Mandatory arbitration, unlikely to go away, should be made fairer

The 9th U.S, Circuit Court of Appeals ruled on Sept. 15 that Assembly Bill 51, California's prohibition against mandatory arbitration clauses in employment agreements, was not entirely preempted by the Federal Arbitration Act. It appeared that the tide had finally turned in favor of workers' rights.

In a divided decision, two of the three judges held that the law was not preempted by the FAA when it came to what employers did before an arbitration agreement was signed. Chamber of Commerce of the U.S., et al. v. Bonta, et al., 2021 DJDAR 9599. The federal law, they ruled, only kicked in with respect to civil or criminal penalties against employers who had executed arbitration agreements subject to the FAA.

It is at best a Pyrrhic victory for employees. The panel's decision is likely to be tendered for a rehearing en banc, where the Chamber of Commerce stands a better chance of prevailing, and a review by the U.S. Supreme Court is almost assured. Given the history of arbitration before the high court, as well as the court's current membership, odds overwhelmingly favor the Chamber.

But it's too soon for employee advocates to throw in the towel. Even if AB 51 ends up in the dust bin, it has shined a spotlight on the vicissitudes of arbitration and has provided a roadmap for making things better. Under the law, employers are barred from requiring workers to sign agreements mandating arbitration for disputes arising out of the California Fair Employment and Housing Act or Labor Code. It is unlawful to condition employment or employment-related benefits on an employee's agreement to forgo a jury trial for any such disputes.

The California law clearly flies in the face of federal court decisions, including those from the Supreme Court, that have found broad FAA preemption over state laws. It is therefore unlikely to find a friendly forum before the nation's top court. The time has come to instead reform the arbitration system so it actually works as was intended.

Arbitration is a two-headed beast. In theory, it is an ideal path to justice, presumably offering a faster process for resolving disputes by limiting discovery, motion practice and appellate review. Arbitrators are generally retired judges or veteran attorneys who are eminently qualified to understand and evaluate evidence and should be capable of delivering reasoned legal decisions.

The reality is much more complicated. Employers vociferously embrace arbitration for a good reason. Arbitration allows them to avoid the roulette-wheel outcomes of jury trials. The industry per diem ($15,000 or more for some neutrals) is still small potatoes compared with unpredictable, sympathetic jury verdicts. Businesses may use the same provider for dozens or even hundreds of cases, and arbitrators are disinclined to bite the hand that feeds them. Neutrals who believe they can render impartial judgment may be subconsciously inclined to favor the party who pays them.

Statistics on arbitration outcomes show that employers have a decided advantage. According to a March 2020 article in the Georgetown Journal on Poverty Law and Policy, "empirical studies show that arbitration favors employers. That is, compared to litigation, employees in arbitration win less often and when they do win, they win smaller awards. The largest impact of mandatory arbitration may be that claims are never pursued." The absence of class actions -- which were effectively killed by the Supreme Court's 2018 Epic Systems decision -- means that small claims cannot be aggregated for trial, so employers who shortchange workers a few dollars a month or engage in other minor violations have little incentive to do the right thing.

Arbitration, however, is ultimately a crap shoot. Despite the employer-leaning numbers, there is no guarantee of a particular outcome, nor is there a cap on monetary awards. I've seen a Wild West of arbitration, with neutrals often acting as unpredictably as juries. Awards are typically kept confidential, so we cannot know with certainty how cases have been decided. Employers, who bear the costs of the process, gamble every time they go before an arbitrator.

If mandatory arbitration is here to stay, we should fix the things about it that are wrong. Let's start with "informed acquiescence." Most employees bound by fine-print contract terms have no idea what they have signed. The FAA, enacted in 1925, required courts to stay litigation, upon motion, when a dispute involved a contract with a written arbitration clause. It presupposed that parties to the contract understood its terms and could willingly and knowingly negotiate and agree to those terms.

This is a fallacy. In a 2018 report, Cornell University professor Alexander Colvin wrote, "research has found that employees are often unaware or fail to recall that they have signed arbitration agreement and may not understand the content and meaning of these documents."

The California Legislature should adopt the same disclosure rules for employment agreements as is required by Civil Code Section 1102 for real estate contracts. Employees should be given clear information in multiple languages and be able to get their questions about arbitration answered before signing any agreement.

Once a case goes to arbitration, the process should be both transparent and fair. The FAA provides no recourse when an arbitrator's decision is based on a flawed legal analysis, and it allows judicial review only if a decision was procured by fraud, the arbitrator was biased, he or she refused to hear relevant evidence, or he or she exceeded the power bestowed by the arbitration agreement. State legislation could improve outcomes for both parties by requiring that every arbitral decision include a reasoned, published opinion and that the legal basis for the decision be subject to outside review and judicial appeal if erroneous.

Assuming that mandatory arbitration is not going away, it's time to make the system fairer. Require employers to obtain truly "informed acquiescence" from employees who will be bound by arbitration clauses in their contacts. Require true accountability from arbitrators who are making critical decisions. Finally enact laws that remove the unchecked discretion now plaguing the system and level the playing field for all parties.