Use Of Mandatory Arbitration Provisions To Avoid Court Litigation Costs And Limit Exposure

Increasingly, employers have attempted to reduce the costs associated with the litigation of employment lawsuits by contracting with their employees to arbitrate legal disputes arising out of the employment relationship. Arbitration of employment claims, including claims of dis-crimination, can result in tremendous savings to employers, who thereby avoid expensive and lengthy litigation at both the Equal Employment Opportunity Commission (EEOC) and in federal court. As recent court decisions have made clear, however, mandatory arbitration provisions will not be enforced unless they are properly drafted and are supported by adequate consideration.

The Supreme Court first addressed the enforceability of mandatory arbitration provisions in employment agreements in Gilmer v. Interstate/Johnson Lane Corporation.¹ In Gilmer, an employer sought to compel arbitration of an employee’s age discrimination claims based on the mandatory arbitration provision in the employee’s employment contract. The Court held that the Federal Arbitration Act required enforcement of the mandatory arbitration clause at issue.² Cases since Gilmer have upheld pre-dispute agreements to arbitrate not only claims under the Age Discrimination in Employment Act (ADEA), but all discrimination claims.³

Recently, however, courts have questioned the validity of some mandatory arbitration clauses. For example, in Wright v. Universal Maritime Service Corporation,⁴ the Supreme Court held that a disability discrimination suit could proceed, notwithstanding the employee’s earlier agreement to arbitrate such disputes. The Court held that the arbitration clause at issue, which was contained in a collective bargaining agreement, was not a "clear and unmistakable waiver" of the employee’s rights to pursue federal claims of discrimination in a judicial forum. The Court stated, "We will not infer from a general contractual provision that the parties intended to waive a statutorily protected right unless the undertaking is explicitly stated."⁵

Since Wright, lower courts have continued to strike down arbitration clauses that are either too broad, otherwise poorly drafted, or not supported by adequate consideration. As such, it is critical that employers understand how to draft mandatory arbitration provisions that can survive judicial scrutiny.

Courts generally hold that an agreement to arbitrate employment claims is like any other contract, and will be enforced so long as the state laws regarding formation of contracts are met.⁶ State laws typically require contracts to be supported by adequate consideration, i.e., either a detriment to the employer or a benefit to the employee. While the Seventh Circuit recently agreed that adequate consideration is a prerequisite to enforceability,⁷ the amount of consideration necessary to support a mandatory arbitration clause is minimal. Indeed, Courts have upheld an agreement to arbitrate when the only consideration involved was the employer’s promise to be bound by the arbitration agreement as well.⁸ Nevertheless, employers must give up something in return for the employee’s waiver of judicial enforcement, even if it is simply an equivalent waiver on the employer’s part.

In addition, most states require that for any waiver of rights to be enforceable, it must have been entered into both "knowingly" and "voluntarily." In order for an employee to knowingly and voluntarily waive his right to a judicial forum, the employee must have the opportunity to read and sign a contract to that effect. The mandatory arbitration provisions should not be printed solely in an employee handbook or other company policy statement. Rather, the provisions should be in a separate contract that places the employee on notice of the waiver. The contract should state in clear, specific and unambiguous language the terms of the arbitration agreement and specifically what rights are being waived. As the Supreme Court stated in Wright, if a particular statute is not listed in the waiver, the waiver is not "clear and unmistakable" with respect to a claim filed under that statute.⁹ Therefore, the waiver should contain a provision explaining the specific rights and claims that the employee is potentially sacrificing.

Last, to avoid a challenge to the adequacy of arbitration proceedings, an employer should ensure that due process norms are observed during the arbitration process. To that end, employers can follow the National Rules for the Resolution of Employment Disputes, developed by the American Arbitration Association. Further, an arbitration proceeding may be successfully challenged in the event that the employee incurs unreasonable fees. As a result, employers should split the costs of arbitration with the employee and the mandatory arbitration provision should specify this arrangement.

1 500 U.S. 20 (1991).

2 Id. at 35.

3 See, e.g., Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361 (7th Cir.1999).

4 119 S.Ct. 391 (1998).

5 Id. at 396 (emphasis added).

6 Michalski v. Circuit City Stores, Inc., 177 F.3d 634, 636 (7th Cir. 1999).

7 Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126 (7th Cir. 1997).

8 Michalski, 177 F.3d at 636-37. It should be noted that a California Court of Appeals recently struck down an arbitration agreement drafted by the same employer that prevailed in Michalski. In that case, the Court held that the agreement to arbitrate was "unconscionable" because the defendant employer had (1) not agreed to limit itself from filing court actions against employees; (2) the agreement limited the ability of employees to seek judicial relief for class actions; and (3) the agreement limited an employee’s right to punitive damages. See Ramirez v. Circuit City Stores, Inc., 90 Cal.Rptr.2d 916 (Cal. Ct. App. 1999). This decision, from December 1999, indicates that same courts may not enforce arbitration agreements that are not supported by cnsideration greater than the employer’s agreement to arbitrate employee claims.

9 Wright, 252 U.S. at 396.

First published in January 2000