Ensuring Enforceability and Fairness in the Arbitration of Employment Disputes

122 Pages·2010·0.69 MB·English

by  Stacy A. Hickox

ENSURING ENFORCEABILITY & FAIRNESS IN THE
ARBITRATION OF EMPLOYMENT DISPUTES
16 WIDENER LAW REVIEW (FORTHCOMING 2010)

STACY A. HICKOX
TABLE OF CONTENTS

I. Overview

II. Formation of the Agreement …………………………………..10

A. Assent by current employees
B. Ability to Opt Out
C. Binding New Employees
D. Employer Discretion may undermine agreement
E. Knowing Agreement

III. Conscionability of the Agreement ………………………………26

IV. Fairness of Arbitration …………………………………………33

A. Bias of Arbitrators
B. Bias of the Process
C. Relief Available
D. Assessment of Costs

V. Effect of Arbitration on Litigation ……………………………...74

VI. Judicial Review of Arbitration Awards ………………………….78

A. Public Policy Considerations
B. Disregard of Law

VII. Conclusion & Recommendations …………………………...93

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ABSTRACT
Private arbitration of employment law claims has become common in
recent years. The Supreme Court has shown a strong preference for requiring
that an employee pursue an employment claim through an arbitration program
rather than seeking to enforce his or her rights in court. At the same time,
legislation has been introduced to try to protect the rights of employees who,
without an arbitration program in place, would have the opportunity to assert
their statutory rights in court. This article explores what safeguards should be
in place to assure that employers can rely on the enforceability of an
arbitration program because that program provides employees with a fair
process in which to assert their claims. The article reviews numerous court
decisions as well as guidelines and requirements developed by several
arbitration services to advise what an enforceable arbitration program would
look like.
2009] Ensuring Enforceability & Fairness in the Arbitration Of 3
Employment Disputes

ENSURING ENFORCEABILITY & FAIRNESS IN THE
ARBITRATION OF EMPLOYMENT DISPUTES
STACY A. HICKOX
Employers continue to turn to arbitration as a means to resolve issues
arising in the employment relationship. At the same time, concerns have been
expressed about the fairness of requiring employees to rely on arbitrators to
enforce their statutory rights. This concern has resulted in the introduction
the Arbitration Fairness Act of 2009 in the U.S. House to limit the
enforceability of “pre-dispute” arbitration agreements in the employment
setting.1 The bill states that no predispute arbitration agreement would be
enforceable if it requires arbitration of an employment dispute or a dispute
arising under any statute intended to protect civil rights or to regulate
contracts or transactions between parties of unequal bargaining power.2
The Arbitration Fairness Act has support based on concerns about
the current use of arbitration to resolve both employment and consumer
disputes. The sponsor of the similar 2008 Senate Bill, Russ Feingold,
expressed concern that the use of mandatory arbitration in employment and
consumer disputes has been “slowly eroding the constitutional rights of
Americans.”3
The findings underlying the bills support some regulation of arbitration:

1. H.R. 1020 (2009).
2
H.R. 1020 (2009).
3. “Senate Subcommittee Hears Witnesses Split on Proposal to Limit Mandatory
Arbitration,” BNA Daily Labor Report, Dec. 13, 2007.
4 Widener Law Review [Vol. 16: XXX

1) Mandatory arbitration undermines the development of public law for
civil rights because there is no meaningful review of arbitrators‟
decisions

2) Mandatory arbitration is a poor system for protecting civil rights
because it is not transparent.

3) Private arbitration companies are sometimes under great pressure to
devise systems that favor corporate repeat players

4) Arbitration clauses often include unfair provisions that deliberately tilt
the systems against individuals.4

The sponsor of both the 2008 and 2009 versions of the bill, Rep. Hank
Johnson, has stated that big business has “warped and corrupted the
arbitration process.”5 A representative of the National Employment Lawyers
Association (NELA) characterized the current system of arbitration as
“separate and very unequal.”6 Rep. Linda Sanchez, as chair of the House
Commercial and Administrative Law Subcommittee of the Judiciary
Committee, stated in 2007 that “To be a respected and reasonable alternative
to the courts, arbitration must provide a level and fair playing field.”7
At the same time, proponents of arbitration have spoken out against
the bills. The executive director of the Council for Employment Law Equity
(CELE), an attorney who represents management, called mandatory

4. H.R. 1020.
5. “Subcommittee Gives Favorable Report to Bill Limiting Arbitration Clauses in Job
Contracts,” BNA Daily Labor Report, July 16, 2008.
6. “House Subcommittee Hears Divided Views on Proposal to Limit Mandatory
Arbitration,” BNA Daily Labor Report, Oct. 26, 2007.
7. “Subcommittee Gives Favorable Report to Bill Limiting Arbitration Clauses in Job
Contracts,” BNA Daily Labor Report, July 16, 2008.
2009] Ensuring Enforceability & Fairness in the Arbitration Of 5
Employment Disputes

employment arbitration “a useful, fair and productive fixture on our American
employment landscape.”8 He believes that the bills would have “far-reaching
and disastrous impacts on American jurisprudence and American society.”9
Academic studies presented at hearings on the 2008 bills showed that
parties with an inferior bargaining position achieve better or at least
comparable results through arbitration.10 At the Senate hearing, the CELE
representative claimed that employees participating in arbitration have a 63%
chance of prevailing, whereas employees only prevail 43% of the time in
court.11 Similarly, the American Arbitration Association (AAA) found in a
2006 study that employees had a favorable outcome in 77% of cases going to
arbitration.12 Regarding the process, a professor suggested at the Senate
hearing that with passage of the bill, employees would find it more difficult to
find a lawyer, and would have less satisfactory resolution of their claims Over
a longer period of time.13 The loss of arbitration of employment disputes was
projected to quadrouple the costs of dispute resolution by approximately $88
million.14
A representative of Public Justice testified at the Senate hearing
against “palliative” approaches that would allow mandatory arbitration under

8. “Senate Subcommittee Hears Witnesses Split on Proposal to Limit Mandatory
Arbitration,” BNA Daily Labor Report, Dec. 13, 2007.
9. Id.
10. Id.
11
Id.
12. Id.
13. Id.
14. Id.
6 Widener Law Review [Vol. 16: XXX

some restrictions to make it more equitable.15 He called arbitration “largely a
system above and beyond the law.”16 Yet the AAA suggested at the House
hearing on Bill 3010 that Congress should enact “due process safeguards” to
apply to mandatory arbitration.17 The AAA has adopted procedures intended
to protect the due process rights of participants in the arbitration of
employment disputes.18 These include the right to have counsel present and
the right to participate with only reasonable costs, as well barring limitations
on remedies.19 An AAA representative suggested at the Senate hearing that its
standards were required by law, then fairness in employment arbitration would
be mandatory.20
I. OVERVIEW

Concerns about the fairness of some arbitration programs are
supported by the court decisions which have refused to enforce certain
mandates to arbitrate rather than litigate statutory claims. Typically these
decisions result from an employee‟s pursuit of a statutory claim despite the
existence of an arbitration agreement with his or her employer. This article

15. Id.
16. Id.
17. “House Subcommittee Hears Divided Views on Proposal to Limit Mandatory
Arbitration,” BNA Daily Labor Report, Oct. 26, 2007.
18
AAA Employment Arbitration Rules and Mediation, available at
http://www.adr.org/sp.asp?id=32904#1
19
Id.
20. “Senate Subcommittee Hears Witnesses Split on Proposal to Limit Mandatory
Arbitration,” BNA Daily Labor Report, Dec. 13, 2007.
2009] Ensuring Enforceability & Fairness in the Arbitration Of 7
Employment Disputes

explores what safeguards should be required, rather than suggested, based on
guidance from the AAA and other organizations or arbitrators and on the
decisions of the federal courts which have reviewed arbitration agreements
and decisions.
The U.S. Supreme Court has shown significant support for arbitration
as an alternative to litigation of employment law disputes. In applying the
Federal Arbitration Act (FAA), the Court has held that its purpose is “„to
reverse the longstanding judicial hostility to arbitration agreements … and to
place them on the same footing as other contracts.‟”21 To achieve this
purpose, the Court has supported “rigorous enforcement” of agreements to
arbitrate to give effect to the contractual rights and expectations of the
parties.22
The Supreme Court‟s generally favorable view toward the use of
arbitration has been applied to employment disputes. Employment
discrimination claims of all kinds, as well as other statutory claims, are
arbitrable.23 In ordering the arbitration of a claim arising under the Age
Discrimination in Employment Act, the Supreme Court found no reason to
treat civil rights statutes any differently than other important statutes that may

21. Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 89 (2000).
22. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987).

23. See Green Tree Financial Corp.-Alabama, 531 U.S. at 89; Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52, 62 (1995); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26-
35 (1991).
8 Widener Law Review [Vol. 16: XXX

be enforced under arbitration agreements.24 The Court stressed that pre-
dispute arbitration clauses should be enforced unless the employee shows that
Congress specifically intended to preclude arbitration.25 Since that decision,
courts have followed its guidance and typically supported the arbitration of
discrimination claims.26
Perhaps because of this favorable view of arbitration, it is estimated
that at least 500 employers and five million employees were covered by its
employment arbitration programs in 2000.27 Under collectively bargained
agreements, arbitration has always been a mainstay. One study compared the
use of arbitration in those settings to arbitration of disputes in non-unionized
settings.28 The highest disciplinary appeal proportion was for union
procedures at 55%, with the lowest appeal proportion for other nonunion
procedures at 11%, and with nonunion procedures that include mandatory
arbitration occupying a middle position at 34%.29
Despite this preference for arbitration, arbitration agreements are not
always valid. In assessing whether an arbitration agreement or clause is

24. Gilmer, 500 U.S. at 26-35.
25. Gilmer, 500 U.S. at 26.
26. See, e.g., Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361, 364-65 (7th Cir.
1999).

27. American Arbitration Association, Proud Past, Bold Future, 2000 Ann. Rep. 28
(2001). The AAA is a leading ADR service provider in this market.
28. Alexander J.S. Colvin, Papers from the National Academy of Arbitrators
Conference, “Beyond the Protocol: The Future of Due Process in Workplace Dispute
Resolution”:Empiral Research on Employment Arbitration : Clarity Amidst the Sound and
Fury?, 11 Empl. Rts. & Employ Pol‟y J. 405 (2007).
29. Id.
2009] Ensuring Enforceability & Fairness in the Arbitration Of 9
Employment Disputes

enforceable, courts “apply ordinary state-law principles that govern the
formation of contracts.”30 A contractual clause is unenforceable if it is both
procedurally and substantively unconscionable.31 Courts must also determine
whether the arbitration process affords the employee sufficient opportunity to
assert the statutory rights that could otherwise pursue in court, based on the
fairness of the process.32
Section 4 of the Federal Arbitration Act (FAA) allows a party to an
arbitration agreement to petition a district court to compel arbitration in
accordance with the parties' preexisting agreement.33 Under Section 3, an
employer may seek a stay of court proceedings to allow the dispute to go to
arbitration.34 A party seeking to stay proceedings under section 3 or to compel
arbitration under section 4 must demonstrate “that a valid agreement to
arbitrate exists, that the moving party is entitled to invoke the arbitration
clause, that the other party is bound by that clause, and that the claim asserted
comes within the clause's scope.”35 This proof is required because “a party
seeking to substitute an arbitral forum for a judicial forum must show, at a
bare minimum, that the protagonists have agreed to arbitrate some claims.”36

30. Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002).
31. See Armendariz v. Found. Health Psychcare Servs., Inc., 6 P. 3d 669, 690 (Cal.
2000).

32
Id. See also, Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997).

33. 9 U.S.C. §4.
34. Id.
35. Intergen v. Grina, 344 F.3d 134, 142 (1st Cir. 2003).
36. McCarthy v. Azure, 22 F.3d 351, 354-55 (1st Cir. 1994).
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The FAA does not, however, includes standards to ensure the
conscionability and fairness of the arbitration proceedings. Federal courts
have considered issues of fairness in addition to issues of unconscionability.
After the Gilmer Court gave its general approval of arbitration of employment
disputes, the District of Columbia Circuit Court set up guidelines for creating
an arbitration agreement that would be fair, and therefore enforceable.37
According to that court, an agreement to arbitrate employment-related
statutory claims would be fair if it provides the following:
1) adequate discovery

2) a written award is required

3) employees have access to all types of relief that they could
recover in court

4) employees should not be required, as a condition of going to
arbitration, to pay unreasonable costs, or any arbitrator fees or
expenses38
Commentators have recognized that “infusing arbitration with due
process protections undeniably will influence the public's perception of the
process.”39 Drafters of a protocol on arbitration of employment disputes
hoped that by "specifying clear and stringent quality standards for arbitration,"
the protocol would help "overcome[] the high level of skepticism and

37
Cole v. Burns International Security Services, 105 F.3d 1465, 1482 (D.C. Cir. 1997).
38. Id.
39. Margaret M. Harding, The Limits of the Due Process Protocols, 19 Ohio St. J. on
Disp. Resol. 369, 397 (2004).