United States: What the Latest Court Rulings Mean for Mandatory Arbitration Agreements

by Michele Ballard Miller

The validity of mandatory arbitration agreements has been a subject of intense litigation for years – resulting in confusion and uncertainty for many employers. While two decisions by the U.S. and California Supreme Courts in the last two years have indicated a judicial willingness to uphold properly drafted employee arbitration agreements, a new U.S. Supreme Court ruling has once again thrown the future of mandatory arbitration in doubt. Arbitration agreements are frequently popular with employers, but do they really provide the protection employers seek? If managers are required to sign mandatory arbitration agreements, should servers and bussers be covered as well? We’ll look at the recent court pronouncements on these important subjects, and what they may mean for your arbitration agreements.

In 2001, the U.S. Supreme Court issued an important ruling that was seen as a strong endorsement of compulsory arbitration of employment-related claims. The case, Circuit City Stores, Inc. v. Adams (2001) 532 U.S. 105, involved an employee who had charged the consumer electronics retailer of employment discrimination under California’s Fair Employment and Housing Act (FEHA). Circuit City sought to compel arbitration of the case pursuant to the terms of an arbitration agreement contained in Adams’ employment application. Adams countered that the arbitration agreement he signed was not enforceable, because employment contracts are not covered by the Federal Arbitration Act (FAA). The Supreme Court, however, upheld the arbitration agreement and ruled that mandatory arbitration agreements are permissible under the FAA.

The Circuit City ruling came on the heels of another decision by the California Supreme Court upholding mandatory arbitration of employment discrimination claims brought under FEHA – provided they contain certain procedural safeguards. Marybeth Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4^th 83. In that case, the Court invalidated an arbitration agreement signed by two employees because it (1) limited the remedies they could have

received in court, (2) did not allow for full discovery, (3) did not provide for a written arbitration award, (4) required the employees to bear the cost of the arbitrator, and (5) was not mutual. But the Court went on to affirm the general right of employers to impose properly drafted arbitration agreements.

The practical impact of these two rulings became clear when, on remand, the Ninth Circuit Court of Appeals determined that Circuit City’s arbitration agreement was in fact unconscionable under California law. Although the U.S. Supreme Court had upheld the general validity of mandatory arbitration agreements under federal law, arbitration agreements must still satisfy procedural and substantive requirements under state law in order to be enforceable. In the Circuit City case, the Ninth Circuit determined that the agreement failed this test because it was one-sided (leaving the employer free to file suit in court), limited the remedies available to employees, imposed a strict one-year statute of limitations on all claims, and required employees to share the cost of the arbitrator. Circuit City Stores, Inc. v. Adams (9^th Cir. 2002) 279 F.3d 889, 893-894.

The U.S. Supreme Court’s most recent ruling, EEOC v. Waffle House, Inc. (2002) 534 U.S. 279, is somewhat of a retreat from the Supreme Court’s earlier pro-arbitration pronouncements. In Waffle House, the Supreme Court held that even if an employee himself is bound by an enforceable arbitration agreement, that does not preclude a federal agency such as the Equal Employment Opportunity Commission from suing you in court on the employee’s behalf. The plaintiff in the case, Eric Baker, who had signed an arbitration agreement, alleged that he was fired from his job after suffering a seizure at work. Rather than initiating arbitration proceedings against his employer, he filed a charge of discrimination with the EEOC, which turned around and filed an Americans with Disabilities Act lawsuit against Waffle House. The employer sought to have

the EEOC case thrown out of court, but the Supreme Court ruled that the case could proceed notwithstanding the arbitration agreement.

According to the Court, the EEOC was not a party to the arbitration agreement and therefore could not be bound by it. Moreover, while the plaintiff may have signed away his right to sue, the EEOC acts on behalf of the public interest when it initiates employment-related litigation. This is true, the Court concluded, even when the EEOC seeks so-called "victim-specific" relief from the employer, such as backpay and other damages.

The impact of the Supreme Court’s latest decision on mandatory employment arbitration agreements remains to be seen. While some have called it the death knell for mandatory arbitration, others believe its impact will be limited because agencies such as the EEOC have neither the time nor resources to litigate in the vast majority of cases. Nonetheless, it is clear that the recent ruling eliminates one of the primary advantages of arbitration agreements: knowing with finality that employment disputes will stay out of court.

To complicate matters further, the California Supreme Court in the last year has either granted review or depublished several appellate arbitration decisions - further muddying the waters for employers trying to determine whether their own agreements will pass legal muster. The Court depublished three significant arbitration rulings – including one which that to the extent provisions are inconsistent with state law, they may be stricken and the rest of the agreement still upheld. In addition, the court has granted review in the case of Little v. Auto Stiegler, (2001) 92 Cal. App. 4^th 329, rev. gtd. Dec. 19, 2001. That case had held that the Armendariz requirements to not apply to non-statutory claims, such as breach of contract or wrongful termination. It is possible that the California Supreme Court might now reach a different conclusion.

While the legal trend continues to favor mandatory arbitration, the unsettled legal issues and procedural requirements of such agreements make it more important than ever that employers carefully weigh the pros and cons before imposing mandatory arbitration agreements on their employees. Arbitration has grown in popularity in recent years as a way to cut costs and expedite the resolution of disputes, but it has disadvantages. Moreover, you can’t require your employees to arbitrate legal disputes involving workers’ compensation or union-related claims.

The advantages of arbitration include:

• Faster resolution. Arbitration cases are usually resolved more quickly than litigation, especially since there are limited rights of appeal.
• Lower cost. Although you’ll need to pay the cost of the arbitrator, overall litigation costs are likely – but not guaranteed -- to be less in arbitration.
• Lower damages. Arbitrators tend to award successful plaintiffs less in overall damages.
• More predictability. Arbitrators tend to be more predictable than juries and less likely to award sympathetic plaintiffs whopping punitive damages.

But the disadvantages can be equally compelling:

• Fewer outright victories. Arbitrators are more likely than courts or juries to "split the difference," thereby reducing the likelihood of achieving a complete victory.
• Limited appeal rights. While limited appeals reduce costs, they also reduce your ability to challenge an incorrect decision in a higher court.
• Legal uncertainty. Legal issues about the enforceability of mandatory arbitration agreements remain unresolved, raising the specter of additional, costly litigation over the validity of the agreement itself before reaching the merits of the employee’s claim. Now, employers need to also recognize the possibility of being hit with a separate EEOC lawsuit even if the arbitration agreement is otherwise enforceable. This lack of certainty may make arbitration agreements far less appealing to some employers.
• Human resources investment. Finally, if you decide to impose mandatory arbitration on your employees, you’ll need to invest the time and money into developing thorough personnel policies and an enforceable arbitration agreement that complies with the
• latest legal requirements.

Any employment-related arbitration agreement should comply with the California Supreme Court’s substantive and procedural requirements. Here’s and overview of what you can and can’t do when asking employees to agree to arbitrate:

1. Make the agreement mutual. Employers can’t require employees to arbitrate employment-related disputes without imposing the same obligation on themselves. For example, if an employee terminated for stealing trade secrets is required to arbitrate his wrongful termination claim, the employer must also be required to arbitrate its trade secrets claim against the employee. You could, however, draft the agreement to permit either party to seek an injunction in court.
2. Designate a neutral arbitrator. To be enforceable, a mandatory arbitration agreement must designate a neutral and impartial arbitrator, such as the American Arbitration Association.
3. Require a written decision. In Armendariz, the court did not resolve the employee’s contention that a mandatory arbitration agreement must provide for judicial review of the arbitrator’s award. It did hold, however, that the arbitrator must issue a written arbitration decision that reveals the essential findings and conclusions on which the award is based.
4. Don’t limit remedies. Arbitration agreements that restrict the amount or type of remedies plaintiffs can recover for violations of statutory rights – such as Title VII or FEHA claims – are illegal. It’s not unusual for an arbitration agreement to include a cap on punitive damages or attorneys’ fees, for example – but such provisions can invalidate the entire agreement.
5. Don’t require the employee to bear arbitration costs. The basic rule is that employers can’t force employees, as part of a mandatory arbitration agreement, to bear any type of expense the employee would not be required to bear if he or she were free to bring the action in court. Accordingly, any requirement that employees bear - or even share - unique arbitration expenses will render the agreement unenforceable. Instead, employers must explicitly agree to bear the costs of arbitration - or will be presumed to have agreed if the contract is silent on that point.
6. Don’t limit discovery. The Armendariz court held that employees must be "entitled to discovery sufficient to adequately arbitrate their statutory claim, including access to essential documents and witnesses, as determined by the arbitrator." As a practical matter, agreeing to follow accepted arbitration rules, such as those followed by the American Arbitration Association, will usually be sufficient.

Finally, what do you do if an employee refuses to sign a mandatory arbitration agreement? At least one appellate court has ruled that an arbitration agreement was enforceable even without an employee signature, because the company could prove that the employee received a copy of the agreement and she continued to work thereafter. While it’s always best to have an employee's signature, it’s a good idea to include language on your arbitration agreement that the employee "by signing below and/or by continuing to work for the company" consents and agrees to be bound by its terms. Also include a space for a company representative to sign, indicating the date the agreement was given to the employee.

When it comes to existing employees, use the same language described above and never discipline or terminate someone for refusing to sign an arbitration agreement. Also, whenever possible, try and link the new arbitration agreement to some new employee benefit.

Although the law is unsettled, arbitration agreements can provide a measure of security, particularly if the dispute is with a highly compensated employee. When it comes to lower-level hourly workers, especially those already covered by collective bargaining agreements, the benefits of mandatory arbitration are usually less compelling.

© 2002, Miller Law Group

Miller Law Group is a Bay Area law firm that specializes in representing management in all facets of employment litigation and counseling. If you would like to receive copies of our newsletter electronically, please e-mail us at newsletter@millerlawgroup.com.