Workers are blocked, not barred, from court: the Circuit City ruling may seem like a gift to employers seeking to enforce mandatory arbitration clauses. But creative plaintiff lawyers can get their clients before a jury.

In a triumph of the principle de minimis non curat lex (the law does not concern itself with trivial matters), the U.S. Supreme Court in Circuit City Stores, Inc. v. Adams upheld the enforceability of predispute arbitration agreements for employment discrimination claims. (1) The Court found that because employment discrimination litigation "often involves smaller sums of money than disputes concerning commercial contracts," mandatory arbitration provisions adopted by the nation's employers will help to mitigate the litigation costs and the accompanying "burden" on the courts of having to hear complaints about sexual harassment, race discrimination, and similar matters. (2)

Many courts seem to share this perception that disputes under such statutes as the Americans with Disabilities Act (ADA), (3) the Civil Rights Act of 1964, (4) and the Age Discrimination in Employment Act (ADEA) (5) are little more than small claims matters that clog the docket. After Circuit City and the likely spread of mandatory arbitration, the burden of proving that employment discrimination claims belong in court will be greater than ever. Absent legislative repeal, Circuit City will ensure that most lawyers who practice employment law will be in front of arbitrators for the foreseeable future.

Nevertheless, sloppy defense work, overreaching arbitration provisions, and employer arrogance may provide opportunities to stave off the growing tide of predispute arbitration requirements.

The rise of arbitration

Many practitioners anticipated that Circuit City would turn out badly for plaintiffs. In May 1991, the Court had held in Gilmer v. Interstate/Johnson Lane Corp. that a stockbroker who had signed a form arbitration clause could be compelled to arbitrate his claims under the ADEA. (6) Ten years later, Circuit City reaffirmed that the Federal Arbitration Act (FAA) applies to employment contracts. (7)

The FAA was enacted in 1925 to overcome a long-standing judicial distrust of arbitration. Courts had refused to enforce arbitration agreements because judges doubted the competence of arbitrators, were jealous of their jurisdictional mandate, and believed that the right to a public jury trial was a bedrock of democracy that transcended the interests of the parties to the litigation and the right to enter into contracts.

In Circuit City, the Court was asked to determine whether the FAA's specific statutory exclusions applied to employment contracts. Section 1 provides that the act does not apply to "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." According to the Court, exclusionary language must be construed narrowly: Section 1's "any other class" of workers includes only those similar to seamen and railroad workers. Very few employment contracts, then, are excluded from the FAA.

Most compulsory arbitration provisions are nothing more than adhesion contracts, and state contract law governs the enforceability of the particular provision. The arbitration agreement must meet ordinary principles of contract formation. The FAA requires a written agreement between parties to arbitrate disputes. (8) Nevertheless, courts have often found that the employee consented to arbitrate even when the arbitration clause is not included in the documents the employee signed. (9)

Even when an employee is required to sign the agreement as a condition of employment, the agreement is not enough to invalidate consent. Employees can waive their rights merely by remaining employed, or by receiving a policy that refers to another arbitration document. Courts have even enforced arbitration language contained in employee applications. (10)

Not every court, however, has embraced unwritten waivers of constitutional rights. Some employees who have not signed an arbitration provision, were not provided with the rules for the proceeding, (11) or otherwise did not indicate an intention to be bound to arbitrate have managed to avoid arbitration. The Michigan Supreme Court in 1996 refused to enforce an arbitration agreement without some indication of consent by the employee. (12)

Similarly, in Prudential Insurance Co. of America v. Lai, the Ninth Circuit vacated a trial court decision to compel arbitration of a sexual harassment claim. (13) In Lai, the employer did not allow employees to read the employment contract before signing it and did not provide them with copies of the manual containing the arbitration agreement that was incorporated into the contract by reference. Neither of these documents notified the employees that they were required to arbitrate Title VII claims.

In Nelson v. Cyprus Bagdad Copper Corp., an employee acknowledged receipt of a handbook but did not separately agree to an arbitration provision contained in it. After the district court had ordered arbitration of the plaintiff's ADA claim, the Ninth Circuit held that "any bargain to waive the right to a judicial forum for civil rights claims ... must at the least be express: the choice must be explicitly presented to the employee, and the employee must explicitly agree to waive the specific right in question." (14) The employee's mere continued receipt of a paycheck and performance of the job did not constitute a waiver of rights.

Other courts have found purported arbitration agreements to lack consideration, in that the employee did not receive anything specifically in exchange for the agreement to arbitrate." (15)

You must remember, however, that courts tend to construe arbitration agreements broadly and to allow arbitrators to decide on the arbitrability of particular disputes. For example, a claim of fraud in the inducement may be subject to arbitration. Typically, a court will hold a hearing to determine whether an allegation of fraud applies to the contract generally or merely to the arbitration clause. In most cases, the arbitrator will hear claims of fraud in the inducement that involve only the arbitration provision. (16)

Avoiding arbitration

Like it or not, Circuit City has established new facts of life for employment law practitioners. Keep them in mind as you navigate your way through the new proarbitration landscape.

Most challenges to arbitration procedures focus on the lack of discovery; the partiality of the arbitrator; the excessiveness of the costs and fees; the unavailability of statutory remedies, attorney fees, and punitive damages; and the mutuality of the provisions.

Even if the arbitration provision violates the law, or if there is no underlying contract, your client may still have to arbitrate. Because of the separability doctrine announced in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., (17) an arbitrator will determine the enforceability of a contract containing a valid agreement to arbitrate. State law may permit a court to refashion the arbitration agreement to eliminate the illegal provision and permit arbitration. In some states, however, a single illegal provision will render the entire agreement unenforceable and will allow the employee to go to court.

Recently, the Eleventh Circuit refused to sever an illegal provision.

   If an employer could rely on the courts to sever an unlawful provision and
   compel the employee to arbitrate, the employer would have an incentive to
   include unlawful provisions in its arbitration agreements. Such provisions
   could deter an unknowledgeable employee from initiating arbitration, even
   if they would ultimately not be enforced. It would also add an expensive
   procedural step to prosecuting a claim; the employee would have to request
   a court to declare a provision unlawful and sever it before initiating
   arbitration. Including an unlawful provision would cost the employer
   little, particularly where, as here, the arbitration agreement provides the
   employee must bear the employer's court costs and attorneys' fees incurred
   defending the agreement if arbitration is challenged and the employer
   prevails. (18)

Even more recently, the Eighth Circuit rejected this reasoning and allowed compulsory arbitration even though the agreement contained an illegal provision. (19)

If the arbitration provision refers only to rights under the employee handbook, you may not have to arbitrate. Occasionally, employers will implement arbitration provisions that on their face do not appear to be final, comprehensive, or exclusive. For example, the employer will use permissive language allowing but not requiring arbitration. In those circumstances, an employee will be able to try his or her case before a jury. (20)

Arbitrators should not be able to decide whether there was an agreement to arbitrate the issue of arbitrability. The Supreme Court held in First Options of Chicago, Inc. v. Kaplan that courts should not assume that parties agreed to arbitrate the very issue of arbitrability without clear and unmistakable evidence to support that conclusion. (21)

An arbitration process imposed by an employer must allow for the vindication of the employee's statutory claims. The Court held in 1985 that to avoid arbitration, a party may "make a showing that would warrant setting aside the forum-selection clause...." (22) One such showing is that proceedings "`in the contractual forum will be so gravely difficult and inconvenient that [the employee] will for all practical purposes be deprived of his day in court.'" (23) According to the Court, "Of course, courts should remain attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide gounds `for the revocation of any contract.'" (24)

Employees may conduct only limited discovery. The Supreme Court has noted that the harms caused by reduced discovery in arbitration may be alleviated by the fact that arbitrators are not bound by ordinary rules of evidence. (25) Most private arbitrators have adopted rules that permit, but do not mandate, discovery. The American Arbitration Association (AAA) has adopted National Rules for the Resolution of Employment Disputes that allow discovery "as deemed necessary" by the arbitrator.

In theory, the AAA reserves the right to refuse to hear a case if the arbitration agreement does not meet minimum due process standards. Under the Revised Uniform Arbitration Act, adopted in August 2000 by the National Conference of Commissioners on Uniform State Laws, an arbitrator may order discovery, but should do so only "when appropriate in the circumstances, taking into account the needs of the parties to the arbitration proceeding and other affected persons and the desirability of making the proceeding fair, expeditious, and cost-effective." (26) The failure of an employer to adopt fair rules as part of an arbitration agreement may constitute a breach of the agreement. (27)

Even if the agreement does not specify how arbitration fees and expenses will be allocated, you may still have to arbitrate. The Supreme Court decided in Green Tree Finance Corp.--Alabama v. Randolph that an arbitration agreement's silence concerning arbitration costs and fees does not make it unenforceable. (28) The plaintiff challenging the enforceability of the provision will bear the burden of establishing that the fees and costs are excessive.

Many courts have refused to enforce arbitration agreements because the allocation of fees and costs in a unilaterally imposed arbitration provision was too burdensome on the party requesting the proceeding. (29) Courts have not been reluctant to find that fee and cost provisions that require an employee to pay half of the arbitration fees and an initial filing fee of as much as $2,000 are excessive. (30)

In Maciejewski v. Alpha Systems Lab, Inc., a California decision that is on appeal to the state's supreme court, the appellate court affirmed a trial court's finding of unconscionability. (31) The employer required the employee to pay half of the arbitration fees plus the expenses of his own witnesses and any other witnesses connected with presenting his case. The appellate court determined that these provisions, the forfeiture of the statutory right to attorney fees, and the limits on discovery made the arbitration provision unconscionable.

Prohibition of punitive damages and attorney fees may be enforceable. Gilmer and Circuit City provide that employees required to arbitrate statutory claims be afforded the rights and remedies available under those statutes, including attorney fees and punitive damages.

Nevertheless, some federal courts have compelled arbitration of discrimination claims even when the employer has not complied with this specific mandate. (32) Arbitrators may then determine whether the purported waiver of statutory rights and remedies is enforceable.

When an employer limits an arbitrator's authority to award contract damages, or excludes statutory remedies, you should challenge the arbitration provision's enforceability. Although state law severability principles may send you back to arbitration once the offending provision is gone, federal courts are more likely to refuse to allow the arbitration to proceed under those circumstances. (33)

Arbitrators are more likely to favor repeat players. Depending on the size of your legal community, arbitrators may have a prior relationship with the defendant employer. Courts universally agree that employees and employers are entitled to have neutral arbitrators hear an employment dispute. (34)

While most arbitration providers have a mutual arbitrator selection process, some allow members of the employer's own management to serve as arbitrators. Courts generally will not tolerate arbitration mechanisms polluted with such direct conflicts, or in which the arbitrator enjoys some obvious opportunity to benefit from the outcome. (35)

Still, proving the partiality of an arbitrator is exceedingly difficult. In Commonwealth Coatings Corp. v. Continental Casualty Co., a four-judge plurality of the Supreme Court determined that an undisclosed prior business relationship could constitute the "evident partiality" necessary to vacate an arbitration award. (36)

The Court found that any dealings that might suggest "even the appearance of bias" would constitute evident partiality under the FAA. (37) Unfortunately, most courts have ignored the language in Commonwealth Coatings and have required substantial proof of actual bias. (38)

Is there meaningful review?

The FAA provides that an arbitral award may be vacated only if the aggrieved party can demonstrate that (1) the award was procured by fraud; (2) the arbitrator was biased; (3) the arbitrator refused to hear material evidence or to postpone a hearing upon a showing of cause; or (4) the arbitrator exceeded his or her authority. (39)

The Supreme Court in First Options noted that a court may reverse an arbitration decision if it reflects a "manifest disregard" of applicable law. (40) Consistent with that ruling, the Ninth Circuit has held that parties could agree to arbitration terms allowing a court to vacate, modify, or correct an award where the arbitrators' findings of fact were not supported by substantial evidence or where the arbitrators' conclusions of law were erroneous. (41)

Unfortunately, judicial review of arbitration decisions is, at best, superficial. Courts have held that an arbitrator's ruling in a contract dispute may not be reversed if it is "in any way plausible." (42) Although a few courts have vacated arbitration decisions, (43) as noted in Baravati v. Josephthal, Lyon & Ross, Inc., "judicial review of arbitration awards is tightly limited; perhaps it ought not be called `review' at all." (44) Although there is no consensus among courts, parties to a true arbitration agreement may provide for heightened judicial scrutiny of an arbitrator's decision. (45)

In order to obtain real review, however, you must provide a record of the proceedings and the arbitrator's written opinion. Although numerous court decisions mandate written opinions by arbitrators, some of the nation's arbitration providers still do not require written opinions or transcripts of proceedings. The AAA's National Rules for the Resolution of Employment Disputes require reasoned written opinions. Without a written record, a disgruntled employee has little chance of proving manifest disregard of the law.

Every employment lawyer who represents plaintiffs should decide how to address client needs in the new world of binding arbitration. Some will attempt to avoid these issues through case screening. Others will fight to keep cases in court.

Some will pursue legislative responses and boycotts. The willingness of federal courts to cede their authority has prompted some members of Congress to call for the end of mandatory arbitration and the procedural overhaul of employment arbitration.

The Commission on the Future of Worker-Management Relations--appointed jointly by the Departments of Labor and Commerce--recommended that arbitration agreements not be enforced if used as a condition of employment. The Equal Employment Opportunity Commission has maintained that mandatory binding arbitration imposed as a condition of employment is contrary to civil rights laws.

There are some rays of light amid the gloom. Lewis Maltby, the director of the American Civil Liberties Union's National Task Force on Civil Liberties in the Workplace, points out that because summary judgment is almost unheard of in arbitration, employees as a whole may fare better. Maltby concludes that far more employees win in arbitration than in court. (46)

Also, there is evidence that some employers are not enamored of mandatory arbitration. While the AAA reported a 41.5 percent increase overall in the number of cases filed for arbitration between 1999 and 2000, the number of employment-related cases filed during the same period remained virtually unchanged. Perhaps the Supreme Court was correct when it predicted that "it is unlikely that all or even most ADEA claimants will be subject to arbitration agreements." (47)

On the other hand, the static number of employment arbitration filings is more likely due to overreaching arbitration agreements and excessive expenses and costs that discourage filings.

Arbitration is not inappropriate for all employment matters. Disputes involving current employees, promotions, pay raises, and everyday personnel matters may be appropriate subjects for arbitration. The sheer availability of arbitration makes it attractive to some employees.

In any event, Circuit City cannot be ignored. The decision is broad and unequivocal. Absent congressional action, mandatory arbitration has the potential to choke the enforcement of anti-discrimination laws in the workplace. Adapting to this new world will test the tenacity and ingenuity of the plaintiff bar for some years to come.

Prepare your mandatory arbitration case with documents from the ATLA Exchange

The documents listed below and others on issues in mandatory arbitration litigation are available from the Exchange, ATLA's litigation support and research service.

For more information, visit the Exchange Web site at exchange. atla.org, or contact the Exchange by phone at [phone] or by fax at [phone].

Ackerman v. Money Store. The unpublished opinion in a case holding that an employer violated New Jersey's antidiscrimination law by interfering with the plaintiff's right to a trial by jury when it terminated her employment for refusing to sign an arbitration agreement. (No. LR3431.)

Badie v. Bank of America. The various briefs and motions in support of and in opposition to summary judgment, the parties' trial and posttrial briefs, the court's decision and judgment, the parties' appellate briefs, and the court's opinion in a case involving a bank's contract. The court held that a mandatory arbitration clause is an unenforceable modification to a contract if it was not within the reasonable contemplation of the parties when they entered into the original contract. (No. LR3369.)

Broughton v. Cigna Healthplans of California. ATLA's amicus brief in a case holding a claim for injunctive relief under state consumer law may not be subject to arbitration. (No. LR3551.)

Cheng-Canindin v. Renaissance Hotel Associates. The parties' appellate briefs in a case in which the court held a hotel employee handbook's dispute resolution procedures did not amount to an arbitration agreement, and the hotel could not compel arbitration of a wrongful termination claim. (No. LR2934.)

Crawford v. Cavalier Manufacturing. The plaintiff's complaint, the defendants' brief in support of a motion to compel arbitration, and the plaintiff's supplemental response to that motion in a case holding that an arbitration clause in a manufactured-home sales contract and financing documents was invalid. (No. LR3507.)

Grundstad v. Ritt. The plaintiff's appellate brief in a case holding that a guarantor could not be compelled to arbitrate his liability under an arbitration clause in the underlying contract even though his agreement was in the same document. (No. LR2977.)

Lambdin v. District Court. The parties' motions and briefs in a case holding that an employment agreement's arbitration provision was void under the Colorado Wage Claim Act, which prohibits waiver of rights. (No. LR2730.)

Majdi v. Circuit City Stores, Inc. The plaintiff's complaint in a case alleging wrongful termination and racial discrimination where a store required applicants to sign an arbitration agreement to be considered for employment. (No. LR3572.)

Prudential Insurance Co. of America v. Lai. The parties' appellate briefs and amici curiae briefs in a case holding that a Title VII plaintiff will be forced to arbitrate only if he or she knowingly agreed to do so. (No. LR2359.)

Wilson v. Waverlee Homes, Inc. The plaintiffs' brief opposing the defendant's motion to compel arbitration in a case holding that a binding arbitration clause in installment sales and financing contracts conflicted with the Magnuson-Moss Act. (No. LR2989.)

Notes

(1.) Circuit City Stores, Inc. v. Adams, 121 S. Ct. 1302 (2001).

(2.) Id. at 1313.

(3.) 42 U.S.C. [subsection] 12101-12213 (2000).

(4.) 42 U.S.C. [subsection] 2000e to 2000e-17 (2000).

(5.) 29 U.S.C. [subsection] 621-634 (2000).

(6.) 500 U.S. 20 (1991).

(7.) 9 U.S.C. [subsection] 1-16 (2000).

(8.) 9 U.S.C. [section] 2 (2000).

(9.) See, e.g., Williams v. Cigna Fin. Advisors, 56 F.3d 656 (5th Cir. 1995).

(10.) See Nguyen v. Bar-S Foods Co., No. 96-Z-745 (D. Colo. Apr. 17, 1996).

(11.) See, e.g., Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1 (1st Cir. 1999).

(12.) Heurtebise v. Reliable Bus. Computers, Inc., 550 N.W.2d 243 (Mich. 1996), cert. denied, 117 S. Ct. 1311 (1997).

(13.) 42 F.3d 1299 (9th Cir. 1994), cert. denied, 116 S. Ct. 61 (1995).

(14.) 119 F.3d 756, 762 (9th Cir.), cert. denied, 118 S. Ct. 1511 (1998); see also Renteria v. Prudential Ins. Co. of Am., 113 F.3d 1104, 1108 (9th Cir. 1997).

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

(16.) Southland Corp. v. Keating, 465 U.S. 1 (1984); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); see also Sydnor v. Conseco Fin. Servicing Corp., 252 F.3d 302 (4th Cir. 2001).

(17.) Prima Paint Corp., 388 U.S. 395.

(18.) Perez v. Globe Airport, 253 F.3d 1280, 1287 (11th Cir. 2001).

(19.) Gannon v. Circuit City Stores, Inc., No. 00-3243, 2001 WL 930550 (8th Cir. Aug. 17, 2001).

(20.) See, e.g., Brennan v. King, 139 F.3d 258 (1st Cir. 1998); Rudolph v. Alamo Rent A Car, Inc., 952 F. Supp. 311 (E.D. Va. 1997); Orlando v. Interstate Container Corp., 100 F.3d 296 (3d Cir. 1996).

(21.) 514 U.S. 938, 939 (1995).

(22.) Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632 (1985).

(23.) Id. (citations omitted).

(24.) Id. at 627 (citations omitted).

(25.) Gilmer, 500 U.S. 20, 31.

(26.) REPORT OF THE NATL. CONF. OF COMM'RS ON UNIFORM STATE LAWS, (Aug. 2000).

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

(28). 531 U.S. 79 (2000).

(29.) See, e.g., Perez, 253 F.3d 1280; Shankle v. B-G Maint. Mgmt. of Colo., Inc., 163 F.3d 1230 (10th Cir. 1999).

(30.) See, e.g., Geiger v. Ryan's Family Steak Houses, Inc., 134 F. Supp. 2d 985 (S.D. Ind. 2001).

(31.) 87 Cal. Rptr. 2d 390 (Ct. App.), review granted, 986 P.2d 170 (1999).

(32.) See Great W. Mortgage Corp. v. Peacock, 110 F.3d 222 (3d Cir.), cert. denied, 522 U.S. 915 (1997); Johnson v. Hubbard Broadcasting, Inc., 940 F. Supp. 1447 (D. Minn. 1996); Degaetano v. Smith Barney, Inc., No. 95 CIV 1613 (DLC), 1996 WL 44226 (S.D.N.Y. Feb. 5, 1996).

(33.) See Alcaraz v. Avnet, Inc., 933 F. Supp. 1025 (D.N.M. 1996); Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138 (Ct. App. 1997).

(34.) See, e.g., Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.2d 669, 690 (Cal. 2000); Graham v. Scissor-Tail, Inc., 623 P.2d 165 (Cal. 1981).

(35.) See, e.g., Geiger, 134 F. Supp. 2d 985.

(36.) 393 U.S. 145, 147-48 (1968) (citing 9 U.S.C. [section] 10).

(37.) Id. at 150.

(38.) See, e.g., ANR Coal Co. v. Cogentrix of N.C., Inc., 173 F.3d 493 (4th Cir.), cert. denied, 120 S. Ct. 186 (1999); Beck Suppliers, Inc. v. Dean Witter Reynolds, Inc., 558 N.E.2d 1187, 1193 (Ohio Ct. App. 1988).

(39.) 9 U.S.C. [section] 10 (2000).

(40.) First Options of Chicago, Inc., 514 U.S. 938, 942.

(41.) Lapine Tech. Corp. v. Kyocera Corp., 130 F.3d 884 (9th Cir. 1997).

(42.) Labor Relations Div. of Constr. Indus. v. Int'l Brotherhood of Teamsters, 29 F.3d 742, 743 (1st Cir. 1994).

(43.) See, e.g., Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2d Cir. 1998), cert. denied, 119 S. Ct. 1286 (1999).

(44.) 28 F.3d 704, 706 (7th Cir. 1995).

(45.) See Gateway Techs., Inc. v. MCI Telecomms. Corp., 64 F.3d 993 (5th Cir. 1995); cf. UHC Mgmt. Co. v. Computer Scis. Corp., 148 F.3d 992 (8th Cir. 1998).

(46.) Lewis Maltby, Employment Arbitration: Is It Really Second-Class Justice? 6 DISPUTE RESOLUTION MAG. 23 (1999).

(47.) Gilmer, 500 U.S. 20, 32.

Christopher P. Thorman practices employment law in Cleveland.