Fighting arbitration's abuse of power.

Mandatory arbitration has long been troublesome for workers trying to vindicate their rights. The U.S. Supreme Court's decision in Circuit City Stores, Inc. v. Adams in 2001 set an even higher hurdle for employees and plaintiff lawyers seeking to enforce antidiscrimination laws in the workplace. (1)

In Circuit City, a bare majority of the Court held that the Federal Arbitration Act (FAA) applies to most employment contracts. (2) The holding encourages employers to impose mandatory pre-dispute arbitration clauses, requiring workers to waive their constitutional right to a jury trial as a condition of gaining or continuing employment.

While the FAA makes these clauses generally enforceable, it does not require that every arbitration clause must be enforced in every case. As it turned out, the plaintiff in Circuit City did not have to arbitrate his discrimination claims because, after the Supreme Court remanded his case, the Ninth Circuit held that one-sided terms in his employer's arbitration clause rendered it unconscionable as a matter of state contract law. (3)

Understanding the arguments available for fighting arbitration clauses under the FAA is critical considering the rights at stake and the disadvantages that employer-mandated arbitration can pose for workers. Employees who must resolve claims through private arbitration encounter several obstacles that they would not face in Court: (4)

No publicly accountable decision-maker. While judges are selected through public proceedings and are ultimately accountable to public bodies, private arbitrators are accountable only to the parties that appear before them. (5) This allows employers to use arbitrators with whom only they--not the employee--have a prior relationship. (6)

In addition, employers control the arbitration process, and arbitrators are compensated on a short-term, case-by-case basis. Possibly because of their relationship with the employer--and their interest in repeat business--arbitrators are widely seen as bringing pro-defense views to the bargaining table. (7) Even when employees prevail in arbitration, arbitrators tend to award smaller damages than judges or juries do in similar cases. (8)

Steep fees. Employees may also face prohibitive costs. While a court system is publicly funded, parties in arbitration must pay steep filing and arbitrator fees themselves. (9) In one case, a secretary who had to arbitrate her sexual harassment claims against a supervisor paid $18,260 in fees and costs to the American Arbitration Association (AAA). When she did not prevail in arbitration, she had to pay $207,271 for defense attorney fees under a "loser pays" provision in the employer's arbitration clause. (10)

In November 2002, AAA capped filing fees that plaintiffs in most employment cases must pay at $125. (11) Still, plaintiff lawyers should ascertain their clients' potential liability for forum costs before arbitrating claims.

Lack of precedent. Unlike the court system--which is designed to provide uniform interpretation of laws through published decisions that create binding precedent for future cases--arbitration requires plaintiffs to prepare their cases in isolation, without looking to the previous successes of similarly situated parties. (12) This loss of access to precedent is especially disabling for employees with statutory claims because it equates to a loss of uniformity that interpretation provides.

Secrecy. Arbitration proceedings are shrouded in secrecy, with many arbitration services adopting rules that bar parties from ever disclosing information obtained in or relating to their cases. (13) If Texaco, Inc., had imposed mandatory arbitration clauses against employees who claimed racial discrimination in Roberts v. Texaco, Inc., the evidence that the plaintiffs obtained might have never come to light. (14)

Unbridled discretion. Arbitrators have full rein in decision-making. As the Sixth Circuit stated 13 years ago, a court's review of arbitration decisions is "one of the narrowest standards of judicial review in all of American jurisprudence." (15) Indeed, the Supreme Court has stated that "improvident, even silly fact-finding" is not grounds for overturning an arbitrator's ruling. (16)

Since more and more employers are requiring arbitration as a condition of employment, employees increasingly are forced to relinquish important legal protections without consent.

Fighting arbitration clauses

The FAA was enacted in 1925 to "reverse the longstanding judicial hostility to arbitration agreements ... and to place arbitration agreements upon the same footing as other contracts." (17) Because the act covers all but a narrow class of employment contracts, (18) it should be the starting point for any challenge to a mandatory arbitration clause. The act provides that written arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (19)

This provision establishes a rule of substantive federal law, making arbitration clauses generally enforceable, but subject to limitation. "State law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally." (20) Generally applicable state law defenses to contract enforcement--such as allegations of fraud, duress, or unconscionability--may be applied to arbitration clauses consistent with the FAA. (21)

As substantive federal law, the FAA applies in federal and state courts alike and has been held to preempt state laws that conflict with its underlying policy goals by singling out arbitration clauses for unique or disfavored treatment. (22) Parties should therefore challenge the enforcement of arbitration clauses just as they would any other contract.

Plaintiffs should focus not on the bare fact that arbitration is required, but on the circumstances of contract formation or on any unfair or one-sided terms that are part of the arbitration requirement. These arguments are usually fact-specific and require development of an extensive evidentiary record, but the FAA provides for trial proceedings before a court rules on a motion to compel arbitration. (23) For example, in Blair v. Scott Specialty Gases, the Third Circuit recognized the plaintiffs right to take discovery related to potential costs of arbitration before the court issues an order enforcing the opposing party's arbitration clause. (24)

State contract law. The FAA requires application of state contract law to the critical questions of whether the parties to an arbitration clause have in fact formed an agreement and whether the terms of any agreement are legal and enforceable. State contract law is probably the most fruitful source of arguments for fighting the enforcement of mandatory arbitration clauses.

Contract-formation arguments. Courts must apply state law principles of contract formation to determine whether there ever was an agreement to arbitrate. (25) One such principle is that a contract does not take effect unless it is supported by consideration from both parties. The requirement of consideration can be important in the employment setting, where an employer typically will impose an arbitration clause through an employee handbook that is distributed on the first day of employment, or through a unilateral contract distributed some time during the employment relationship.

In these circumstances, the bare fact of the employee's continuing employment may or may not constitute consideration on the part of the employer. Thus, when an employer imposes a nonmutual arbitration clause that binds current employees to arbitrate claims but leaves the employer free to sue in court on its own claims, some courts have held that the clause is void for want of consideration. (26)

To constitute a valid and enforceable agreement under state contract law, an arbitration clause must contain terms that constitute an actual agreement between the parties. Courts may find that there is no agreement to be enforced when an employer drafts an arbitration clause and reserves for itself the unilateral right to alter or modify the terms or rules regarding arbitration.

In one particularly egregious example, the Hooters restaurant chain imposed an arbitration clause against waitresses, giving the company the exclusive rights to designate eligible arbitrators, raise new legal issues after proceedings commence, and cancel or modify the rules imposed under the agreement at any time. (27) The Fourth Circuit held that this was a "sham system, unworthy even of the name of arbitration" and that the necessary remedy was rescission of the entire agreement. (28)

Similarly, a federal district court held in 2001 that an arbitration clause in which an employer retains the right to "modify, supplement, or delete provisions ... at any time without advance notice" is illusory, never creating a binding contract between the employer and employees. (29)

To determine whether an agreement was in fact formed under state law principles of contract formation, examine both the circumstances in which an arbitration clause was presented to employees and the terms of the clause itself.

Contract-legality arguments. Like any other contract, mandatory arbitration clauses may be challenged under the common law doctrine that courts will not enforce unconscionable contract terms. To prove that contractual provisions are unconscionable, the plaintiff typically bears the burden of demonstrating at least one of the following:

* There was a substantial imbalance in bargaining power between the contracting parties.

* One party had no meaningful choice as to the provisions.

* The provisions were hidden or concealed so as to create a surprise by their appearance (procedural unconscionability), and the provision itself is unfairly one-sided in favor of the stronger party (substantive unconscionability). (30)

Most courts look for some degree of both procedural and substantive unconscionability, although they need not be present to the same extent. The California Supreme Court has recognized that these two elements of unconscionability coexist: "[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." (31)

Procedural unconscionability addresses factors that bear on whether there was a genuine "meeting of the minds" between contracting parties. Relevant considerations include

* the form in which the disputed contract terms were presented

* whether there was any explanation as to the presence of the disputed terms

* the relative commercial sophistication and bargaining power of the two parties

* whether a party had meaningful choice about inclusion of disputed terms. (32)

Courts applying California contract law, for example, have held that the terms in contracts of adhesion--such as employment contracts imposed on workers as a condition of their employment--are procedurally unconscionable and require an examination of their terms for substantive fairness. (33)

Other courts require more than a showing that a contract is one of adhesion in order to find sufficient evidence of procedural unconscionability. These courts often look for evidence of "surprise," where contract terms are presented in such a way that the nondrafting party is unlikely to understand or appreciate their effect. (34) It is therefore necessary to examine the entire document in which an employer's arbitration clause appears and the circumstances in which the employee receives this document to determine whether the employee was likely to be apprised of the waiver of his or her rights.

Still other courts look to industry-wide practices regarding arbitration to determine whether there is meaningful choice for parties faced with arbitration clauses. (35)

Substantive unconscionability focuses on the terms of a contract and whether they are unreasonably one-sided in favor of the party that dictated the terms. While arbitration clauses are not per se substantively unconscionable, some employers write these clauses to include such one-sided terms that they become unconscionable when applied to individual employees.

A common example is a clause requiring an employee to arbitrate all legal claims while reserving to the employer the right to go to court on any claim against an employee. Numerous courts have found this type of clause unconscionable. (36)

Courts have also found arbitration clauses substantively unconscionable if they take away any substantive remedies that would be available to employees in court. (37)

The potentially prohibitive effect of high arbitration costs imposed against an employee may also make a mandatory arbitration clause substantively unconscionable. (38) Any employee challenging an arbitration clause on this basis should assume the burden of developing an evidentiary record showing that arbitration will be too expensive. (39) Once again, a party's right under the FAA to take discovery and present evidence supporting any challenge to the enforcement of an arbitration clause is crucial. (29) If a party proves that it is facing potentially prohibitive forum costs, a court should not compel arbitration.

Federal statutory arguments. Employees asserting claims based on federal statutory protections may be able to raise federal law arguments against the enforcement of arbitration clauses. Although the Supreme Court has held that statutory claims can generally be subject to arbitration under the FAA because there is no conflict between statutory remedies and private arbitration, the Court has insisted that arbitration provide all substantive rights and remedies that would be available in court: "[B]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial forum." (41) Arbitration, the Court said, must allow a claimant to "effectively vindicate [his or her] statutory cause of action." (42)

Conversely, courts have repeatedly held that arbitration clauses waiving a party's substantive remedies under a federal statute are illegal and unenforceable. (43) These should include any clause with a "loser pays" provision--requiring that civil rights plaintiffs who do not prevail in arbitration pay the employer's legal fees and costs. (44) Thus, when an employer overreaches by imposing an arbitration clause that takes away rights an employee is guaranteed under a federal statute, the employee should argue that the statute renders the clause unenforceable.

Just as Congress provided for the general enforcement of arbitration clauses in the FAA, Congress can also override its directive by banning or limiting arbitration of claims under any other federal statute. The Supreme Court has held that "if Congress did intend to limit or prohibit waiver of a judicial forum for a particular claim, such an intent `will be deducible from [the statute's] text or legislative history' or from an inherent conflict between arbitration and the statute's underlying policies." (45) There is a strong argument that Congress did exactly this in the Older Worker Benefits Protection Act (OWBPA) amendments to the Age Discrimination in Employment Act (ADEA) restricting waivers of the statutory right to a jury trial. (46)

In 2002, a federal court held in Hammaker v. Brown & Brown, Inc., that a contract waiving an employee's ADEA right to a jury trial (although not requiring arbitration) was unenforceable because it did not comply with the OWBPA's requirements for waivers of statutory rights. (47) The act provides that "an individual may not waive any right or claim under this chapter unless the waiver is knowing and voluntary." (48) To satisfy this requirement, the waiver must refer specifically to the ADEA; advise the individual to consult with an attorney; and provide a seven-day revocation period. (49) Hammaker held that these requirements apply to waivers of the right to a jury trial.

While recognizing contrary authority that holds that these requirements apply only to waivers of substantive rights and do not apply to arbitration clauses, (50) Hammaker rejected this limitation as unsupportable under the OWBPA's plain language referring to waivers of "any right." (51) Since most arbitration clauses do not comply with these standards for knowing and voluntary waivers, the ADEA prohibits enforcement of many arbitration clauses.

Although state contract law remains the most fruitful source for arguments against the enforcement of employers' mandatory arbitration clauses, federal law addressing arbitration or waivers of statutory rights may also preserve an employee's access to court in certain cases.

Employers' ability to opt out of the civil justice system poses fundamental policy questions for Congress and the courts. Advocates can draw from a wide range of arguments under state and federal law to fight arbitration abuses and preserve the right of employees to have their day in court.

Notes

(1.) 532 U.S. 105 (2001).

(2.) 9 U.S.C. [section] 1 (2000).

(3.) See Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002).

(4.) See generally E PAUL BLAND JR. ET AL., NAT'L CONSUMER LAW CENTER & TRIAL LAWYERS FOR PUB. JUST. FOUND., CONSUMER ARBITRATION AGREEMENTS: ENFORCEABILITY & OTHER TOPICS (2d ed. 2002).

(5.) See Harry T. Edwards, Where Are We Heading with Mandatory Arbitration of Statutory Claims in Employment? 16 GA. ST. U. L. REV. 293, 295 (1999).

(6.) See Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465, 1476 (D.C. Cir. 1997); Mercuro v. Super. Ct., 116 Cal. Rptr. 2d 671, 678-79 (Ct. App. 2002).

(7.) See Lisa B. Bingham, Employment Arbitration: The Repeat Player Effect, 1 EMPLOYEE RTS. & EMP. POL'Y J. 189 (1997); David S. Schwartz, Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 WIS. L. REV. 33, 63-64.

(8.) See Armendariz v. Found. Health Psychare Servs., Inc., 6 P.3d 669, 693 (Cal. 2000) (citing Robert L. Haig, Corporate Counsel's Guide: Legal Development Report on Cost-Effective Management of Corporate Litigation, 610 PLI/Lit. 177, 186-87 (July 1999); see also Schwartz, supra note 7, at 64.

(9.) See Ting v. AT&T, 182 F. Supp. 2d 902, 916 (N.D. Cal. 2002); see also Cole, 105 F.3d 1465, 1484 (describing arbitrator's fees of up to $1,000 per day).

(10.) Warner v. Von Buettner Ristow, No. 965653 (Cal., San Francisco County Super. Ct. July 22, 1998).

(11.) NAT'L R. FOR RES. OF EMP. DISP.: ADMIN. FEE SCHEDULE (Am. Arb. Ass'n 2002).

(12.) See Edwards, supra note 5, at 295.

(13.) See NAT'L ARB. Forum, CODE OF PROCEDURE R. 4 ("Confidentiality").

(14.) 979 F. Supp. 185, 190 (S.D.N.Y. 1997).

(15.) Lattimer-Stevens Co. v. United Steelworkers, 913 F.2d 1166, 1169 (6th Cir. 1990).

(16.) Major League Baseball Players Ass'n v. Garvey, 532 U.S. 504, 509 (2001) (citation omitted).

(17.) Equal Emp. Opportunity Comm'n v. Waffle House, Inc., 534 U.S. 279, 289 (2002) (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991)).

(18.) The act exempts from its coverage the "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. [section] 1. See, e.g., Harden v. Roadway Package Sys., Inc., 249 F.3d 1137, 1140 (9th Cir. 2001); Buckley v. Nabors Drilling USA, Inc., 190 F. Supp. 2d 958, 962-63 (S.D. Tex. 2002).

(19.) 9 U.S.C. [section] 2 (1999).

(20.) Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) (emphasis in original).

(21.) Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).

(22.) See, e.g., Perry, 482 U.S. 483, 492 n.9.

(23.) See 9 U.S.C. [section] 4.

(24.) 283 F.3d 595 (3d Cir. 2002).

(25.) See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

(26.) See, e.g., Gibson v. Neighborhood Health Clinics, 121 F.3d 1126 (7th Cir. 1997); Dumais v. Am. Golf Corp., 150 F. Supp. 2d 1182 (D.N.M. 2001), aff'd, 299 F.3d 1216 (10th Cir. 2002); but see Ameriquest Mortgage Co., Inc. v. Bentley, No. 1011791, 2002 WL 31664283 (Ala. Nov. 27, 2002) (at-will employment is sufficient consideration for arbitration clause covering employment and post-termination claims).

(27.) Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999).

(28.) Id. at 940.

(29.) Gourley v. Yellow Trans., 178 F. Supp. 2d 1196 (D. Colo. 2001).

(30.) See U.C.C. [subsections] 4-3 to 4-7 (1972).

(31.) Armendariz, 6 P.3d 669, 690.

(32.) See U.C.C. [subsections] 4-3 to 4-7.

(33.) See, e.g., Circuit City, 279 F.3d 889, 893; Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778 (9th Cir. 2002); Mercuro, 116 Cal. Rptr. 2d 671; see also State ex rel. Dunlap v. Berger, 567 S.E.2d 265 (W. Va. 2002) (holding exculpatory provisions in consumer contract unconscionable based in part on contract's non-negotiable, adhesive nature).

(34.) See, e.g., Ting, 182 F. Supp. 2d 902, 912-13.

(35.) See, e.g., Am. Gen. Fin., Inc. v. Branch, 793 So. 2d 738 (Ala. 2000).

(36.) See, e.g., Armendariz, 6 P.3d 669; Circuit City, 279 F.3d 889; but see Harris v. Green Tree Fin. Corp., 183 F.3d 173 (3d Cir. 1999).

(37.) See, e.g., Circuit City, 279 F.3d 889; Ting, 182 F. Supp. 2d 902; Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp. 2d 1087 (W.D. Mich. 2000).

(38.) See, e.g., Pinedo v. Premium Tobacco Stores, 102 Cal. Rptr. 2d 435 (Ct. App. 2000); see also Pitchford v. Oakwood Mobile Homes, Inc., 124 F. Supp. 2d 958 (W.D. Va. 2000); Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (App. Div. 1998).

(39.) See Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 92 (2000).

(40.) See Blair, 283 F.3d 595.

(41.) Gilmer, 500 U.S. 20, 26 (citation omitted).

(42.) Id. at 28 (citation omitted).

(43.) See, e.g., Graham Oil Co. v. ARCO Prods. Co., 43 F.3d 1244 (9th Cir. 1994); Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054 (11th Cir. 1998) (Cox, J., concurring); Gourley, 178 F. Supp. 2d 1196.

(44.) See generally Christiansburg Garment Co. v. EEOC, 434 U.S. 412 (1978); cf. Sosa v. Paulos, 924 P.2d 357 (Utah 1996) ("loser pays" provision renders arbitration clause substantively unconscionable).

(45.) Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987) (quoting Mitsubishi, 473 U.S. 614, 628).

(46.) Pub. L. No. 101-433, 1990 Stat. 1511 (amending Age Discrimination in Employment Act at 29 U.S.C. [subsections] 621, 623, 626, 630).

(47.) 214 F. Supp. 2d 575 (E.D. Va. 2002).

(48.) Id. at 578-79 (quoting 29 U.S.C. [section] 626(f)(1)) (emphasis added).

(49.) Id. at 579.

(50.) See Williams v. Cigna Fin. Advisors, Inc., 56 F.3d 656, 660-61 (5th Cir. 1995); Seus v. John Nuveen & Co., 146 F.3d 178 (3d Cir. 1998); Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 170 F.3d 1 (1st Cir. 1999).

(51.) Hammaker, 214 F. Supp. 2d 575, 580.

Michael J. Quirk is a staff attorney with Trial Lawyers for Public Justice in Washington, D.C. Kerry-Ann T. Powell is the Power-Cotchett Fellow at the organization.