I.  Introduction

 

            Litigation is a costly, stressful, slow and uncertain way of bringing a legal controversy to a conclusion.  Courts have encouraged and even required parties and their attorneys to employ alternative means to resolve legal disputes to relieve overcrowded dockets.  Congress has also encouraged alternative dispute resolution.  The 1991 Civil Rights Act added a provision encouraging the use of alternative dispute resolution of Title VII claims.^[1]  Prompted by Supreme Court and lower federal court decisions finding employer mandated dispute resolution procedures enforceable an increasing number of employers have adopted such procedures as part of their relationship with their employees.  Those most commonly invoked are mediation and arbitration..  

 

II.  Writing a Legally Binding Arbitration Agreement for Employment Claims

 

            A.  Impetus to Arbitration of Employment Disputes by Recent Supreme Court Decisions          

 

            Binding arbitration which is commonly a part of collective bargaining agreements has served well for decades as a means of settling disputes over rights governed by contracts between unions and employers.  It has proven to be a quick, effective and relatively inexpensive means of dispute resolution.  The controversies that are likely to be arbitrated under collective bargaining agreements include discipline, failure to promote, demotion as well as many of the other questions that are frequently the subject of discrimination suits.

 

            Arbitration of employment disputes including statutory claims potentially offers considerable advantage to employers and employees.  A decision is usually reached much more quickly in arbitration providing the possibility of earlier relief to the employee.  While arbitration has come to more closely resemble judicial action in terms of motion practice and discovery with their attendant costs and delays, to date it still is likely to be less costly.  A feature of arbitration that may be an advantage or a disadvantage to employees and employers is that arbitrator’s decisions are ordinarily not subject to review by an appeals court.  There are very few bases on which a court can set aside an arbitrator’s decision which in almost all instances is final and binding.^[2]  However both parties have the opportunity to participate in the selection of the arbitrator from panels of experienced employment lawyers maintained by such organizations as the American Arbitration Association.  This affords the parties the benefit of a decision maker who has a thorough understanding of employment law.  The ruling of an experienced arbitrator can be preferable to the whims of a jury or a court that is inexperienced in this type of case.  Another potential advantage of arbitration is that it is not a matter of public record.  There are occasions where employees as well as employers may want the existence of the controversy and its outcome to be confidential. 

 

            Until recent Supreme Court decisions giving sanction to the use of arbitration in non-union employment disputes employers had little inclination to make mandatory alternative dispute resolution, including arbitration, a part of their relationship with their employees.  A corner was turned with the decision in Gilmer v.  Interstate/Johnson Lane Corp.^[3] which found the arbitration clause in the “U-4" form used in the securities industry to be enforceable under the “FAA to bar a judicial action under the Age Discrimination In Employment Act (the “ADEA”).^[4]

 

            Gilmer left an important question unresolved.  The F.A.A. provides that “... nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”^[5]  The U-4 is not strictly an employment contract. It is required to be signed by customers of security firms as well as by employees. 

 

            The Supreme Court resolved the question left open in Gilmer in Circuit City Stores, Inc. v. Adams.^[6]  In Circuit City the Court held that the F.A.A. made arbitration provisions in employment contracts enforceable except for those involving transportation workers.  However the Court restricted the efficacy of arbitration in E.E.O.C. v. Waffle House, Inc.^[7] holding that an agreement to arbitrate between an employer and an employee does not bar the E.E.O.C. from suing an employer for monetary and other specific relief for such an employee. 

 

            The decision in Wright v. Universal Maritime Service Corp.^[8] negates requiring arbitration of statutory discrimination claims under the grievance procedures in collective bargaining agreements (“CBA’s”).   The only notable case finding such a claim to be arbitrable pursuant to the arbitration clause in a CBA is Austin v. Owens- Brockway Glass Container Corp.,Inc.^[9]  After Wright that decision has questionable precedential value.  In Carson v. Giant Foods, Inc.^[10] the Fourth Circuit declined to order arbitration of an ADA claim pursuant to the arbitration clause in a collective bargaining agreement.  The court, citing  Wright, held that the language of the agreement did not “clearly and unmistakably” give the arbitrator the right to decide statutory claims.  The court further held that the arbitrator did not have the power to determine if the action was arbitrable under the agreement as the agreement did not give the arbitrator discretion to decide questions of arbitrability.  This ruling suggests that the employer may want to write an arbitration agreement to grant the arbitrator the right to determine the scope of the arbitrator’s jurisdiction. 

 

B.  Not All Employer Mandated Agreements to Arbitrate Statutory Claims Will be Enforced by Courts

 

            If an employer wishes to adopt an alternative dispute resolution procedure requiring the arbitration of statutory claims such as those made under Title VII of the 1964 Civil Rights Act, the Americans With Disabilities Act (the “ADA”)^[11]  or the ADEA it should be carefully planned  with counsel.  Not all such programs have been enforced by courts.  Public policy considerations militate against agreements that eliminate or dilute statutory rights or remedies.

 

            Courts have declined to require arbitration where the procedure is too one sided in favor of the employer, where it does not afford all the relief that would be available under the statute on which the claim is based or if it places a financial burden on the employee of paying arbitration costs in excess of what court fees would be.

 

            C.   Waiver of Substantive Statutory Rights May Invalidate an Arbitration Agreement

 

             An agreement to arbitrate statutory claims will be enforceable where an employee waives the right to a jury trial but it will not be enforced by a court where it purports to deprive an employee of any substantive right conferred by a protective statute. In Paladino v. Avnet Computer Technologies, Inc.,^[12] a Title VII action, the Eleventh Circuit found an arbitration agreement to be unenforceable where by its terms the arbitrator was limited to awarding damages for breach of contract only.  The court would not permit an employee to waive other relief  allowed by Title VII such as  equitable relief, compensatory damages and punitive damages.  See also McCaskill v. MCI Management Corp.^[13] holding that an arbitration agreement requiring each party to pay its own attorney’s fees in a Title VII case was not enforceable.  The court reasoned that the possibility of obtaining an award of attorney’s fees was a right conferred by the statute that an employee cannot waive.   

 

            In contrast the Eleventh Circuit in Anders v. Hometown Mortgage Services, Inc.^[14] upheld an arbitration agreement that prohibited the award of punitive damages, treble damages, penalties and attorney’s fees.  The underlying action was under the Truth in Lending Act and the Real Estate Settlement Procedures Act which allows those remedies.  The court based its decision on the fact that the arbitration agreement contained a severability clause that provided if any of it was held unenforceable the remainder would not be affected.  The court noted that interpretation of the contract was to be under the law of Alabama in which state the case arose.  Alabama law favors severability.  The court further held that it was for the arbitrator to determine whether the restrictions on remedies was invalid.    

 

            D. Payment of Arbitrator’s Fees

 

            When an action is filed in court the plaintiff pays a relatively modest filing fee.  There is no charge for the services of the judge.  Arbitrators charge for their services.  Their fees are likely to be no less than $800 per day and are commonly as high as $1200 per day or even greater.  Some courts have raised the issue that requiring an employee to pay arbitrator’s fees will deter them from seeking to enforce statutory rights.  Two members of the panel in Paladino v. Avnet Computer Technologies,  supra, in a concurring opinion, found the arbitration clause objectionable because it had no provision requiring the employer to pay the arbitrator’s fees.^[15]  In Shankle v. B-G Maintenance of Colorado, Inc.^[16] the Tenth Circuit declined to require the plaintiff to arbitrate an age, disability and Title VII discrimination action where the arbitration agreement required fee splitting.  The court found that imposing such a condition on an employee effectively denied the employee a forum.

 

            In Cole v. Burns International Security Services^[17] where the subject arbitration agreement was silent on the issue of responsibility for payment of the arbitrator’s fees the court interpreted the agreement to require the employer to pay them.  The court made it clear that it was doing so  “...to uphold the validity of the parties’ contract” and that it would have refused to enforce a requirement that the employee share in the payment of the fees. 

  

            Subsequent to the Paladino, Shankle and Cole decisions the Supreme Court held in Green Tree Financial Corp. v. Randolph^[18] that the absence of a provision stating who would pay arbitration costs did not by itself invalidate an agreement to arbitrate a Truth in Lending Act claim.  The Court held that “... a party seeking to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive bears the burden of showing the likelihood of incurring such costs.”^[19]  Citing Green Tree Financial the Eleventh Circuit in Musnick v. King Motor Co. of Ft. Lauderdale^[20] enforced an arbitration clause that provided that the loser pays the winner’s attorney’s fees.  The court noted that Musnick had failed to establish that incurring the costs of the defense counsel would have been prohibitive for him.  The court further held that the validity of the fee shifting provision was to be determined by the arbitrator, at least in the first instance, and not by the court.  It observed that a fee was award against Musnick could be challenged in a judicial against in which he could argue that such an award is against public policy.       

 

            Even after Green Tree Financial there have been findings that fee splitting requirements in arbitration agreements are invalid conditions.  In Ferguson v. Countrywide Credit Industries, Inc.^[21] VII sexual harassment, hostile work environment and retaliation claims, the Ninth Circuit found that the employer may not impose an arbitration agreement requiring the employee to pay the arbitrator’s fees.

 

            Other courts have followed the Green Tree Financial approach which  rejects the view that requiring the employee to share the fees per se invalidates the arbitration agreement.  The Third Circuit in Blair v. Scott Specialty Gases^[22] held that whether requiring an employee to pay one-half of the arbitration costs effectively bars her pursuing her statutory rights is to be decided on a case-by-case basis.  The court ruled that the employee has the burden of proof on the issue but she can engage in limited discovery to establish the elements of her case.  The Fourth Circuit took a like view in Adkins v. Labor Ready, Inc.,^[23] an attempted class action brought under the Fair Labor Standards Act^[24] and West Virginia’s Wage Payment and Collection Act.^[25]  The Court declined to find the arbitration clause unenforceable in the absence of evidence of the cost of the arbitration and the individual’s financial status.  See also Morrison v. Circuit City Stores, Inc.,^[26] a Title VII race and sex discrimination case, in which the Sixth Circuit also declined to apply a per se rule.  The court reasoned that the validity of a fee sharing requirement should be decided on a case by case basis with attention to the individual plaintiff’s financial circumstances.

 

            The payment of arbitrator’s fees is less likely to be an obstacle to requiring the arbitration of a claim other than one based on a protective statute.  In Brown v. Wheat First Securities, Inc.^[27] the D.C. Circuit held that agreements to arbitrate common law claims are not subject to the limitation on the employee’s obligation to pay arbitration costs.  

 

            E.  “One-Sided” Agreements

 

            Arbitration agreements are not likely to hold up against court scrutiny where the provisions are stacked against the employee.  The Federal Appellate Court for the Fourth Circuit declined to force an individual to arbitrate a Title VII sexual harassment claim in Hooters of America, Inc. v. Phillips.^[28] The court found the employer’s dispute resolution procedure “...utterly lacking in the rudiments of even-handedness.”  Among the flaws in Hooters’ agreement to arbitrate was that the arbitration rules promulgated by the employer could be unilaterally changed by the employer at any time without notice.  The employee was required to furnish the particulars of her claim at the outset along with a list of witnesses and a summary of the facts of which they were aware.  The employer was relieved of any obligation to file a responsive pleading or name its witnesses.  Only Hooters had the right to make a record of the proceedings or file a judicial action to modify an award.  The arbitrators had to be selected from a panel named by the employer.  The rules further permitted Hooters to broaden the scope of the proceedings to include matters not involved in the original claim.  Hooters additionally had the option to nullify the agreement to arbitrate at any time.  The court ruled that Hooters wrote the “...rules so egregiously unfair as to constitute a complete default of its contractual obligation to draft arbitration rules and to do so in good faith.”^[29]  It further found the rules to be “...so one-sided that their only purpose is to undermine the neutrality of the proceeding.”^[30]

 

            The Second Circuit declined to enforce an arbitration agreement it found unconscionable in  Murray v. United Food and Commercial Workers International Union^[31] where the arbitrators were required to be selected from a list furnished by the employer.  It is recommended that the arbitrators should be selected from the panels of well regarded neutral organization such as the American Arbitration Association. 

 

            Other courts have found employer imposed pre-dispute arbitration agreements to be unenforceable where the employer has an absolute right to change the arbitration rules.  In Dumais v. American Golf Corporation^[32] the Tenth Circuit declined to require an employee to arbitrate a statutory claim where it interpreted the arbitration agreement to allow the employer to modify the arbitration agreement at its pleasure.  The court found the agreement to be illusory.  In Floss v. Ryan’s Family Steak Houses, Inc.^[33] the court found the arbitration clause to be illusory where the employer had an absolute right to designate the arbitral forum.  The fact that it could change that forum at any time made the agreement “fatally indefinite.”^[34]

 

            In Ferguson v. Countryside Credit Industries, Inc., supra, one of the fatal flaws that the Ninth Circuit found in the subject arbitration agreement was that it explicitly applied to discrimination claims and such other types of claims that an employee might bring.  The agreement also excluded worker’s compensation and unemployment compensation from the coverage of the arbitration clause.^[35]  At the same time it expressly excluded the types of claims that an employer might bring such as unfair competition, disclosure of trade secrets or other confidential information, and intellectual property violations.

 

            F.  Necessity for Consideration to Support a Contract to Arbitrate Employment Claims

 

            Arbitration clauses are contracts or portions of contracts.  They are therefore subject to the law of contracts.  To be enforceable the arbitration agreement must meet the requirements for the formation of a contract.  Among these are “consideration.”  The consideration offered by each party may consist of the promise to arbitrate.  This was the case in Adkins v. Labor Ready, Inc.^[36]  By contrast the arbitration agreement in Gibson v. Neighborhood Health Clinics, Inc.^[37] did not bar a discharged employee’s ADA judicial action as by its terms only the employee was bound to submit claims to arbitration.  The employer was not bound to arbitrate.  Therefore there was no promise by the employer to arbitrate in consideration for the employee’s  promise.  The court also found no other promise of the employer served as consideration as there was none linked to the employee’s promise to arbitrate.

 

            Where an applicant has been required to sign an agreement to arbitrate employment claims

the employer’s promise to hire the individual as an at will employee has been found to be adequate consideration for the employees promise to agree to arbitrate. Koveleskie v. SBC Capital Markets.^[38] 

 

            The creation of a contract requires an offer and an acceptance.  The issue of whether an incumbent employee accepted the employer’s mandatory arbitration requirement after it was announced was considered in Hightower v. GMRI, Inc.^[39]  In that case the employee’s continuing to work for the employer after being informed of the policy constituted an acceptance. 

           

            G.  Availability of Discovery in Arbitration

 

            While arbitration hopefully will result in less discovery than takes place in judicial proceedings an  arbitration agreement that sharply limits the availability of discovery may be subject to scrutiny by a court that is asked to enforce it.  In Gilmer the Supreme Court addressed the plaintiff’s contention that the New York Stock Exchange rules adopted by the NASD arbitration procedures do not allow a measure of discovery equivalent to that permitted under court rules.  The Court stated that “Although those procedures may not be as extensive as in the federal courts, by agreeing to arbitrate, a party ‘trades the procedures and opportunity for review of the court room for the simplicity, informality, and expedition of arbitration.’”^[40] (quoting Mitsubishi v. Soler Motors  433 U.S. 614, 628, (1985). 

 

            The subject of discovery was discussed in Armendariz v. Foundation Health Psychcare Services, Inc.,^[41] an action in which the employer sought to enforce an employee’s discrimination claim under the California Fair Employment and Housing Act, (the “FEHA”).^[42]  One of the bases on which the plaintiff challenged the arbitration agreement was that it did not provide for adequate discovery in the arbitration proceeding.  The court stated that  “...adequate discovery is indispensable for the vindication of FEHA claims.”^[43]  While noting that the parties may “...agree to something less than the full panoply of discovery” provided by the California Code of Civil Procedure the employer had impliedly consented to discovery by agreeing to arbitrate.^[44]  Therefore although the court found the arbitration agreement unenforceable on other grounds it did not do so on the basis that the employees were deprived of sufficient discovery to vindicate their claims.   See also Cole v. Burns International Security Services, supra,^[45] where the court observed that one of the prerequisites for an enforceable arbitration agreement is that it “...provides for more than minimal discovery.”         

            In Ferguson v. Countrywide Credit Industries, Inc., supra, one reason for the Ninth Circuit’s refusal to remand an employee’s harassment and retaliation claim to arbitration was the limits placed on the employee’s discovery.  The depositions of corporate representatives were limited to four subjects while no such limitations applied to the employee’s witnesses.  The court further found that limiting each side to three depositions put unfair limitations on the employee while not prejudicing the employer which inherently has access to more information.  The arbitration agreement’s allowance of unlimited expert witnesses was found to give the employer an unfair advantage as it was in a better financial position to pay experts. 

 

            A potential means of reducing discovery in arbitration is to provide reasonable limits but allow the arbitrator to expand those limits on a showing of good cause. 

 

            H.  The Need For A Signed Agreement 

 

            To be certain that an arbitration agreement will be binding it should be in a form that makes it clear that the employee is aware of it and that the employee has agreed to be bound by it.  A separate signed document is suggested.  Courts may be reluctant to uphold arbitration requirements set out only in employee handbooks.  This is especially true where the handbook states that the employer may change it at any time.  In Nelson v. Cyprus Bagdad Copper Corporation^[46] the Ninth Circuit held that the arbitration agreement in an employee handbook was not knowingly entered into by the employee.  The fact that the employee signed an acknowledgment that he had received the handbook and that he agreed to read and understand its contents did not suffice.  The acknowledgment did not notify him that the handbook contained an arbitration clause nor did it inform him that he was waiving his right to a judicial forum.  Other courts have found that an employee’s signing an acknowledgment of receipt of a handbook requiring arbitration was sufficient to bind the employee to arbitration.  See Blair v. Scott Specialty Gases^[47] and O’Neil v. Hilton Head Hospital.^[48]

 

            The Eighth Circuit upheld an arbitration clause in a handbook in Patterson v. Tenet Healthcare, Inc.^[49] notwithstanding disclaimers in the handbook that it did not constitute a contract.  The handbook also reserved to the employer the right to amend or rescind any provision in the handbook.  The court found that the arbitration agreement was separate and distinct from the balance of the handbook by virtue of its physical separation, its change in the tone of its language from the balance of the handbook and its use of contractual terms such as “I agree,” “I understand” and “condition of employment”.^[50]

 

            Some case have declined to uphold arbitration clauses where the employee was not provided with the rules before being required to sign it.  In Rosenberg v. Merrill, Lynch, Pierce, Fenner & Smith, Inc.,^[51] an action under Title VII and the ADEA, the First Circuit refused to enforce the arbitration requirement in the U-4 where the employee did not receive the arbitration rules before she signed.  The U-4 requires that the individual agrees to arbitrate disputes pursuant to the rules of various stock exchanges including the New York Stock Exchange.  It also requires the individual to be provided with those rules and to be familiar with them.  The types of case subject to being arbitrated were listed in the NYSE rules but not in the U-4 signed by the plaintiff.  Since the plaintiff was not provided with the necessary information the court found that it would not be “appropriate” under the 1991 Civil Rights Act to enforce the arbitration agreement.  Her waiver of a judicial forum was found to be ineffective as it was not knowing and voluntary.^[52]  The Sixth Circuit took a different view in Haskins v. Prudential Insurance Company of America,^[53] also involving the U-4, where the employer did not provide the employee with the rules.  In requiring the arbitration of the employee’s race and age discrimination claims the court found that the U-4 unmistakably requires arbitration.  The court reasoned that this put the employee on notice that arbitration would be required.  It was incumbent on the employee to be aware of the provisions of the agreement that he signed.  In the absence “...of fraud, duress, mistake. or some other ground upon which a contract may be voided...” the employee was required to arbitrate his claim.^[54]       

 

            I.  Arbitration of Class Claims

 

            The recent five to four Supreme Court decision in Green Tree Financial Corp. v. Bazzle^[55]

points out the possibility that class actions may be heard by an arbitrator.  That case involved actions by borrowers against a lender under contracts requiring in part that “All disputes, claims or controversies arising from or relating to this contract or the relationship which result from this contract ... shall be resolved by binding arbitration selected by us with the consent of you.”  The Supreme Court of South Carolina ruled that since the contracts were silent on arbitration of class claims that such claims were arbitrable.  There was federal jurisdiction under the Federal Arbitration Act.  The U.S. Supreme Court held that whether the contract prohibited  arbitration of class claims was an issue of contract interpretation which was for the arbitrator to decide and not the court.  The moral of the story is for the drafter of an arbitration clause to determine whether or not it wants class claims to be subject to arbitration and specifically set forth that preference in the contract. 

 

            In response to Green Tree Financial Corp. v. Bazzle the American Arbitration Association has drafted supplementary rules for class action arbitrations that are available on its website, www.adr.org.

 

           

J.  Summary

 

             To be certain that an arbitration clause will be enforced, it should contain certain provisions and limitations.  The employer must be bound to it as well as the employee.  Generally the employee should not be compelled to pay arbitrator costs or any filing fees that would exceed the amount the employee would have to pay to file a suit in court.  Arbitrators should be selected from a panel supplied by a neutral organization such as the American Arbitration Association.  The agreement should leave no doubt that the employee is committing to arbitration.  There should be no doubt that the rules governing the scope of the arbitration and the rules governing the hearing have been communicated to the employee before the agreement is signed.  The agreement should be as specific as possible in designating the types of disputes subject to the arbitration clause.  The arbitration clause should cover common law actions as well as specifically enumerated statutory actions.  If the arbitration clause attempts to bar recovery of punitive damages, attorney’s fees  or any other relief allowed by the statutes it is intended to cover it may be found non-binding.  As a fail safe it is a good idea to include a severability clause under which if any portion of the agreement found to be invalid will be severed and the balance of the agreement will survive.  Finally the arbitration clause should be specific in providing whether or not class claims are subject to arbitration.   

 

    

 

 

 

 

 

 

 BIOGRAPHY OF DONALD J. SPERO

 

            Donald J. Spero is a graduate of the University of Michigan Law School who has practiced labor and employment law for over 30 years, both in private practice and as in-house counsel for Sears, Roebuck and Co. from which he retired as Senior Employment Counsel.  He is Board Certified by the Florida Bar in Labor and Employment Law and a Fellow of The College of Labor and Employment Lawyers.  He now devotes his time to serving as a mediator and an arbitrator as well as frequently speaking and writing articles on employment law subjects.  He is on the panels of employment and labor law arbitrators  of the American Arbitration Association and the arbitration and mediation panels of the NASD as well as the mediation panels of the United States District Courts for the Southern and Middle Districts of Florida.  Mr. Spero serves on the Employment & Labor Law committee of the Palm Beach County Bar Association.  He is a member of the Labor and Employment Law Sections of the Florida and the American Bar Associations.  He is also a member of the Chicago and Illinois Bar Associations. 

 

 

                                                                                                                                                                       

 

 

 

 

                       

 

12/02/2003