The Ultimate Arbitration Update: Examining Recent Trends in Labor and Employment Arbitration in the Context of Broader Trends with Respect to Arbitration By: Professor Jean R. Sternlight University of Nevada Las Vegas Boyd School of Law jean.sternlight@ccmail.nevada.edu (702) 895-2358 Presentation to the 2003 ABA Annual Meeting, Session jointly sponsored by Section of Labor and Employment Law and Section on Alternative Dispute Resolution. Sunday August 10, 9:30am - 12:00. 1
I. What is going on in the world of mandatory arbitration? A. More and more U.S. companies are requiring or inviting consumers and employees to agree, pre-dispute, to arbitrate future disputes they may have with the company 1. One study showed that the average Joe in Los Angeles would be covered by mandatory arbitration clauses with respect to a third of the major consumer transactions in his life. Linda Demaine & Deborah Hensler, Only another Forum: Substituting Arbitration for the Courthouse in Consumer Disputes, forthcoming Law and Contemporary Problems (Fall 2003) (draft available at http://www.roscoepound.org/new/demaine.pdf) 2. The manner in which companies impose arbitration varies substantially a. sometimes clauses are signed or initialled b. sometimes clauses are discussed, and questions are answered individually or in a meeting c. sometimes the consumer or employee is given the option to reject the arbitration option, without suffering adverse consequences d. sometimes the arbitration is imposed in a more hidden fashion, e.g. in a bill-stuff or in an employee handbook that the employee never sees, and sometimes the employee or consumer is given no real option to reject the clause 3. Mandatory arbitration remains primarily a U.S. phenomenon. Private companies in other countries typically have not tried to require consumers or employees to resolve disputes through binding arbitration. If they did, likely the courts of those other countries would not condone the practice. See generally Jean R. Sternlight, Is the U.S. Out on a Limb?: Comparing the U.S. Approach to Mandatory Consumer and Employment Arbitration to that of the Rest of the World, 56 U. Miami L. Rev. 831 (2002). B. U.S. courts generally, and the Supreme Court in particular, remain favorably disposed towards arbitration, even when it is propounded in a contract of adhesion. C. But, courts generally, and the Supreme Court in particular, are also recognizing that companies sometimes use arbitration to take unfair advantage of their employees or consumers. Thus, courts are now recognizing that some arbitration clauses should be voided on such grounds as unconscionability or that they fail to allow plaintiffs to fully vindicate their rights. 1. The Supreme Court s decision in Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000), makes clear that arbitration clauses should be voided to the extent they prevent plaintiffs from fully vindicating their rights, for example because the 2
costs of arbitration are shown to be excessive. 2. The Supreme Court has recognized that arbitration clauses may also be void if they are unconscionable, and numerous lower court decisions have voided arbitration clauses that are found to be egregiously unfair because of the limitations on remedies, shortening of the statute of limitations, imposition of a biased neutral, imposition of excessive costs, etc. a. Hooters of America Inc. v. Phillips, 173 F.3d 933, (4 th Cir. 1999) (holding, in sexual harassment case, that particular dispute resolution process was too biased and one-sided to be called arbitration or enforced by court) b. Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, (Cal.2000) (finding arbitration clause unlawful and violative of public policy given limitation of damages clause, one-sided contract, etc.) c. Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002) (finding, in wrongful termination action, that arbitration clause was procedurally and substantively unconscionable) 3. It is becoming increasingly clear that good evidence is the key to a successful attack on an arbitration provision. Challengers must not merely assert that the clause is unfair, but present actual evidence of the high costs, bias, etc. a. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (holding that securities industry employee who had been required to sign Form U-4 calling for arbitration would have to arbitrate rather than litigate ADEA claims, in that he had failed to provide sufficient evidence of serious problems with the arbitration remedy ) b. Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000) (recognizing that excessively costly arbitration process might render clause unenforceable, but holding that plaintiff had failed to meet burden of proof to establish costliness of process) c. Ting v. AT&T, 182 F. Supp. 2d 902, 929-34 (N.D. Cal. 2002) (holding arbitration provision was illegal and unconscionable given its limitation of remedies, elimination of class actions, and other problems as proven by plaintiffs with substantial evidence), aff d in relevant part, 319 F.3d 1126 (9 th Cir. 2003). 3
4. It seems that courts are most likely to strike those arbitration provisions that suffer multiple types of unfairness, whether procedural or substantive II. Ten Big Issues for the Near Future A. What are the respective roles of arbitrator and court in determining whether an arbitration clause should be voided? 1. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (holding that default rule is that court must decide whether clause was actually agreed to) 2. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) (ruling that arbitrator should decide statute of limitations issue) 3. Green Tree Financial Corp. v. Bazzle, No. 02-634, 2003 WL 21433403 (June 23, 2003) (holding that arbitrator, rather than court, should determine whether ambiguous contract allowed arbitral class action) B. If an arbitration clause is found to be unfair, should the unfair portions of the clause be severed, or blue-pencilled, or should the entire clause be voided?. 1. See, Hadi S. Al-Shathir, Note The Perils of Temptation: Has the Eighth Circuit Given Employers an Incentive to Exploit Employees? Gannon v. Circuit City Stores, Inc., 67 Mo. L. Rev. 613 (2002) (summarizing case law on severance) 2. Factors courts consider a. did clause contain a severance provision? b. how unfair? c. would the company be getting away with something if it were allowed to sever or blue-pencil? C. Class actions 1. Can there be such a thing as an arbitral class action? Green Tree Financial Corp. v. Bazzle, No. 02-634, 2003 WL 21433403 (June 23, 2003), seems to say yes. 2. Can companies insulate themselves from class action suits by drafting a clause that prohibits class actions either in litigation or in arbitration? 3. Can companies attempt to insulate themselves from class action liability be attacked on grounds of unconscionability. See Jean R. Sternlight & Elizabeth J. Jensen, Using Arbitration to Eliminate Consumer Class Actions: Efficient 4
Business Practice or Unconscionable Abuse? Law and Contemporary Problems (forthcoming fall 2003). 4. In the event that an arbitrator determines the contract permits an arbitral class action, what are the respective roles of arbitrator and judge in supervising the class action? See Jean R. Sternlight, As Mandatory Binding Arbitration Meets the Class Action, Will the Class Action Survive?, 42 Wm. & Mary L. Rev. 1-126 (2000). Are there due process constraints on arbitral class actions? 5. Class actions brought under the Fair Labor Standards Act are unique, in that opt-in is required. Also, special concerns exist with respect to how putative class members should be provided with notice, and how the statute of limitations is tolled. Can an arbitral class action be brought under the FLSA? Can class actions be barred under the FLSA? D. Can apparent procedural niceties cure substantive failings? 1. In the past, companies often imposed arbitration in such a way that employees or consumers clearly had no choice but to accept the clause. In such cases, if the clause was egregiously unfair, courts would often strike it down. 2. Now, some companies are beginning to use procedures that seem fairer, e.g. by giving employees/consumers an opportunity, at least in theory, to reject the arbitration clause without adverse consequences. 3. To the extent that an opt out is provided, is the company permitted to impose all the substantively unfair terms it wants? See Circuit City Stores, Inc. v. Ahmed, 283 F.3d 1198 (9 th Cir. 2002) (holding that since employee was given a chance to opt out of program, clause was not procedurally unconscionable, notwithstanding purportedly unfair terms) 4. Arguably, a theoretical opt out may not be sufficient, given that so few consumers/ employees are likely to read the clause in detail or take the risk of opting out. E. Can a union waive its members right to arbitrate? 1. An important tension exists between Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974) (holding that employees could bring certain civil rights claims to court, even if they had already lost those claims in court), and Gilmer v. Johnson/Interstate Lane Corp., 500 U.S. 20, 24-26 (1991) (holding that age discrimination plaintiff could be compelled to arbitrate his claims). 2. The Supreme Court essentially punted on this question in Wright v. Universal 5
Maritime Service Corp., 525 U.S. 70 (1998), holding that while it would not decide whether unions had such authority, at minimum the bargaining agreement had to contain a clear and unmistakable waiver of the covered employees rights to a judicial forum for federal claims of employment discrimination. 525 U.S. at 82. Thus, the tension between Alexander v. Gardner-Denver, and Gilmer remains. 3. Can a union waive its members right to litigate without violating the duty of fair representation? F. What does the empirical evidence show with respect to how arbitration compares to litigation? 1. Advocates and opponents of arbitration disagree on the benefits and detriments of arbitration, but few empirical studies have been done. It has always been difficult to do studies, because it is difficult to obtain access to the data, and difficult to say how a particular matter would have been resolved had it gone a different route than it did. 2. Is arbitration really quicker/cheaper? 3. How do employees/consumers fare in arbitration, relative to litigation or other means of dispute resolution? G. How will/should jury trial arguments be applied to mandatory arbitration provisions? 1. A few cases discuss jury trial arguments, but few have seriously examined the question of whether a traditional knowing, voluntary, intelligent waiver standard ought to be used when examining arbitration clauses. 2. See Jean R. Sternlight, Mandatory Binding Arbitration and the Demise of the Seventh Amendment Right to a Jury Trial, 16 Ohio St. J. Disp. Res. 669 (2001). See also Jean R. Sternlight, The Rise and Spread of Mandatory Arbitration as a Substitute for the Jury Trial, forthcoming U. San Francisco L. Rev. (winter 2004) (draft on file with author). H. What power do states have to regulate with respect to arbitration? 1. It is well established that the FAA preempts direct state attempts to proscribe the use of arbitration. See, e.g., Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996) (holding preempted a Montana statute requiring that an arbitration clause be "typed in underlined capital letters on the first page of the contract") 2. However, the scope of this preemption is unclear, and will undoubtedly be 6
tested in the next few years. 3. Some of the open questions include the following: a. Can state constitutional jury trial or access to court provisions be used to void arbitration clauses? b. Can states regulate aspects of arbitration, such as the neutrality of the arbitrator or provider (as California has done) without such legislation being held preempted? c. Is state legislation or case law with respect to classwide arbitration preempted by the FAA? I. Federal legislation 1. Many bills have been introduced that would prohibit use of mandatory arbitration in particular areas, such as with respect to consumer or employment claims. 2. To date, the only bill that has passed protects automobile franchisees from arbitration imposed by automobile dealers. The Motor Vehicle Franchise Contract Arbitration Fairness Act of 2001 was signed into law as part of the 21 st Century Dept. of Justice Appropriations Authorization Act, Pub. L. No. 107-273, 11028, 116 Stat. 1758, 1835-36 (2002). 3. Will the future produce more legislative efforts to protect particular groups from mandatory arbitration? 4. Will any federal legislation be aimed at proscribing mandatory arbitration altogether in certain areas or will it instead try to ensure that any arbitration that is mandated is fair? J. Self-regulation 1. Arbitration providers such as AAA, JAMS, and the NAF have all adopted due process protocols that purport to ensure a fair process to those who use their processes. 2. To date, however, these protocols have been subject to the enforcement efforts of the provider itself. That is, if a provider chooses not to follow its own protocol, the participants have little recourse. Will we see more or beefier protocols in the future? Conclusion: it is essential to consider developments in the area of labor and employment itration in the context of broader developments in the field of arbitration. 7
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