Pros and Cons of Mandatory Arbitration

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Pros and Cons of Mandatory Arbitration

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With the explosion of employment litigation – in particular, wage and hour lawsuits – many employers are turning to mandatory arbitration agreements as a strategy to keep defense costs down and avoid class actions.

But as more and more companies make mandatory arbitration a condition of employment, the controversy surrounding the legality of such agreements escalates, with employee advocates questioning the fairness of prohibiting employees from airing their grievances to a jury.

And as employers seek to enforce arbitration agreements, the debate over enforceability of such provisions, including class action waivers that are often included in such agreements, has moved to the courts.

While the U.S. Supreme Court has consistently held that mandatory arbitration agreements are generally enforceable, plaintiffs’ attorneys continue to creatively challenge enforceability, and some judges find opportunities to chip away at the Supreme Court’s rulings. As a result, employers seeking the many benefits of a reliably enforceable mandatory arbitration agreement must focus on carefully drafting arbitration provisions in a manner that will be more likely to withstand court scrutiny.

Rise of mandatory arbitration in employment setting

The surge in mandatory arbitration agreements is not surprising, as arbitration presents many benefits over traditional litigation.

The cost of defending employment claims has skyrocketed, particularly given the length and formality of the litigation process and the broad scope of permissible discovery. Indeed, employers often agree to pay out settlements for even the most meritless claims, simply to avoid the higher cost of defending themselves.

Many employers rightly view arbitration as a quicker and more cost-efficient way of resolving employment disputes, not to mention a way to avoid the significant cost burden and risk associated with defending class actions, which allow even a single employee to file suit on behalf of many, forcing an employer to consider settlement even when the underlying claim is dubious.

Employers also are attracted to the increased predictability resulting from a trained legal professional deciding their employment disputes rather than the prospect of rolling the dice before a jury.

In addition, because arbitrations are private, the proceedings and ultimate outcome are confidential, reducing both the risk of copycat plaintiffs and damage to the company’s brand and reputation.

Arbitration also has its advantages for employees. It provides a quicker, more cost-effective and accessible way for an employee to address a dispute with his or her employer. Generally, arbitrations reach resolution more quickly than litigation.

Further, while arbitration may not, in the eyes of the plaintiffs’ bar, as frequently produce the windfall, “win-the-lottery” damage awards that juries sometimes render, the expeditious and informal nature of arbitration gives more employees an opportunity to effectively resolve their workplace disputes.

Many judges also favor arbitration, as it helps relieve an already over-burdened court system. Every matter that goes to arbitration is one less matter on the court docket. That not only conserves valuable court resources, but results in employment disputes being resolved without the use of taxpayer dollars and without disrupting the lives of potential jurors.

Of course, the increased use of arbitration agreements is not without controversy.

Detractors may claim that damages awarded to successful employees at arbitration are substantially lower than jury awards. Opponents also criticize the unequal bargaining power between employers and employees, which can result in agreements containing more employer-friendly provisions, such as class action waivers.

Some employers also have been criticized for “burying” arbitration clauses in lengthy, unrelated documents, arguably causing employees to inadvertently sign away their right to litigate claims in court.

Finally, because arbitration awards are entitled to great deference from the courts, even erroneous arbitral awards are nearly impervious to judicial oversight and review.

Judicial view on mandatory arbitration

For its part, the U.S. Supreme Court has routinely held that the Federal Arbitration Act mandates enforcement of arbitration agreements in all but the most unusual circumstances.

In Moses S. Cone Memorial Hospital v. Mercury Construction Corporation, 460 U.S. 1, 22 (1983), the court explained that the FAA amounts to a “congressional declaration of a liberal federal policy favoring arbitration agreements.”

In Dean Witter Reynolds v. Byrd, 470 U.S. 213, 218 (1985), the court went so far as to instruct that the FAA “eliminates district court discretion and requires the court to compel arbitration of issues covered by the arbitration agreement.”

Those decisions have not stopped plaintiffs’ attorneys from working to stem the tide of mandatory arbitration, however. One initially successful approach was to attack the inclusion of class action waivers in arbitration agreements, which require employees to individually arbitrate their employment claims rather than having the option to bring them on a class wide basis on behalf of all similarly situated employees.

At first, courts showed a willingness to invalidate such clauses in which a plaintiff could show that the waiver was effectively a bar to relief. For example, in Feeney v. Dell, Inc., 465 Mass. 470 (2013), the court held that class action waivers may be invalidated when “class proceedings are the only viable way for a [] plaintiff to bring a claim against a defendant, as may be the case where the claims are complex, the damages demonstrably small and the arbitration agreement does not feature the [appropriate] safeguards.”

In 2013, however, the Supreme Court in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), held that the FAA nonetheless permits waiver of the class action procedure, so long as the arbitral process would allow redress of an individual claim, as the FAA’s “command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims.”

Nonetheless, life remains in the fight against class action waivers. In In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012), the National Labor Relations Board ruled that class waivers violate an employee’s right to engage in concerted protected activity under the National Labor Relations Act.

Although D.R. Horton was ultimately overturned by the 5th U.S. Circuit Court of Appeals, the NLRB maintains its stance that class action waivers violate the NLRA and continues to rule that an employer who uses such waivers has committed an unfair labor practice.

By and large, courts have rejected the NLRB’s position, but due to the significance of the issue, as well as the possibility that appellate courts may become divided, it appears that only the Supreme Court will settle the controversy.

In the meantime, plaintiffs have relied on D.R. Horton to attack mandatory arbitration provisions though the NLRB, hoping that a favorable board ruling will open the door to class litigation.

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