The menace of mandatory arbitration: Arbitration clauses require workers to sign away their rights and take a detour around the courthouse. Although judges have repeatedly upheld these clauses, there are ways to challenge and halt their worst excesses.

The Federal Arbitration Act (FAA) has divided plaintiffs employment lawyers into two camps: those who think it means death to the republic, and those who think it merely means death to the civil justice system.

But until there's a congressional amendment--and that's unlikely any time soon--or a significant change in U.S. Supreme Court jurisprudence--a pleasant but wistful thought--plaintiff employment lawyers are going to have to deal with the FAA.

We won't praise the act, and we can't bury it. But by looking at recent decisions about employees not covered by collective bargaining agreements, we can come up with strategies that will increase your chances of securing your clients a day in court. (1)

The use of mandatory arbitration clauses in employment is expanding rapidly. (2) These days a fight over termination at will is as likely to happen in a nearby Holiday Inn meeting room as in the local courthouse.

For this, you can thank [section] 2 of the act, which provides that 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." State law can preclude enforcement of arbitration clauses "if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally." (3) State contract law plays a large role in assessing whether such agreements are enforceable.

Section 1 of the act excludes "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." But in Circuit City Stores, Inc. v. Adams, the Supreme Court made it clear that this exemption is narrow, applying only to "contracts of employment of transportation workers." (4)

One way to defeat mandatory arbitration clauses would be to convince courts to drop their obsessive devotion to enforcing all boilerplate contracts, not just those with arbitration agreements. Professor Paul Carrington of Duke Law School has argued that this blithe enforcement undermines important public values, and that jurisprudence that refuses to enforce controversial terms would better serve the public interest. (5)

In employment cases, enforcing adhesion contracts ensconces in the law a decidedly pre-industrial-revolution vision of "choice" that seems determined to take workers back to the Oliver Twist era. Not that you want to make this argument in court. Until courts come to their collective senses, you're better off trying more nuanced positions.

Unconscionability

The strongest argument you can make is that an agreement is unconscionable. Barron's Law Dictionary defines unconscionability as "so unreasonably detrimental to the interest of a contracting party as to render the contract unenforceable." Courts have asked whether an agreement is so one-sided that it would "shock the conscience" of a reasonable person. (6) The law defining this varies from state to state, but it usually has both procedural and substantive components.

The procedural component considers how the contract was formed, taking into account the relative bargaining power of each party and who wrote the contract. Defendants are quick to point to the Supreme Court's decision in Gilmer v. Interstate/Johnson Lane Corp., which found that "mere inequality in bargaining power ... is not a sufficient reason to hold that arbitration agreements are never enforceable...." (7)

But the Court also noted that Gilmer was an "experienced businessman" who was not saying he had been "coerced" into signing the clause. (8) The very notion of a coerced arbitration agreement is anathema to the Supreme Court's repeated pronouncement that "arbitration under the act is a matter of consent, not coercion." (9) In the context of employment cases, there is a good chance that adhesion contracts will meet the criteria for procedural unconscionability. (10)

The second component, substantive unconscionability, has to do with the substantive fairness of the agreement. Four categories are of particular importance: costs of arbitration (where arbitration is held and who pays for it); limitations on relief (kinds of damages, amount of damages, and injunctive relief); mutuality (whether both parties are bound in the same way); and procedural limitations (limits on discovery). One procedural limitation, on the capacity to bring class actions, is so important that we treat it separately.

Costs of arbitration. The Supreme Court has ruled that in "agreeing to arbitrate a statutory claim, a party does not forgo ... substantive rights.... It only submits to their resolution in an arbitral rather than a judicial forum." (11) Other courts, however, have found that this shift can cause big problems for plaintiffs.

The costs of an arbitration proceeding--including filing fees, administrative costs, and arbitrator compensation--can be thousands of dollars, which is prohibitively expensive for the average claimant. (12) In Green Tree Financial Corp. v. Randolph, the Supreme Court acknowledged that "the existence of large arbitration costs could preclude a litigant ... from effectively vindicating [his or] her federal statutory rights in the arbitral forum." (13) Without establishing an exact point at which costs become that high, the Randolph Court placed the burden of showing this hardship on the party seeking to invalidate the arbitration agreement. (14)

The Court also held that where an arbitration agreement doesn't specify who will pay, the risk that the plaintiff will be unfairly financially burdened is too speculative to justify a per se invalidation. (15)

Many arbitration agreements include a cost-sharing or fee-splitting requirement. Lower courts have treated these provisions differently depending on their perceived effect. In Morrison v. Circuit City Stores, Inc., the Sixth Circuit acknowledged that if a cost-sharing provision would prevent an employee from vindicating his or her statutory rights, it might render the agreement unenforceable. (16) But the court also said the agreement could still be enforceable if the cost-sharing provision could be severed from the contract.

In effect, the court adopted a case-by-case approach, requiring an analysis of the provision's "chilling effect." It concluded that "if the reviewing court finds that the cost-splitting provision would deter a substantial number of similarly situated potential litigants, it should refuse to enforce the cost-splitting provision...." (17)

The Third, Fifth, and Tenth circuits have ruled that cost-sharing provisions may make agreements invalid. (18) Reaching a similar conclusion, the Fourth Circuit compared the costs of arbitration with the costs of litigation to determine whether the difference would be enough to deter a plaintiff from going to arbitration. (19)

Limitations on relief. In Armendariz v. Foundation Health Psychcare Services, the California Supreme Court concluded that "the principle that an arbitration agreement may not limit statutorily imposed remedies such as punitive damages and attorney fees appears to be undisputed." (20) The court based this conclusion on its earlier holding in Broughton v. Cigna Healthplans that "an agreement to arbitrate a statutory claim implicitly incorporates 'the substantive and remedial provisions of the statute' so that parties to the arbitration would be able to vindicate their statutory cause of action in the arbitral forum." (21)

The Armendariz court even rejected the employer's claim that the damages limitation in the arbitration agreement applied to contract claims arising from the "terms, conditions, or covenants of employment," because the limitation was so "all-encompassing" that it was "contrary to public policy." (22)

State and federal courts generally agree that arbitration procedures involving statutory claims that limit relief to an amount less than the amount available under the applicable statute are unenforceable. (23) For example, in Emeronye v. CACI International, Inc., the U.S. District Court for the District of Columbia, citing Gilmer, held that arbitration of statutory claims can be required only if the arbitration agreement

* provides for neutral arbitrators

* provides for more than minimal discovery

* requires a written award

* provides for all types of relief that would be available in court

* does not require employees to pay either unreasonable costs or any arbitrators' fees or expenses as a condition of arbitration. (24)

Building a record on these matters is imperative. On the other hand, in Martindale v. Sandvik, Inc., the New Jersey Supreme Court held that if there was no evidence that remedies for statutory violations would be unavailable under arbitration, the employee's statutory claims could not be exempted from arbitration. (25)

Mutuality, According to the Restatement (Second) of Contracts, "the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration." Mutuality-of-obligation challenges to arbitration agreements usually occur when the weaker party--the employee or purchaser is forced to arbitrate all claims, while the stronger party--the employer or the seller--has the option of going to court.

Most courts enforce arbitration agreements despite a lack of mutuality. Many courts have held that consideration exists where both parties have agreed to be bound by an arbitration agreement. (26) In Blair v. Scott Specialty Gases, the Third Circuit went so far as to hold that as long as a contract is supported by consideration, lack of mutuality is irrelevant. (27)

Even when employees, but not employers, are required to arbitrate claims, courts have enforced arbitration agreements. Mutuality can be destroyed, however, by reservation of the right to change rules and procedures unilaterally. In Walker v. Ryan's Family Steak Houses, Inc., for example, the court rejected the defense argument that the plaintiff's continuing to work for the defendant after the arbitration policy went into effect proved mutuality of obligation. It said the arbitration agreement was unenforceable because "[the arbitration] service had reserved the right to alter applicable rules and procedures without any obligation to notify or receive the consent of the employees." (28)

The Seventh Circuit ruled similarly in Penn v. Ryan's Family Steak Houses, Inc., refusing to enforce a contract between an employee and an arbitration service because the agreement contained an illusory promise and no mutuality of obligation. (29)

Any clause that allows an employer to unilaterally change the terms of an arbitration agreement without notifying the employee may be unenforceable because it lacks consideration. (30) But if the employer gives advance warning of what it's going to do, a court would probably uphold the agreement because "the notice of the change in terms can be understood as an invitation to enter into a relationship governed by the new terms." (31)

Procedural limitations. Supposedly, the biggest advantage of arbitration over litigation is that claims are resolved more quickly and at less expense. Some courts say these benefits justify arbitration's negatives, such as sharply curtailed discovery.

The Supreme Court itself used this argument in Gilmer, when it rejected the plaintiff's challenge to limitations imposed by the arbitration rules of the New York Stock Exchange: "Although those procedures might not be as extensive as in the federal courts, by agreeing to arbitrate, a party 'trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.'" (32) The Court also found that "an important counterweight to the reduced discovery ... is that arbitrators are not bound by the rules of evidence." (33)

The Gilmer Court brushed aside other challenges to arbitration, including the possibility that the arbitrator might be biased, that the arbitration agreement may not require a written opinion, and that the arbitrator may not have authority to fashion equitable relief. Nevertheless, each of these grounds may be the basis for a successful challenge. For example, in Murray v. United Food & Commercial Workers International Union, the Fourth Circuit found an arbitration agreement unenforceable because it was drafted by the employer and "placed control over the selection of the single arbitrator for employment disputes in the hands of [the] employer." (34)

The class action question

In Green Tree Financial Corp. v. Bazzle, the Supreme Court held that if an arbitration agreement does not discuss whether class actions are permissible, it is the arbitrator's job to decide whether they are. (35)

Bazzle effectively overruled earlier cases that precluded the arbitrators from certifying class actions. The decision emphasized that state law governs the formation of contracts and leaves courts free to find class-action bans unconscionable.

Given that many employers use mandatory arbitration specifically to avoid class actions, it's likely that most recently drafted arbitration clauses will state in no uncertain terms that they prohibit class actions, and arbitrators, not courts, will decide the question of unconscionability. (36)

Meanwhile, some courts have already ruled on the class action issue. The Fourth, Fifth, and Sixth circuits all have enforced arbitration agreements that prohibit class action claims, holding that they do not deprive anyone of a substantive right. (37)

The plaintiffs in Scott v. Cingular Wireless, LLC, have addressed this issue head-on, calling a class-action ban by its rightful name: an exculpatory clause that unfairly favors one party to the agreement. (38) At press time the case was not yet decided, but the results will be of great interest.

The constitutionality debate

In Southland Corp. v. Keating, the Supreme Court found that [section] 2 of the FAA was substantive law that applied to state court proceedings. The Court also ruled that the statute is meant to reach as far as the commerce power allows. (39)

However, Justice Sandra Day O'Connor's stinging dissent argued that the statute was intended to apply only in federal court cases. (40) Four other justices have agreed that Southland was wrongly decided, (41) but the Court does not readily overturn its own rulings, reasoning that Congress can fix them. True, but we haven't heard any pundit predict that this is going to happen with the FAA any time soon.

Academic critics have also questioned whether the FAA, as interpreted by the Supreme Court, is consistent with the Constitution.

Professors Jean Sternlight of the University of Nevada Law School and Richard Reuben of the University of Missouri-Columbia School of Law have looked at the FAA as a state action requiring the enforcement of contracts that waive constitutional rights--including the right to trial by jury. (42) Sternlight and Reuben argue that to be valid, these waivers must meet more stringent standards than those that apply to other agreements.

In general, a waiver of constitutional rights must be knowing, intelligent, and voluntary. Because the Constitution itself compels this standard, the FAA cannot compel a lesser one and still be constitutional. In short, something has to give.

Maryland's highest court recently looked at this question. The court accepted the argument that a waiver must be knowing and voluntary (and found that it was in the case before it). (43) But the court said that agreeing to arbitration implicitly waives a person's right to a courtroom trial or a jury, and that simply signing an agreement constitutes a knowing and intelligent waiver. That is a very weak application of the constitutional waiver standard, which frowns on any "implicit" signing-away of a person's rights.

As the Maryland court noted, other courts have invalidated arbitration clauses because the waiver of rights was inconspicuous. (44) The Illinois Court of Appeal found that a unilaterally imposed arbitration clause resulted in an involuntary waiver, rendering the clause unenforceable. This case, which has squarely raised the constitutional issue, is under review by the Illinois Supreme Court. (45)

Professor David Schwartz of the University of Wisconsin offers a more subtle way to attack the FAA. (46) He posits that its real effect is to create a set of procedural rules for state courts. Invoking old law about the limited power of the federal government over state court procedures, and new cases exploring the limits of the commerce power and the substantive reach of the Tenth Amendment, Schwartz argues powerfully that the FAA, as currently construed, does not pass constitutional muster. This analysis strongly suggests that the Supreme Court should reverse its earlier holding in Southland.

What is a plaintiff lawyer to do?

You won't be able to win one of these claims without litigating it. Make sure you treat the arbitration issue as one to be pleaded and proved. Seek discovery, and seek jury determination of contested facts.

Support litigation and legislation that seek to reverse the courts' tendency to enforce every line of every clause of every boiler plate arbitration agreement they see.

For example, "Give Me Back My Rights!," a national coalition including the American Consumers Union, the National Association of Employment Lawyers, and the National Consumer Law Center has proposed state legislation that could rein in mandatory arbitration agreements without running afoul of the FAA.

Keep reminding the public and decision-makers of the FAA's dangers. The right to a day in court is not an afterthought of constitutional law. An American courthouse is one of the few places in the world where one ordinary citizen can call a multinational corporation to account.

A worker should not be threatened with "economic capital punishment"--in the form of job loss--for refusing to sign this right away. And a worker's "agreement" to mandatory arbitration under that threat should not be construed as a voluntary waiver of his or her rights.

Notes

(1.) We recognize that arbitration is a different beast in the collective bargaining environment, in part because organized workers assert some realistic bargaining power against their employer. We confine our discussion to mandatory arbitration in employment at will.

(2.) See, e.g., Russell D. Feingold, Mandatory Arbitration: What Process Is Due?, 39 HARV. J. ON LEGIS. 281, 290 (2002).

(3.) Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987).

(4.) 532 U.S. 105, 119 (2001).

(5.) Paul D. Carrington, The Dark Side of Contract Law, TRIAL, May 2000, at 73.

(6.) See Ferguson v. Countrywide Credit Indus., 298 F.3d 778, 784 (9th Cir. 2002) (applying California law); see generally RESTATEMENT (SECOND) OF CONTRACTS [section] 208 (1981).

(7.) Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33 (1991).

(8.) Id

(9.) EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002) (citing Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57 (1995)).

(10.) See, e.g., Gibson v. Neighborhood Health Clinics, Inc., 121 F. 3d 1126,1132 (7th Cir. 1997); Kelsay v. Motorola, Inc., 384 N.E. 2d 353, 357 (Ill. 1978); Shaw v. Burchfield, 481 So. 2d 247, 254 (Miss. 1995); Ludwick v. This Minute of Carolina, Inc., 337 S.E.2d 213, 214 (S.C. 1985).

(11.) Adams, 532 U.S. 105, 123, quoting Gilmer, 500 U.S. 20, 26.

(12.) See Matthew T. Ballenger, The Price of Justice: The Role of Cost Allocation in the Employment Arbitration Fairness Analysis, 18 LAB. LAW 485, 489 (2003).

(13.) 531 U.S. 79, 90 (2000).

(14.) Id. at 92.

(15.) Id. at 91.

(16.) 317 F.3d 646 (6th Cir. 2003).

(17.) Id at 663. See Giordano v. Pep Boys--Manny, Moe & Jack, Inc., No. CIV. A. 99-1281, 2001 WL 484360 (E.D.Pa. 2001).

(18.) See Spinetti v. Serv. Corp. Int'l., 324 F.3d 212 (3d Cir. 2003); Williams v. Cigna Fin. Advisors, Inc., 197 F.3d 752, 763 (5th Cir. 1999); Shankle v. B-6 Maint. Mgmt. of Colo., Inc., 163 F.3d 1230 (10th Cir. 1999).

(19.) Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549, 556 (4th Cir. 2001); see Ball v. SFX Broadcasting, Inc., 165 F. Supp. 2d 230, 240 (N.D.N.Y. 2001).

(20.) 6 P.3d 669, 682 (Cal. 2000).

(21.) Id.

(22.) Id. at 683.

(23.) See, e.g., Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054,1059 (11th Cir. 1998).

(24.) 141 F. Supp. 2d 82 (D.D.C. 2001).

(25.) 800 A.2d 872 (N.J. 2002).

(26.) See, e.g., Blair v. Scott Specialty Gases, 283 F.3d 595, 603 (3d Cir 2002); Michalski v. Circuit City Stores, Inc., 177 F.3d 634 (7th Cir. 1999); Johnson v. Circuit City Stores, Inc., 148 F.3d 373 (4th Cir. 1998); Dantz v. Am. Apple Group LLC, 123 Fed. Appx. 702 (6th Cir. 2005); Circuit City Stores, Inc. v. Najd, 294 F.3d 1104 (9th Cir. 2002); Winfrey v. Bridgestone/Firestone, Inc., 205 F.3d 1349 (8th Cir. 1999); Paint & Varnish Works v. Continental Can Co., 133 N.E. 711, 714 (Ill. 1921).

(27.) 283 F.3d 595, 604. See also Harris v. Green Tree Fin. Corp., 183 F.3d 173 (3d Cir. 1999).

(28.) 400 F.3d 370 (6th Cir. 2005).

(29.) 269 F.3d 753, 759 (7th Cir. 2001).

(30.) See Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 306, 316 (6th Cir. 2000); Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 940 (4th Cir. 1999); Gibson, 121 F.3d 1126; Dumais v. Am. Golf Corp., 299 F.3d 1216 (10th Cir. 2002); Al-Safin v. Circuit City Stores, Inc., 394 F.3d 1254, 1259 (9th Cir. 2005).

(31.) Iberia Credit Bureau, Inc. v. Cingular Wireless, LLC, 379 F.3d 159, 173 (5th Cir. 2004); see also Morrison, 317 F.3d 646, 667-68.

(32.) Gilmer, 500 U.S. 20, 31 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)).

(33.) Id.

(34.) 289 F.3d 297, 303 (4th Cir. 2002).

(35.) 539 U.S. 444 (2003).

(36.) See, e.g., Gipson v. Cross Country Bank, 354 F. Supp. 2d 1278, 1289 (D. Ala. 2005) (enforcing a clause providing that "'neither [the plaintiff] nor anyone else on [her] behalf can pursue [her] claim.., in an arbitration proceeding on a class-wide basis ...'" and collecting cases on enforceability).

(37.) See Adkins v. Labor Ready, Inc., 303 F.3d 496, 503 (4th Cir. 2002); Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294, 298 (5th Cir. 2004); Walker, 400 F.3d 370.

(38.) Scott v. Cingular Wireless (Wash., King County Super. Ct. Sept. 10, 2004), appeal docketed, No. 55028-41 (Wash. Ct. App. Jan. 21, 2005). The appellants' brief is available online at www.tlpj. org/briefs/cingular_012105.pdf (last visited June 29, 2005).

(39.) 465 U.S. 1,10-11 (1984).

(40.) Id. at 22 (O'Connor, J., joined by Rehnquist, J., dissenting: "Congress intended federal, not state, courts to respect arbitration agreements.").

(41.) Rehnquist joined O'Connor's dissent in Southland. Justice John Paul Stevens, concurring in part and dissenting in part in Southland, noted that O'Connor was correct in her analysis of congressional intent. 465 U.S. 1, 17. In Allied-Bruce Terminix Cos., Inc. v. Dobson, Justice Antonin Scalia, dissenting, said, "Adherence to Southland entails a permanent, unauthorized eviction of state court power to adjudicate a potentially large class of disputes," and noted that while he would no longer dissent from cases citing it as precedent, he would vote to overrule it. 513 U.S. 265, 284-85 (1995). Justice Clarence Thomas, also dissenting, said, "In my view, the Federal Arbitration Act does not apply in state courts." Id. at 285.

(42.) Jean Sternlight, Mandatory Binding Arbitration and the Demise of the Seventh Amendment Right to a Jury Trial, 16 OHIO ST. J. DISP. RESOL. 669 (2001); Jean Sternlight, Rethinking the Constitutionality of the Supreme Court's Preference for Binding Arbitration: A Fresh Assessment of Jury Trial, Separation of Powers, and Due Process Concerns, 72 TUL. L. REV. 1, 57 (1997); Richard C. Reuben, Democracy and Dispute Resolution: The Problem of Arbitration, 67 LAW & CONTEMP. PROBS. 279 (2004).

(43.) Walther v. Sovereign Bank, 872 A.2d 735 (Md. 2005).

(44.) Gaylord Dep't Stores of Ala. v. Stephens, 404 So. 2d 586, 588 (Ala. 1981); Fairfield Leasing Corp. v. Techni-Graphics, Inc., 607 A.2d 703 (N.J. Super. Ct. Law Div. 1992).

(45.) Melena v. Anheuser-Busch, Inc., 816 N.E.2d 826 (Ill. App. Ct. 2004), appeal docketed, No. 99421 (Ill. Jan. 25, 2005).

(46.) David S. Schwartz, The Federal Arbitration Act and the Power of Congress over State Courts, 83 OR. L. REV. 541 (2004).

JOHN VAIL is senior litigation counsel at the Center for Constitutional Litigation in Washington, D.C. TOM OSBORNE is the senior attorney with the AARP Foundation, also in Washington. The authors would like to thank Kim Berg and Liza Deever for their assistance with this article.