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Clause Requiring Arbitration of Title VII Claim Upheld by Ninth Circuit

April 1, 1992

In an effort to avoid the expense and uncertainties of court litigation and jury trials, some employers have entered into employment agreements requiring that all disputes arising out of the employment relationship be submitted to binding arbitration. One purpose of such arbitration provisions is to require employees to arbitrate claims of employment discrimination, but courts have disagreed as to whether such provisions are enforceable and whether an employee may validly waive his or her right to assert a discrimination claim in a court proceeding. In the latest decision on the issue, the U.S. Court of Appeals for the Ninth Circuit, in San Francisco, recently held that an employee was required to arbitrate her claim of sex discrimination because she had signed an employment application which contained a clause providing for arbitration of all job-related disputes. Mago v. Shearson Lehman Hutton, Inc., 58 Fair Emp. Prac. Cas. (BNA) 178 (9th Cir. 1992).

Plaintiff Dano Mago was employed by E.F. Hutton when the firm was acquired by Shearson Lehman. After the acquisition, Mago signed an employment application which stated that she was required to arbitrate any controversy concerning compensation, employment or termination of employment. When her employment was later terminated, plaintiff filed a sex discrimination lawsuit against Shearson, which moved to stay all judicial proceedings pending arbitration of the sex discrimination charge.

On appeal, the Ninth Circuit reversed, citing the Supreme Court's 1991 decision in Gilmer v. Interstate/Johnson Lane Corp., 111 S. Ct. 1647 (1991). In Gilmer, the plaintiff was employed as a manager of financial services. He was required by his employer to register as a securities representative with the New York Stock Exchange ("NYSE"). The applicable rules of the NYSE, in turn, required that he submit to arbitration any dispute arising out of his employment. When Gilmer was terminated and sued for age discrimination, under the Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. § 621 et seq., Interstate relied upon the NYSE rules to argue that he was required to submit his claim to arbitration rather than proceeding in court. The Supreme Court agreed, holding that nothing in the ADEA precluded enforcement of an agreement to arbitrate age discrimination claims.

In Mago, the Court of Appeals closely followed the Supreme Court's reasoning in Gilmer. The court rejected the plaintiff's reliance upon cases such as Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974), in which the Supreme Court had held that a plaintiff unsuccessful in asserting a claim of discrimination in an arbitration procedure conducted pursuant to a collective bargaining agreement could nevertheless pursue that claim in a subsequent court proceeding. Like the Gilmer Court, the Court of Appeals in Mago noted that cases such as Alexander were concerned "with the inherent tension between collective representation and individual statutory rights"; such concerns are not present when the arbitration at issue is not pursuant to a collective bargaining agreement but pursuant to an individual agreement between an employer and an employee.

In sum, the Court in Mago concluded that Gilmer was dispositive. While the Mago case arose under Title VII and Gilmer arose under the ADEA, the court recognized that the two statutes have similar goals and similar substantive provisions and that they are usually construed in like manner.

While Gilmer and Mago clearly signal a greater judicial willingness to refer statutory claims to arbitration, there still remain certain barriers to the wholesale enforcement of agreements to arbitrate employment discrimination claims. The authority of the federal courts to enforce agreements to arbitrate is based upon the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. However, the FAA contains certain exclusions; in particular, it does not apply to "contracts of employment of seamen, railroad employees or any other class of workers engaged in foreign or interstate commerce." Plaintiffs seeking to avoid arbitration of employment discrimination claims have argued that federal courts lack the authority to enforce agreements to arbitrate such claims because of this exclusionary provision in the FAA. In Gilmer, the Supreme Court found it unnecessary to address this argument at all, because the agreement to arbitrate at issue there was not technically in an employment agreement between plaintiff and his employer but, rather, was contained in the New York Stock Exchange Rules, to which plaintiff was subject as a registered securities representative.

Similarly, the Court of Appeals in Mago declined to address the issue of the exclusion of employment contracts from the coverage of the FAA: because the plaintiff had not argued that point in the lower courts, it had been waived.

Another potential barrier to enforcement of an agreement to arbitrate discrimination claims is a contention that such an agreement is a "contract of adhesion," e.g., one that results from unequal bargaining power between employers and employees and is, therefore, unenforceable. The Mago court remanded the case to the District court for further consideration of this issue, noting that the Supreme Court in Gilmer had cautioned that "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 grounds for the revocation of any contract."

In summary, employers should continue to consider using arbitration provisions in employment agreements, especially agreements with higher-level employees. While the effectiveness of such a provision in precluding court litigation of a discrimination claim is not definitively resolved, the decisions in Gilmer and Mago may suggest that courts will, where possible, continue to find a basis for enforcing these agreements.