The rise and fall (out) of mandatory pre-dispute employment arbitration

The most far-reaching work law development of the past three decades has been the rise of mandatory pre-dispute arbitration. Over the strenuous objections of the plaintiff's bar and workers' rights advocates, a majority of American businesses now require their employees -- not to mention consumers of their communication, health care, financial and other services -- to enter into agreements to resolve legal disputes in arbitration rather than in courts of law.

Although voluntary in form, pre-dispute arbitration agreements are mandatory in practice: The employee or consumer has no choice but to sign or otherwise assent to arbitration if she wants to get and keep her job, cellphone, medical treatment or credit card. And these agreements are tough to avoid. This is due to two developments: primarily, a landmark ruling by the U.S. Supreme Court 30 years ago (Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)), which declared the practice to be supported by national policy favoring arbitration; and secondarily, to more recent decisions, which held state laws regulating arbitration to be preempted but class action waivers to be enforceable (see, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011); American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013); Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018)).

The controversy over mandatory employment arbitration stands in sharp contrast to the widespread acceptance of mandatory labor arbitration, which has enjoyed the trust and confidence of labor relations professionals on both sides of the adverse line for close to a century. So it's hardly surprising that I am asked the following questions:

Q. What's the difference between mandatory employment arbitration and mandatory labor arbitration? Why are workers' advocates resistant to the former but not the latter?

Let's start with what the two systems have in common: Both employment and labor arbitration are creatures of contract intended by the parties to be faster, less formal, and less expensive than going to court. The arbitrator must be mutually agreed upon, and her fees must be shared in some fashion. The proceedings are confidential; neither the media nor the public have a right to attend or know what happened. There are no juries and no appeals; the arbitrator's award is final and binding, and can be vacated only upon the narrowest of grounds, such as fraud.

But there are big differences. The biggest difference has to do with how the agreement to arbitrate is put into place. In unionized workplaces, labor arbitration is chosen and negotiated for by parties of relatively equal bargaining power: an employer and a union representing affected employees. It is part of a system of workplace democracy in which the parties seek to maintain their relationship by resolving grievances amicably and instead of resorting to strikes, boycotts, lockouts and other forms of labor unrest. In non-union workplaces, however, employment arbitration is imposed by the employer on the individual employee on a take-it-or-leave-it basis. It is part of a system designed to expedite the termination of the employment relationship, and in so doing, to avoid the time, trouble, and expense of civil litigation by diverting claims to alternative dispute resolution.

In theory, diverting claims to employment arbitration is a merely a neutral change of forum; in practice, it can change the outcome. According to several empirical studies, employees bring fewer claims, win significantly less often, and win significantly less money in employment arbitration. In a leading study comparing trial outcomes, employees won 36.4% of the time in federal court and a whopping 57.0% of the time in state court, but only 21.4% of the time in employment arbitration; their average damages were $394,223 in federal court and $575,543 in state court, but only $109,858 in employment arbitration (see Katherine V.W. Stone & Alexander J.S. Colvin, "The Arbitration Epidemic," Econ. Pol'y Institute (Dec. 7, 2015). In a later study, the employee win rate was reported as dipping below 20% in employment arbitration (see Alexander J.S. Colvin & Mark D. Gough, "Individual Employment Rights Arbitration in the United States: Actors and Outcomes," 68 Indus. Lab. Rel. Rev. 1019 (2015)).

Among the major reasons offered to explain these outcomes is the "repeat player" syndrome, in which the arbitrator is said to favor employers on the merits because they are the major source of repeat business for her services. As a full-time academic and a part-time neutral, I am in a better position than many arbitrators to resist the pull of one side or the other. I know that I will continue to collect a steady paycheck no matter how I decide any given case, and no matter who uses (or declines to use) my neutral services in the future. But there's no denying that the pull exists.

For example, my first case as an arbitrator was a contentious fee dispute between counsel who represented the officers and directors of a publicly traded company and their directors and officers insurance carrier. I granted most of counsel's fee application. He was delighted and fought successfully to get me selected to hear his separate, equally contentious claim for more fees against the company's D&O continuation carrier. But I denied most of that fee application. He was furious, and I figured it would be the last time counsel ever picked me to hear a dispute involving any of his clients. I was right.

That said, employment arbitration appears to be here to stay. Even in the #MeToo era, in which the confidential nature of the practice has come in for substantial criticism, efforts to amend the Federal Arbitration Act of 1925 to ban or modify it have gone nowhere. In fact, the use of mandatory pre-dispute arbitration agreements has continued to grow. In 1992, just over 2% of non-union workers in the private sector were subject to mandatory employment arbitration; by 2018, this figure had risen to 55% of such workers, or more than 60 million Americans (see Alexander J.S. Colvin, "The Growing Use of Mandatory Arbitration," Econ. Pol'y Institute (Apr. 6, 2018).

In light of this, a number of organizations have explored ways to promote fairness in mandatory employment arbitration. For example, the National Academy of Arbitrators, the country's leading honorary and professional association of dispute resolution professionals, has issued both a due process protocol encouraging the employee's free choice of representation, equitable fee sharing, access to discovery, and the training of arbitrators (see "A Due Process Protocol for Mediation and Arbitration of Statutory Disputes Arising Out of the Employment Relationship" (May 9, 1995)). The academy also has issued a policy statement governing when and how one of its members should take an employment arbitration case, run a hearing, and issue an opinion and award (see National Academy of Arbitrators Policy Statement on Employment Arbitration (May 20, 2009)).

Employment arbitration can be improved in a number of other ways. Topping this list are the development and training of arbitrators and encouraging diversity among the ranks of arbitrators who are listed on arbitration panels and rosters. As to the former, a number of ADR service providers, such as the American Arbitration Association and the Federal Mediation and Conciliation Service offer extensive training programs, including classes online. As to the latter, although arbitrators come from all areas of law practice, a substantial percentage are retired trial court judges, who tend to be elderly white males.

Although the organizations mentioned here are trying to encourage diversity in the arbitral ranks, much work remains to be done. There are at least two reasons. First, arbitrators don't pick themselves; we rely for our livelihoods on the parties and their advocates who select us. Second, most parties and advocates have little or no incentive to select an arbitrator for diversity's sake. They are risk-averse to picking neutrals whom they don't already know, and besides, they're in it to win it (see Michael Z. Green, "Arbitrarily Selecting Black Arbitrators," 88 Fordham L. Rev. 2255 (2020)). Even NAA President Dan Nielson pointed out that the academy is more than 80% male and more than 90% white.

An exciting idea to promote diversity in the arbitral ranks that is gaining attention is the Ray Corollary Initiative, which has been developed and promoted by my colleague Professor Homer C. LaRue of Howard University School of Law. Inspired by both social science research and the "Rooney Rule" for interviewing NFL head coaching candidates, the RCI posits that at least 30% of the candidate pool for a given case should include arbitrators of diverse or non-traditional backgrounds. Apparently, 30% is a critical threshold that substantially increases the chances that a diverse candidate actually will be selected (see Homer C. LaRue, "A Call - and a Blueprint - for Change," 27 ABA Dispute Res. Mag. 6 (2021). As of this writing, a number of ADR providers, such as the AAA and the FMCS, and a number of large consumers of ADR services, such as Amtrak, are considering adopting the RCI approach, or some variation of it. 