|
Original Source: http://www.calbar.ca.gov/calbar/2cbj/01may/page10-1.htm
Point Counterpoint
Employment Arbitration after Circuit City: Will the ruling cause
more employee litigation or does it offer fair and cost-effective
justice for American workers and employers?
Voluntary ADR is preferable to mandatory arbitration agreements
which are sure to result in more litigation
The Supreme Court’s 5-4 decision
in Circuit City Stores Inc. v. Adams, __ U.S. __ (2001), disappointed
workers’ advocates, not because it significantly changed existing
law but because it impeded prospects for much needed state-by-state
employment arbitration reform.
The issue in Circuit City was whether
Congress in 1925 intended to exclude all workers, rather than only
so-called “transportation” industry workers, from the
coverage of the Federal Arbitration Act. Plaintiff St. Clair Adams
was joined by 22 states, the United States, the National Academy
of Arbitrators and most major national civil rights groups in arguing
that Congress intended the “contracts of employment”
exemption in FAA §1 to exclude all workers’ contracts
of employment. That’s what Congress said it was doing in 1925,
and no other construction of the exclusion made any sense, given
Congress’ limited Commerce Clause powers at the time.
But the Supreme Court disagreed.
Applying peculiar principles of statutory construction (that as
Paul Cane notes will cause “frenzy” among the experts),
the court rejected the Ninth Circuit’s textual and historical
analysis and held that Congress excluded only the class of “transportation”
industry workers from the FAA’s coverage.
The reason this matters is because
the Supreme Court in 1984 held that the FAA pre-empts most state
arbitration laws. By narrowly construing the FAA’s “contracts
of employment” exclusion, the court in Circuit City correspondingly
expanded the FAA’s preemptive reach.
No short-term impact
While the court’s ruling is
disappointing to those advocating state-by-state employment arbitration
reform, Circuit City has virtually no short-term impact on employment
litigation. Twelve of the 13 circuit courts already read the FAA
exclusion narrowly. In those circuits, states were already precluded
from providing special protections to workers subject to mandatory
arbitration.
Although many states had protective
legislation on the books (including Arizona, Kentucky, Louisiana,
Oklahoma, Wisconsin), under Circuit City the only workers who can
now fully benefit from those protections are the undefined class
of workers in the “transportation” industry, whom the
court said are excluded from the FAA’s coverage.
Legislative battle ahead
The reform battle thus turns to Congress,
where legislation will shortly be introduced to overturn the Supreme
Court’s decision, while the courts are left to fight over
questions like, “what comprises the ‘class’ of
‘transportation’ workers excluded from the Act?”
and what constitutes an enforceable employment arbitration agreement
under applicable statutory principles?
Contrary to what some employer’s
lawyers are saying, the Circuit City decision had no bearing on
whether mandatory arbitration agreements are enforceable or what
the standards for enforceability should be. Those issues simply
weren’t before the court. So why all the furor? If Paul Cane
is right that Circuit City “broke no new ground,” why
do so many lawyers representing employers trumpet Circuit City as
such a major victory?
Perhaps the strong reaction can be
attributed to employers’ fear of what would have happened
had the Ninth Circuit been affirmed. In recent years, American workers
have rallied behind efforts to protect their ability to vindicate
civil rights and employment rights in court.
Many states were poised to enact
reform bills that would have prohibited employers from forcing workers,
as a condition of employment, to waive their right to pursue employment
claims in court, or that would have required arbitration agreements
to be truly fair, knowingly entered into and voluntary.
It is no secret why workers’
advocates have fought so passionately to protect the right to sue
in court while lawyers representing employers have just as forcefully
touted the supposed benefits of mandatory employment arbitration.
Paul Cane states the employers’
case well. Employers argue that arbitration is a quick and inexpensive
way to resolve discrimination and other employment-related claims,
and that arbitration is a fair and even-handed way to resolve contentious
workplace disputes. But that description only applies to some employers’
arbitration schemes. It ignores that many employers’ arbitration
programs impose high costs and unfair restrictions on workers that
either chill the workers’ willingness to pursue their rights
at all, sharply curtail available remedies, or diminish the workers’
likelihood of success.
Why not voluntary?
If arbitration were always of equal
benefit to workers and employers, and if employers were right that
reasonably enlightened workers should embrace arbitration as a quick
and inexpensive alternative, why are most employers unwilling to
make their arbitration agreements truly voluntary? Do they distrust
their workers’ ability to choose the forum that is in those
workers’ best interests? Why not give workers the option of
pursuing civil rights in court, while offering an arbitration program
that provides a sufficiently attractive alternative to a jury trial
that the workers will agree to proceed in that forum, knowingly,
intelligently and voluntarily?
The sad answer to these questions
stems from the fact that most employers, with their vastly superior
bargaining power, have the ability not only to impose mandatory
pre-dispute arbitration agreements on their workers as a condition
of employment, but also to tilt the arbitral playing field sharply
in their own favor. Circuit City’s arbitration agreements,
for example, capped punitive damages and front pay, shortened the
statute of limitations, required workers to pay half the costs of
arbitration (including arbitrator fees and expenses), and failed
to require fee- or cost-shifting as required by FEHA.
Why would any reasonable worker knowingly
and voluntarily agree to such a forum, given the alternative of
litigating those claims before a jury of the worker’s peers?
Can such an ADR system honestly be defended as merely substituting
one forum for another, without affecting the workers’ substantive
rights? Not many lawyers would counsel a victim of workplace discrimination
to opt for such a system over a jury trial — no matter how
speedily arbitrators issue their rulings.
No one disputes the benefits of ADR
where all parties knowingly and voluntarily agree to arbitration
or mediation as an alternative to fighting out their dispute in
court. But when employers with overwhelmingly superior bargaining
power force their workers to give up the right to sue in court over
future violations, and when those same employers dictate non-negotiable
rules and procedures to govern the arbitration, they’re simply
asking for more litigation than they could possibly avoid by imposing
a system of arbitration in the first place.
Three options
Before Circuit City, workers had
three lines of argument available to challenge the enforceability
of a mandatory, pre-dispute arbitration agreement: 1) a challenge
under state contract law (because FAA §2 incorporates state
law contract doctrines of general applicability), as endorsed by
the Supreme Court in Doctor’s Associates Inc. v. Casarotto,
517 U.S. 681 (1996), and as applied in cases such as Armendariz
v. Foundation Health, 24 Cal.4th 83 (2000); 2) a challenge that
the agreement deprives the worker of non-waivable statutory rights,
as endorsed by the Supreme Court in Gilmer v. Interstate/Johnson
Lane Corp., 500 U.S. 20, 26 (1991), and as applied in cases such
as Duffield v. Robertson Stephens, 144 F.3d 1182 (9th Cir.), cert.
denied, 525 U.S. 982 (1998), and Graham Oil v. ARCO Products, 43
F.3d 1244 (9th Cir. 1994), cert. denied, 516 U.S. 907 (1995); and
3) a challenge to the agreement as involuntary or unknowing, as
endorsed in Gilmer and Mastrobuono v. Shearson Lehman Hutton Inc.,
514 U.S. 52 (1995) (reiterating that arbitration must be a matter
of “consent, not coercion”), as applied in cases such
as Renteria v. Prudential Ins. Co., 113 F.3d 1104 (9th Cir. 1997),
Prudential Ins. Co. v. Lai, 42 F.3d 1299, 1305 (9th Cir. 1994),
and Nelson v. Cyprus Bagdad Copper Corp., 119 F.3d 756 (9th Cir
1997).
Each of those three lines of argument
remains fully available after Circuit City — as they must,
because Circuit City did not raise any issue as to the enforceability
of mandatory arbitration agreements. As a result, employers who
impose mandatory arbitration agreements on their workers face the
prospect of more litigation over the protection of workplace and
civil rights.
Hundreds of cases now pending in
state and federal court challenge the enforceability of non-negotiable,
mandatory employment arbitration agreements. By contrast, there
are virtually no cases challenging the enforceability of arbitration
agreements where the parties voluntarily decided, post-dispute,
to submit their dispute to an arbitration procedure agreeable to
both parties. So whose interests are really being served?
Until employers learn to provide
arbitration programs that their workers will accept as fair alternatives
to the judicial system, employers will continue to be faced with
legal challenges to the enforceability of their arbitration agreements.
The solution to the problem of too
much litigation isn’t to force workers to arbitrate employment
claims, but to design arbitration programs that will be perceived
by both sides as attractive alternatives to the present system,
so both parties will knowingly, intelligently and voluntarily choose
to resolve their dispute in that alternative, non-judicial forum.
Counterpoint
Arbitration contracts treat workers and employers fairly and provide
both with cost-effective justice
By PAUL W. CANE JR.
Does this sound familiar? Your client
is in a lawsuit. It believes that it is in the right. You are reasonably
confident that you can prevail. But your client asks, “How
much will it cost to take this to trial?” The answer is: “Well
into six figures.” The client pales. So it asks, “If
we win, will the loser have to pay our attorney’s fees?”
Almost certainly not, you explain.
Enter a mediator. “I can settle
this case for you for less than the costs of defense,” she
says.
And so you settle. Neither you nor
your client likes it, but you settle anyway.
Too often, that’s the real
world of litigation (especially employment litigation) these days.
Transaction costs frequently batter the parties into submission.
But that’s not justice. Justice
that costs too much isn’t justice at all. Transaction costs
should not make it impractical to reach the merits. That’s
why arbitration has such appeal.
Circuit City Inc. v. Adams, 69 U.S.L.W.
4195 (U.S. March 21, 2001), presented an arcane question of statutory
interpretation: whether the 1925 Federal Arbitration Act protects
agreements to arbitrate employment claims. Scintillating reading
it is not. The majority and dissenting opinions advanced dueling
principles of statutory interpretation (note how these principles
often are revered as “canons” when they support your
position and dismissed as “bromides” when they don’t).
The end result no doubt has the editors of Sutherland on Statutory
Construction in a frenzy (“there’s a new case to cite
in the next pocket part!”), but the rest of us mostly are
content to know the bottom line.
Which is that — Michael Rubin’s
superb brief and oral argument notwithstanding — most predispute
agreements to arbitrate employment claims are protected as a matter
of federal law. (The exception, based on §1 of the Federal
Arbitration Act, is for persons who actually carry goods in interstate
commerce; this is what Professor Sam Estreicher has called “the
schlepper exception.”)
No tampering
Because the federal act pre-empts
state law, the decision bars state courts and legislatures from
tampering with the enforceability of FAA-covered arbitration agreements.
Michael Rubin’s article, accompanying
this one, cites the amicus filings of a number of states in support
of his client’s position and laments the existence of pre-emption.
Respectfully, however, he is only
an occasional exponent of the virtues of federalism. “States
rights” is fine, in Michael’s view, if the states are
doing what he wants them to do — but not otherwise.
As for the number of states who were
amici on his side, my response is: Well, sure. One could review
the Supreme Court Reports for the last century and find few if any
instances, on any issue, in which states argued in favor of federal
preemption. “Stop me before I legislate again!” is not
the states’ typical refrain.
No doubt Michael and his colleagues
will ask Congress to amend the Federal Arbitration Act. Congress
should resist, because arbitration contracts are a good thing, in
the workplace as elsewhere. Arbitration was a good thing more than
40 years ago when the Supreme Court decided the famous Steelworkers
Trilogy. It’s a good thing now. Arbitration is fast, fair
and efficient. You can litigate and win (or lose) on the merits,
without being cowed into submission by litigation costs.
No new ground
Almost every court to consider the
issue had correctly anticipated the Circuit City majority opinion,
so in a sense Circuit City broke no new ground. Yet the publicity
the case has received has reignited a debate over predispute arbitration
— witness these very articles — so it may be advisable
to review first some principles and dispel some myths (some of which
Michael would perpetuate in his piece alongside).
“Don’t arbitration agreements
take away substantive rights?” No, arbitration agreements
at their core simply change the forum in which substantive rights
are adjudicated. Even after Circuit City, arbitration agreements
that substantively overreach may be attacked, case by case. The
California Supreme Court last year in Armendariz v. Foundation Health
Psychcare Services, 24 Cal. 4th 83 (2000), articulated (1) a (mostly)
reasonable due process protocol that prevents overreaching, and
(2) severability principles, so that courts do not throw the arbitration
baby out with the bath water in evaluating agreements that are challenged.
“Won’t arbitrators favor
employers over employees?” No. The plaintiffs’ bar is
well organized and well informed. An arbitrator who issues unsound
decisions favoring employers soon will have to find another line
of work.
Same choices
“But what choice do you have
if presented with an arbitration agreement at the time of hire?”
You have the same choice you have when presented with any term or
condition of employment that you don’t like. You ask that
it be changed; if unsuccessful, you work for an employer that has
terms and conditions more to your liking. Individuals applying for
work often are presented with more or less non-negotiable terms.
Unless the terms are unconscionable
(which virtually every court in the country, including the unanimous
California Supreme Court in Armendariz, has said arbitration is
not), a valid contract is formed. Arbitration actually is among
the more innocuous of typical employment terms and conditions.
Job applicants often are required
to sign detailed employment-at-will agreements: documents that say
that never, ever, no matter how long employment lasts, will an individual
secure freedom from an arbitrary discharge. Such an agreement unquestionably
alters the parties’ substantive rights, and such agreements
often are imposed as a condition of hire. Arbitration agreements,
by contrast, do not destroy substantive rights; they simply change
the forum in which the rights will be adjudicated.
“But what if the arbitrator
is just wrong on the law?” If this is a concern, the parties
can contract for a limited form of appellate review. In LaPine Technology
Corp. v. Kyocera Corp., 130 F.3d 884 (9th Cir. 1997), the court
noted that judicial review was not at all inconsistent with the
notion of arbitration. (In a colorful concurring opinion, Judge
Kozinski emphasized that the standard of judicial review (there,
de novo on questions of law, substantial evidence on questions of
fact) had to be reasonably conventional. Should the parties stray
too far from conventional standards of review — as Judge Kozinski
put it, should a court be asked to review an arbitration award by
odd methods such as “flipping a coin or studying the entrails
of a dead fowl” — then the rule would be otherwise.)
Enough, then, of the myths and misperceptions
on the plaintiffs’ side. Michael Rubin may be surprised to
learn that I still get skeptical questions about arbitration from
employers:
“If we have an arbitration
program, won’t we get more frivolous claims?” No. I’ve
advised dozens of employers who have instituted arbitration programs.
Not one has reported an increase in claims, let alone in baseless
claims.
“Will a predispute arbitration
agreement hurt our recruiting?” No. I’m not aware of
any company that has reported applicant push-back, even in the overheated
job market of the past few years.
This, then, is the response to the
argument that arbitration is unfair. Employees have no objection
to it; employees’ lawyers, the beneficiaries of the costs-of-defense
settlement phenomenon described at the outset, are the persons who
most often complain. (Michael argues that only post-dispute arbitration
agreements should be enforced and asks why employees do not embrace
that sort of arbitration program instead of a predispute program.
The answer is that it never would work, because plaintiffs’
lawyers rarely are willing to surrender the leverage inherent in
their ability to lay on the employer a costly litigation siege.)
The Duffield case
“Hasn’t the Ninth Circuit
ruled that most discrimination claims cannot be arbitrated?”
Yes, in Duffield v. Robertson Stephens & Co., 144 F.3d 1182
(9th Cir. 1998), a case that Michael argued and won.
But Duffield is a dead man walking.
Virtually every court in the United States has criticized the reasoning
in Duffield. The pages of Shepard’s Citations devoted to Duffield
would be an instructive teaching aid in any law school research
and writing course. The sheer number of critical references screams,
“This case is bad law.” You can take it to the bank:
The Supreme Court will overrule Duffield soon (if the Ninth Circuit
en banc doesn’t do so first).
“Isn’t arbitration itself
costly, particularly where the employer is required to pay all or
substantially all of the arbitration’s costs and fees?”
The costs are not trivial. But they pale by comparison to the transaction
costs of court litigation. (Michael notes that there has been a
lot of expensive litigation over arbitrability. He is right, but
I expect that kind of litigation to subside, now that the ground
rules have become reasonably clear.)
“Why are you preaching this
gospel? Isn’t arbitration going to reduce the need for lawyers
like you?” Maybe so. But we all know what Shakespeare said
should be done about lawyers. Maybe it’s in our enlightened
self-interest to make dispute resolution work for our clients rather
than preserving it as an expensive game for ourselves.
|