Banning compulsory arbitration clauses is not the answer

THE NEUTRAL CORNER

On April 24, the U.S. Supreme Court issued its long-awaited decision in Lamps Plus, Inc. v. Varela, 2019 DJDAR 3349. In that case, the court (5-4) reversed yet another 9th U.S. Circuit Court of Appeals decision and held that an employment agreement could not be interpreted to permit class arbitration if it did contain an affirmative contractual basis for concluding that the parties agreed on this procedure. The 9th Circuit had tried to avoid the consequences of a prior Supreme Court case holding class arbitrations are not permitted if the agreement is silent on the issue by characterizing the Lamps Plus agreement as ambiguous. The Supreme Court rejected the 9th Circuit's reliance on the state law doctrine that contractual ambiguities should be construed against the drafter finding that rule to be based on public policy considerations and not designed to determine the parties' intent. As such, the Supreme Court held, application of the rule would interfere with the fundamental attributes of arbitration.

This case will undoubtedly add fuel to the efforts, both in California and nationally, to ban compulsory arbitration clauses. As a professional arbitrator, I certainly have a pecuniary interest in the continuation of arbitration as a forum for resolving all types of disputes. At the same time, I acknowledge opponents of mandatory arbitration clauses have valid concerns. Nevertheless, I believe arbitration can live up to its potential of providing an efficient, cost-effective, fair process for resolving employment disputes. After all, labor unions and management have relied on arbitration under collective bargaining agreements to resolve discharge and discipline cases for decades.

A brief history of arbitration clauses in employment contracts.

In 1925, Congress passed the Federal Arbitration Act creating a national policy allowing and encouraging arbitration clauses. Under the FAA, arbitration clauses are enforced so long as neither party can prove fraud or unconscionability.

Arbitration was not officially endorsed as a way to resolve employment disputes until 1960 after the Supreme Court's landmark decision in the Steelworkers' Trilogy, a series of three related cases. The court's ruling in these cases established the rational that arbitration was to be preferred over litigation or strikes as a means of resolving employment disputes, especially on a mass scale.

Eventually, as a means of reducing exposure in employment claims, many employers began requiring employees and new hires to sign arbitration agreements. The U.S. Supreme Court finally weighed in and upheld the enforceability of mandatory arbitration clauses in the employment context in Gilmer v. Interstate/Johnson Lane Corp. This was a 7-2 decision with John Paul Stevens and Thurgood Marshall dissenting. The dissenters would not have applied the FAA to employment contracts.

As the Supreme Court has tilted right over the past decade, case after case has strengthened employers' ability to craft arbitration clauses that substantially limit employees' ability to bring class or collective actions. For example, Lamps Plus comes less than a year after another 5-4 decision in Epic Systems v. Lewis, where the high court wrote that Congress had concluded "arbitration had more to offer than courts recognized -- least the promise of quicker, more informal and often cheaper resolutions for everyone involved." Of course, the plaintiff's employment bar would argue the resolutions are only cheaper for employers because arbitrators do not award the proper amounts to prevailing plaintiffs. In the face of recent Los Angeles County Superior Court jury verdicts -- like the $28 million punitive damages award to an Ontario woman in an age discrimination case -- that position is certainly understandable.

The modern movement to ban arbitration clauses.

Opponents of mandatory arbitration clauses have been fighting against them for years and had early success in convincing courts and arbitration service providers to provide more "due process" protections for employees. As a result of those efforts, employers must pay most of the costs associated with the arbitration forum and employees must be allowed to conduct adequate discovery. The more recent widespread backlash against mandatory arbitration clauses in employment contracts has coincided with the growth of the #MeToo movement.

#MeToo shined a spotlight on the use of mandatory arbitration clauses in sexual harassment claims. Last fall, many hi-tech employers like Google, Microsoft and Facebook responded to employee concerns by removing mandatory arbitration clauses from their employment contracts and instead making them optional. Other companies, like Uber, have waived mandatory arbitration only for sexual harassment claims. Harvard and other prominent law schools also caved into student pressure by refusing to allow firms using mandatory arbitration clauses in their own employment agreements to recruit on campus.

Last year, the California Legislature sent Assembly Bill 3080 to then-Gov. Jerry Brown for signature. AB 3080 would have made it an unlawful employment practice to require an applicant, employee or independent contractor to agree to arbitrate any FEHA or Labor Code claim. Even voluntary agreements from which an employee could opt out would have been banned. And, the bill would have criminalized covered arbitration agreements under Labor Code Section 433. Brown had vetoed similar bills before and, perhaps because of the fairly obvious overreaching here, vetoed AB 3080. Despite Gov. Gavin Newsom's background as a business owner, he is likely to face calls to sign a similar ban.

On the national front, the Arbitration Fairness Act has been kicking around Congress for at least a decade. The Forced Arbitration Injustice Repeal Act (FAIR) introduced by Congressman Hank Johnson (D-Ga.) and Senator Richard Blumenthal (D-Conn.) has 147 House and 33 Senate co-sponsors. If enacted, this bill would prohibit the use of mandatory arbitration clauses in almost all employment and consumer contracts. The bill contains a very broad definition of "employment dispute," which it defines as "arising out of or related to the work relationship or prospective work relationship between them, including a dispute regarding the terms of or payment for, advertising or, recruiting for, referring of, arranging for, discipline or discharge in connection with such work." This proposed statute would also apply to independent contractors. Not surprisingly, the bill contains a carve out for collective bargaining agreements while, at the same time, including language to make clear that only claims arising under the agreement (as opposed to a state statute, for example) are subject to labor arbitration.

Of course, arbitration has its pros and cons. The oft-stated objections are not without some merit. Nevertheless, I believe our judicial system depends on arbitration to alleviate burdens on courts that would markedly increase if arbitration were banned as proposed. When I first started practicing law in California, cases would routinely take five years to get to trial. It is no coincidence that the reduction in cycle time coincided with the increased use of arbitration agreements by non-union employers.

Arbitration can be more efficient and cost-effective. This depends, in part, on an arbitrator's willingness to afford due process but not allow the parties to turn a case into a conventional litigation in a different forum. Perhaps broadening the grounds for overturning an arbitration award makes sense. And, allowing for provisions to avoid or mitigate the "repeat player effect," is a topic worthy of further discussion. Finally, in the employment context, it may make sense to allow class action arbitration. If an illegal policy is truly applied across an entire workplace, it does not make sense to force litigation of individual claims.

Of course, the devil is always in the details. But, there are other ways to address the legitimate objections to arbitration without jettisoning an approach through which thousands of cases have been successfully and fairly resolved.