where the underlying arbitration agreements were silent as to class remedies. Opponents of class action waivers collectively exhaled when the Supreme Court did not affirmatively endorse class action waivers, and proponents of class action waivers were encouraged by language from the Court that seemed to suggest such waivers may be enforceable. Ultimately, the Court decided only that it was for the arbitrator, not the court, to decide whether a particular arbitration agreement provided for class procedures and remedies. Because the courts (not the arbitrators) had done so in Bazzle, the cases were remanded. In response to this case, many employers amended their arbitration agreements to expressly prohibit arbitration on a class or collective basis. In 2011, the Supreme Court finally came through with some additional guidance. In AT&T Mobility LLC v. Concepcion, a 5-4 Supreme Court struck down California s policy of prohibiting waivers of class claims in consumer arbitration agreements. The Court held that California s so-called Discover Bank rule conflicted with the Federal Arbitration Act. The AT&T decision is yet another statement of the strong federal policy favoring arbitration of disputes and may provide support to employers who want to include class waivers in employment agreements. The AT&T case was based on a consumer purchase of cellular phone service, under a contract that contained an arbitration clause. The arbitration clause provided that AT&T would pay all costs for non-frivolous claims. AT&T would arbitrate in the county where the customer lived. On claims with a value of less than $10,000, arbitration could be conducted either in person, by telephone, or based on written submissions. The parties retained the right to pursue claims in small claims court, and the arbitrator had authority to award any relief, including injunctions and punitive damages against AT&T. AT&T agreed that it could not seek reimbursement of attorneys fees, and if the claimant obtained an arbitration award that exceeded AT&T s last written offer, AT&T agreed to pay a minimum of $7,500 (later increased to $10,000) and double attorneys fees. These provisions are exceedingly fair by most standards. However, the AT&T contract also prohibited the arbitration of class claims against AT&T. In 2002, Vincent and Liza Concepcion purchased cellular service from AT&T, including a free phone, but they were charged sales tax on the retail value of the phone. Feeling duped, and after enjoying the free phone for four years, the Concepcions sued AT&T for falsely advertising the phone as free. The Concepcions claim was consolidated with a class action already pending in U.S. District Court for the Southern District of California. AT&T moved to compel arbitration, but the district court denied the motion, even while finding that AT&T s arbitration clause was both fair and efficient. AT&T appealed to the U.S. Court of Appeals for the Ninth Circuit (which hears appeals from federal courts in Alaska, Arizona, California, Hawaii, Idaho, Montana, 4
Nevada, Oregon, Washington, Guam, and Northern Mariana Islands), but the Ninth Circuit agreed with the district court. Both the district court and the Ninth Circuit relied on a California Supreme Court decision from 2005, Discover Bank v. Superior Court, which held that a class waiver in a consumer arbitration agreement is unconscionable if the agreement is considered a contract of adhesion (one that the other party feels he or she has no choice but to sign and no ability to negotiate), the dispute involves a small amount, and the party with inferior bargaining power alleges an intent to defraud. Known as the Discover Bank rule, this holding practically eliminated any chance of avoiding a class action on an alleged mass consumer protection claim. In other words, the Discover Bank rule holds that arbitration agreements in these situations are per se unconscionable. No unconscionability analysis from a procedural or substantive standpoint would be necessary: the arbitration agreements were unenforceable, and class actions were not waived. The 5-4 majority on the U.S. Supreme Court, however, found that the Discover Bank rule conflicted with the policy favoring arbitration set forth in the FAA. Justice Antonin Scalia, writing for the majority (joined by Alito, Kennedy, Roberts, and Thomas), noted that, no matter how generous and fair the arbitration provision may be, if the agreement prohibited class claims, California law took the draconian approach of finding the agreement unconscionable. Indeed, he noted, California s courts have been more likely to hold contracts to arbitrate unconscionable than other contracts. Most importantly, Scalia found that the Discover Bank rule conflicted with the purpose of the FAA: The overarching purpose of the FAA... is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA. In this regard, Scalia said, a ban on class arbitration was as valid as a clause in an arbitration agreement that provided for streamlined discovery or evidentiary procedures. Since the AT&T decision, many employers have been encouraged to consider including waivers of class claims in employment arbitration agreements. E. Anti-Arbitration Bills In the last few years, numerous bills have been introduced limiting the right of companies to enter into predispute agreements with employees, unions or consumers to submit any disputes to binding arbitration. Two of these bills seek to reverse the Supreme Court decision in Circuit City Stores, Inc. v. Adams, which upheld employer policies requiring employees to enter into pre-dispute binding arbitration agreements as a condition of employment. For example, the Arbitration Fairness Act of 2011 introduced in the U.S. Senate by Senator Al Franken would prohibit corporations from including arbitration clauses in their standard contracts with consumers and non-union employees. The case would also effectively invalidate the Concepcion case discussed above. III. ARBITRATION: THE PROCESS A. Growing Popularity of Arbitration as Option Even as the courts continue to grapple with the enforceability of arbitration agreements, the popularity of such agreements seems to grow. More specifically, companies like arbitration agreements because it provides a venue to get around the inefficient and expensive court system. There is also pressure from the courts and 5
EPLI carriers to find cheaper, more efficient ways of handling cases, and to use alternative dispute resolution techniques to resolve the dispute earlier. Some companies also see it as a way to get employees and consumers to engage in a more controlled, interactive process to resolve issues. Some companies have a very complex Alternative Dispute Resolution program, which requires employees to step through a three or four step process before finally ending up on the arbitrator s doorstep. One of these steps typically includes mediation. Those companies believe that even if the ultimate arbitration process ends up being as expensive (or more) than litigation, they have thwarted many claims (or settled those claims cheaply) before they morph into litigation. B. Typical Arbitration Process While most of the readers of this article will no doubt generally understand how arbitration works and the distinction between arbitration and other alternative dispute resolution programs such as mediation, it is helpful to describe the process, generally. Of course, arbitration is a process whereby the parties both agree to submit their claims to an arbitrator (or arbitration panel) to resolve the disputes. Most employment disputes are handled by one arbitrator, although a panel of three is not unheard of (panels are more typically used in the union environment). The parties put on their proof for the arbitrator, just like they would in trial, with more relaxed and flexible procedures and evidentiary rules. The arbitration is typically held in a law office or hotel conference room, so the atmosphere is also more relaxed for attorneys and witnesses. Because the parties have more leeway to agree on their own procedures, and the arbitrator has more discretion to morph the procedure, the arbitration can usually move along more smoothly and quickly than in a courtroom. Once the parties have put forth their proof, the arbitration closes, and the arbitrator or parties can request submission of post-arbitration briefs. Typically 30 days after those briefs are filed, the arbitrator issues a written decision. The arbitrator s decision is binding and generally non appealable (except in non-binding arbitration, discussed below). While the parties can technically appeal the decision to court, the court can only review and overturn the arbitrator s decision if it is arbitrary and capricious. Thus, not surprisingly, very few awards are overturned. (but see discussion of recent Hall Street Associates case below). C. Pros and Cons of Mandatory Arbitration 1. Reasons Companies Choose Arbitration Agreements There are some companies who hold hard and fast to their arbitration agreements, feeling that they reap several advantages through the process. Generally, the benefits most such companies cite are: a. May be Cheaper/ Easier b. May thwart claims before they are brought c. Speedier/ Brings Finality d. More laid-back hearing environment e. No juries more predictability 6
f. Punitive Damages May be Less Likely g. Get to pick arbitrator h. Confidentiality of Information no public record i. Feels like you have more control 2. Hidden Costs, Problems, and Unexpected Turns Other companies, however, feel just as strongly that the arbitration process is just as costly as litigation, and in fact, has hidden problems and costs which companies don t often foresee when putting those arbitration agreements together. Those companies cite the following issues: a. Parties waive right to jury of their peers b. May incur costs to enforce arbitration agreement in court (and have to be ready to appeal decision) c. Is it really voluntary? d. Arbitration legally binding; rarely appealable e. Summary Judgment difficult f. Arbitrators may split the baby g. Limited Discovery h. Arbitration may be just as costly i. Business may have to pay cost of arbitration, win or lose 3. To Do An Arbitration Clause or Not to Do an Arbitration Clause? Clearly, then, arbitration agreements are not for everyone. For companies contemplating implementation of a mandatory arbitration agreement, they should consider the following: a. Analyze your venue will the court enforce the agreement if mandatory? b. Are you going to terminate the employee if they refuse to sign agreement? c. Do you want to implement a process for employees (Dispute Resolution Program), or just an arbitration agreement? d. Will you be able to decide, on occasion, not to seek enforcement of the arbitration agreement (if you so choose). e. How good is your company at maintaining/ keeping up with documentation and signatures on arbitration agreements? 7
f. Quality of your pool of arbitrators g. How much discovery are you going to need (or want)? h. Analyze clause carefully avoid boilerplate language. i. Watch for unconscionability (overreaching) in drafting of agreements j. Consider less strenuous dispute resolution program 4. What Must You Include in an Arbitration Agreement to make Sure it is Enforceable A company must also consider the text of its arbitration agreement. Such agreements are struck down regularly simply because the company was not diligent in putting in magic language, or perhaps too diligent in trying to overreach. So what can a company do to ensure it is in compliance with laws? Frankly, sometimes it is difficult to tell until the agreement is challenged. Even agreements which seem almost identical to another agreement which has been enforced in that district or circuit court may be struck down for one reason or another. Generally, however, you should make sure you think of the following when drafting an arbitration agreement: 1 Make sure it contains a clear and unmistakable waiver of the covered employees rights to a judicial forum for federal claims of employment discrimination. Wright. Similarly (or stated another way), make sure that the arbitration arrangement provides for all of the types of relief that would otherwise be available in court. Have the arbitration clause in a separate employment agreement rather than an employee handbook. Courts in some states have refused to enforce arbitration clauses which were slipped into some other document, finding the employee did not explicitly agree to arbitration. Think about the take-it-or-leave-it nature of your agreement. Although many states have found such agreements are fine (and that companies can condition the individual s hire upon signing an arbitration agreement), others have refused to enforce such agreements finding that it creates vastly uneven bargaining power between the parties. Ensure the clause does not require employees to pay either unreasonable costs or any arbitrators fees or expenses as a condition of access to the arbitration forum. While employees may be required to pay the arbitration filing fee or an administrative fee (just like suing in court), costs beyond that may be considered unconscionable, and should be paid by the employer. Consider including a class action waiver as outlined by Concepcion. 1 See Enforcement of Arbitration Clauses, Free Enterprise, Findlaw Small Business Law Blog, April 1, 2009-, http://blogs.findlaw.com/free_enterprise/2009/04/enforcement-of-arbitration-clauses-supreme-court-rules-them-valid-inunion-contracts.html 8
5. Examples of Arbitration Agreements/ Language of an Arbitration Clause Below is an example of very simple arbitration language which a company could use in employment (and has been upheld in a few districts): Because of the delay and expense of the court systems, the Company and I agree to use confidential binding arbitration, instead of going to court, for any claims that arise between me and Company, its related companies, and/or their current or future employees. This includes any claims concerning compensation, employment, sexual or other types of harassment or discrimination, or termination of employment, and any class or collective claims. Before arbitration, I agree first to present any claims in writing and in full detail to Company; and next, to complete the civil service review process and any other Company s internal review process. Nothing in this agreement to arbitrate shall prevent me from filing a claim with any external administration or agency (such as the EEOC or similar state or local agency). In any arbitration, the then-prevailing National Rules for the Resolution of Employment Disputes of the American Arbitration Association shall apply. IV. CONCLUSION Clearly, arbitration is a hot topic these days, and while the current state of the law favors arbitration clauses, including in class claims, companies should be aware that these cases and procedures are under constant scrutiny by the courts and legislature, such that nothing is definite even from year to year! Even so, at this juncture, companies are free to include such clauses. Thus, they should certainly weigh the pros and cons and logistics of arbitration in determining if mandatory arbitration clauses would be beneficial to the company s interests. 9