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Staying Out of Court: Mandatory Arbitration of Employment Claims

December 31, 2001

The past year has seen significant developments in the law governing employer-created dispute resolution programs that provide for mandatory arbitration of employment-related claims, including discrimination and harassment actions.

Circuit City: the Supreme Court clears the way

Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 S.Ct. 1302 (2001), was certainly the most high-profile case of the year in this area of the law. One theory that plaintiffs have used for years in their attacks on employer-sponsored arbitration programs was based on the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. The FAA provides that written agreements to arbitrate generally are valid and enforceable, except when contained in "contracts of employment of seamen, railroad employees, or any other class of workers engaged in . . . interstate commerce." Advocates for employees frequently argued that this exclusion invalidated the arbitration agreements of all employees engaged in interstate commerce. Employers argued that the exclusion applied only to transportation employees. While most federal courts had adopted the employer position on this issue, the U.S. Court of Appeals for the Ninth Circuit in San Francisco stubbornly clung to an analysis that favored the plaintiffs' position. It was the only federal appellate court in the nation to do so. Circuit City reversed the Ninth Circuit on this point, and established as the law of the land that the enforceability of arbitration agreements in contracts of employment will not be affected by the FAA's exclusionary language, except for employees involved in interstate transportation.

To this extent, Circuit City was a fairly narrow decision that changed the state of the law in only a handful of states (including, of course, California). But it has been perceived by the popular press and by the employer community as a "green light" for the implementation of mandatory arbitration programs. That perception is supported by a subsidiary, less well-publicized holding in Circuit City; i.e., that the FAA pre-empts state employment laws that purport to restrict the use of arbitration agreements. Thus, despite the narrow scope of its principal holding, Circuit City is very much a landmark case, and has triggered a proliferation of employer-sponsored programs that require arbitration, rather than litigation, of employment related disputes.

There are many significant reasons for this development. Arbitration is regarded in the employer community – quite properly, in our experience – as a much less expensive means of resolving employee claims than litigation in the courts or before administrative agencies. Moreover, arbitration usually is a much speedier method of dispute resolution. It also affords employers a degree of control over the litigation process that is unavailable in any government-created forum, since in arbitration, employers have a say in the selection of the "judge" who will decide the dispute. Employers also have an opportunity, in arbitration, to structure the dispute resolution process, since they can have input into the rules that govern the procedure, e.g., how many depositions may be taken, how much document discovery may be had, whether the liability phase of the case can be bifurcated from the damages determination phase, and so on. In addition, employers can structure the arbitration process to maximize confidentiality and minimize publicity.

For these reasons and more, Circuit City clearly was the most significant development in the area of the law governing alternate dispute resolution in the year 2001.

Who pays for the arbitration?

There were other significant developments as well. One such development was highlighted by a decision issued by the Supreme Court in 2000, Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 121 S.Ct. 513 (2000). Green Tree addressed the "who pays" issue that necessarily is raised in any arbitration program, since unlike litigation in courts, where the only expense directly related to the forum is the court's modest filing fee ($150 in federal court, and less than $200 in most state courts), arbitration entails a range of fees that can be substantial. For example, the filing fee charged by the American Arbitration Association is $500. There is also an administrative fee of $150 per day payable by each party; postponement/cancellation fees are charged, as well. And while the parties never have to pay the salary of the state or federal judge, arbitrators charge $600 to $1,500 or more per day, and some charge hourly rates in excess of $300 to as much as $600. Even if the parties split the cost of arbitration, the individual claimant can be socked with a bill that can be intimidating.

In a 5-4 decision, the Supreme Court ruled in Green Tree that the plaintiff's attempt at invalidating an arbitration agreement on the ground that she could not afford the costs of arbitration failed because she had not submitted evidence sufficient to determine what costs of arbitration she would incur. However, the Court did state that if a plaintiff could prove that the costs of arbitration were so high that she would be precluded from effectively vindicating her federal statutory rights, she could avoid having to arbitrate her claims.

The four-Justice dissent in Green Tree drew much of its reasoning from Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997), so Cole remains an important decision. Cole had held that an employee cannot be required to arbitrate a dispute that arises under a federal discrimination statute if the employee would be required to pay the arbitrator's fees, since in court the employee would not have to pay the judge's salary. See also, Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999). Nonetheless, Cole upheld the arbitration program at issue because it did not say which party was responsible for the arbitrator's fees, and the court held that this ambiguity could be construed in a way that preserves the enforceability of the arbitration program by requiring the employer to pay the arbitrator's fees.

Green Tree suggests that in the future, Cole may be limited, such that an employee could avoid arbitration only if she could show that her share of the arbitrator's fees would be so "prohibitively expensive" for her individually as to preclude her from effectively vindicating her claims. At least one court has so held, Bradford v. Rockwell Semiconductor Systems, 238 F.3d 549 (4th Cir. 2001), and even before Green Tree, other courts had rejected or modified the Cole rule in cases where either the claimant could afford the fees at issue, Williams v. Cigna Financial Advisors, 197 F.3d 752 (5th Cir. 1999), or else the amount of the fees had not yet been determined and the court decided that the impact of the fee award should await the completion of arbitration and be decided in a proceeding to set the award aside. Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, 170 F.3d 1 (1st Cir. 1999); Koveleskie v. SBC Capital Markets, 167 F.3d 361 (7th Cir.), cert. denied, 528 U.S. 811 (1999). And a sister court of Cole has held that the rule in Cole is limited to arbitrator's fees, and does not invalidate a mandatory arbitration program which requires the claimant to pay half of the AAA's administrative and filing fees. LaPrade v. Kidder, Peabody & Co., 246 F.3d 702 (D.C. Cir. 2001).

However, there are enough judges who are averse to depriving plaintiffs of a federal forum for the vindication of their federal rights that employers cannot be completely sure whether a plaintiff will succeed in attacking an arbitration program based on the fee-splitting arrangements it contains. See, e.g., Ball v. SFX Broadcasting, Inc., 165 F. Supp.2d 230 (N.D.N.Y. 2001) (arbitration clauses in employment contract are per se unenforceable where employee is required to pay any portion of the arbitrator's fee).

Where do you arbitrate?

Yet another interesting development during the year 2001 in the law of mandatory arbitration of employment-related claims was Klinedinst v. Tiger Drylac, U.S.A. Inc., 2001 WL 1561821 (D.N.H., Nov. 28, 2001). There, a California employer had fired a New Hampshire salesman and moved to compel arbitration under its mandatory arbitration program after the salesman sued for age and national origin discrimination in federal court in New Hampshire. The twist in this case was that the arbitration program required arbitration in California. The court ruled that this element of the program was enforceable, since it was set forth expressly in the document the plaintiff had signed when he had started work ten years earlier, and that the employer was not obligated to pay the plaintiff's costs of transportation to California. (Notably, the plaintiff in Klinedinst also argued that arbitration should not be compelled because he earned only $23,000 per year, and therefore the costs of arbitration were beyond his financial means. The court rejected this argument, holding that there was no evidence he could not afford the costs of arbitration, particularly since the arbitration clause at issue did not specify which party would have to pay those costs, and under the rules of the AAA, the party initiating arbitration is responsible for the filing fees, administrative fees can be waived in hardship cases, and the arbitrator has discretion to allocate the costs and fees associated with the arbitration as deemed appropriate in the case.)

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Judicial developments in 2001 favored the expansion of employer-created and sponsored mandatory arbitration programs. This is an expansion that we believe has a great deal of significance and value for the employer community.