Act Now Advisory: The Future of Employment Arbitration Agreements — The Legacy of AT&T Mobility LLC v. Concepcion

Employment litigation is growing at a rate far greater than litigation in general. Twenty-five times more employment discrimination cases were filed last year than in 1970, an increase almost 100 percent greater than all other types of civil litigation combined. Case backlogs at the U.S. Equal Employment Opportunity Commission ("EEOC") and in state and federal courts and administrative agencies nationwide number in the hundreds of thousands. Class and collective wage and overtime cases are inundating the courts. These types of cases now even outnumber discrimination cases. Most of the employment-related cases pending in the courts involve jury trials with lengthy delays and unpredictable results.

Alternate dispute resolution ("ADR") presents a significant alternative to litigation of these types of cases. While an agreement to submit a dispute to voluntary arbitration after the dispute has arisen is non-controversial and of some benefit, most often parties post-dispute become less flexible, gird for battle, and are less inclined to step back from judicial confrontation. The time for the parties to agree to ADR and binding arbitration is before the dispute has arisen. Drafting and implementing an ADR policy that ensures fundamental due process, with proper checks and balances, could protect the rights of both parties on a speedy, cost-effective basis. It could also reduce the burden on our judicial system.

For those employers that might wish to consider ADR, the Supreme Court of the United States has issued a series of decisions in five major cases, providing a road map. Not only do these decisions ratify the validity of carefully drafted pre-dispute ADR policies so as to bar individual employees from suing in court, but the most recent two decisions even allow employers to draft and enforce pre-dispute ADR policies that preclude both class action lawsuits and class action arbitrations. These decisions are summarized below.

First, in 1991, the Supreme Court held in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), that courts may compel employees to honor pre-dispute arbitration agreements and to arbitrate age discrimination claims. In barring Gilmer from suing in court, the Supreme Court expressly held that the unequal bargaining power as between employer and employee was irrelevant, and that the agreement to arbitrate could not be set aside unless the employee could (a) prove "fraud in the inducement," or (b) show unawareness of the existence of the arbitration language in the agreement and, therefore, that the employee did not "knowingly or voluntarily" enter into the arbitration agreement (Gilmer, at 32-33).

Second, in 2001, in Circuit City Stores v. Adams, 532 U.S. 105 (2001), the Supreme Court extended Gilmer beyond age discrimination to all forms of statutory employment discrimination. This paved the way for the vast majority of private sector employers to bind their employees and applicants for employment to mandatory pre-dispute arbitration as a condition of employment.

Third, in mid-2009, in 14 Penn Plaza LLC v. Pyett, 129 S. Ct. 1456, 556 U.S. __, 173 L. Ed. 2d 398 (2009), the Supreme Court held that employers and unions could agree in their collective bargaining agreements that statutory discrimination claims of covered employees must be submitted to binding arbitration.

Fourth, in mid-2010, the Supreme Court held in Stolt-Nielson SA v. AnimalFeeds International Corp., 130 S. Ct. 1758, 559 U.S. __, 176 L. Ed. 2d 605 (2010), that, absent a party's express agreement in its arbitration undertaking, it could not be required to arbitrate on a class action basis. An agreement to arbitrate class claims could not be inferred from silence.

Finally, on April 27, 2011, the Supreme Court held in AT&T Mobility LLC v. Concepcion, ___ U.S. ___ (2011), that a state law that banned class action waivers in arbitration agreements was invalid and preempted by the Federal Arbitration Act.

As a result of these five cases, the Supreme Court has set the bar in favor of employers that choose to mandate arbitration of all statutory employment discrimination and wage and overtime claims. Properly drafted arbitration agreements may not only preclude employees from initiating or participating in class actions in court (thereby avoiding employers having to deal with jury trials), but may also bar class arbitration and require separate, individual employee case-by-case determinations in arbitration.

What Employers Should Do Now

Employers should first determine whether, under their separate business models and cultures, they wish to implement arbitration agreements that bind their employees and applicants for employment to mandatory pre-dispute arbitration and, if so, whether they wish to prohibit class arbitration. There are pros and cons to mandatory arbitration. The arbitration process is generally quicker and less expensive and is conducted in a private forum. In addition, the arbitration process protects employers from "runaway" jury verdicts. On the other hand, arbitrations do not provide for some of the formal procedural safeguards found in judicial proceedings. For example, the traditional judicial rules of evidence and privilege do not necessarily apply, and there is limited judicial review and appeal of arbitration decisions. Further, there are judicial decisions and state and local rules that require employers to pay all of the fees of the arbitrators and of administering agencies, such as the American Arbitration Association or JAMS (except for the equivalent of a federal court filing fee).

Of course, as stated in Gilmer, arbitration is not available for statutory claims where Congress clearly expressed its antipathy to arbitration in the relevant statute. For example, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act of 2002 ("SOX") to prohibit specifically the use of pre-dispute arbitration agreements for SOX claims. Further, the EEOC and the National Labor Relations Board take the position that an employee waiver of the right to file an administrative agency charge or complaint is void as against public policy and, in any event, cannot bar the agency from exercising its statutory rights. Thus, care must be taken in drafting a pre-dispute arbitration policy not only to exclude from the policy certain statutory claims, such as SOX claims, but also to carve out an employee's right to file agency charges while at the same time limiting the employee's right to share in any monetary relief that might be obtained in an agency proceeding.

Bear in mind that aside from mandating the arbitration of statutory employment-related claims, many other non-statutory forms of employment disputes may also be required to be arbitrated. These include, for example, contract and tort claims, such as wrongful discharge, assault and battery, defamation, negligent hiring and retention or supervision, and intentional infliction of emotional distress — claims that employees' attorneys typically assert with statutory claims to avoid the 1991 Civil Rights Act's $300,000 cap and to take advantage of the absence of caps on compensatory and punitive damages under state law.

Employers that decide to implement and embrace a mandatory pre-dispute arbitration program must carefully draft and implement the program. It must be bilateral — that is, it must be binding on employer as well as on employees, and the program must not over-reach. It must be fair, and it must afford due process. In short, it must merely substitute an arbitral forum for a judicial forum, while enabling employees to preserve all the rights and remedies that they would have been entitled to in a court of law.

If you have any questions about this Advisory or other mandatory pre-dispute arbitration policy issues, please contact:

Evan J. Spelfogel
New York
[email protected]