ADR is preferable to mandatory arbitration
agreements which are sure to
result in more litigation
By MICHAEL RUBIN
The Supreme Court's 5-4 decision in Circuit
City Stores Inc. v. Adams, __ U.S. __ (2001), disappointed workers'
advocates, not because it significantly changed existing law but
because it impeded prospects for much needed state-by-state employment
The issue in Circuit City was whether Congress in
1925 intended to exclude all workers, rather than only so-called
"transportation" industry workers, from the coverage of the
Federal Arbitration Act. Plaintiff St. Clair Adams was joined by 22
states, the United States, the National Academy of Arbitrators and
most major national civil rights groups in arguing that Congress
intended the "contracts of employment" exemption in FAA §1 to
exclude all workers' contracts of employment. That's what Congress
said it was doing in 1925, and no other construction of the exclusion
made any sense, given Congress' limited Commerce Clause powers at
But the Supreme Court disagreed. Applying
peculiar principles of statutory construction (that as Paul Cane notes
will cause "frenzy" among the experts), the court rejected the
Ninth Circuit's textual and historical analysis and held that
Congress excluded only the class of "transportation" industry
workers from the FAA's coverage.
The reason this matters is because the Supreme
Court in 1984 held that the FAA pre-empts most state arbitration laws.
By narrowly construing the FAA's "contracts of employment"
exclusion, the court in Circuit City correspondingly expanded the
FAA's preemptive reach.
No short-term impact
While the court's ruling is disappointing to
those advocating state-by-state employment arbitration reform, Circuit
City has virtually no short-term impact on employment litigation.
Twelve of the 13 circuit courts already read the FAA exclusion
narrowly. In those circuits, states were already precluded from
providing special protections to workers subject to mandatory
Although many states had protective legislation
on the books (including Arizona, Kentucky, Louisiana, Oklahoma,
Wisconsin), under Circuit City the only workers who can now fully
benefit from those protections are the undefined class of workers in
the "transportation" industry, whom the court said are excluded
from the FAA's coverage.
Legislative battle ahead
The reform battle thus turns to Congress, where
legislation will shortly be introduced to overturn the Supreme
Court's decision, while the courts are left to fight over questions
like, "what comprises the 'class' of 'transportation'
workers excluded from the Act?" and what constitutes an enforceable
employment arbitration agreement under applicable statutory
Contrary to what some employer's lawyers are
saying, the Circuit City decision had no bearing on whether mandatory
arbitration agreements are enforceable or what the standards for
enforceability should be. Those issues simply weren't before the
court. So why all the furor? If Paul Cane is right that Circuit City
"broke no new ground," why do so many lawyers representing
employers trumpet Circuit City as such a major victory?
Perhaps the strong reaction can be attributed to
employers' fear of what would have happened had the Ninth Circuit
been affirmed. In recent years, American workers have rallied behind
efforts to protect their ability to vindicate civil rights and
employment rights in court.
Many states were poised to enact reform bills
that would have prohibited employers from forcing workers, as a
condition of employment, to waive their right to pursue employment
claims in court, or that would have required arbitration agreements to
be truly fair, knowingly entered into and voluntary.
It is no secret why workers' advocates have
fought so passionately to protect the right to sue in court while
lawyers representing employers have just as forcefully touted the
supposed benefits of mandatory employment arbitration.
Paul Cane states the employers' case well.
Employers argue that arbitration is a quick and inexpensive way to
resolve discrimination and other employment-related claims, and that
arbitration is a fair and even-handed way to resolve contentious
workplace disputes. But that description only applies to some
employers' arbitration schemes. It ignores that many employers'
arbitration programs impose high costs and unfair restrictions on
workers that either chill the workers' willingness to pursue their
rights at all, sharply curtail available remedies, or diminish the
workers' likelihood of success.
Why not voluntary?
If arbitration were always of equal benefit to
workers and employers, and if employers were right that reasonably
enlightened workers should embrace arbitration as a quick and
inexpensive alternative, why are most employers unwilling to make
their arbitration agreements truly voluntary? Do they distrust their
workers' ability to choose the forum that is in those workers'
best interests? Why not give workers the option of pursuing civil
rights in court, while offering an arbitration program that provides a
sufficiently attractive alternative to a jury trial that the workers
will agree to proceed in that forum, knowingly, intelligently and
The sad answer to these questions stems from the
fact that most employers, with their vastly superior bargaining power,
have the ability not only to impose mandatory pre-dispute arbitration
agreements on their workers as a condition of employment, but also to
tilt the arbitral playing field sharply in their own favor. Circuit
City's arbitration agreements, for example, capped punitive damages
and front pay, shortened the statute of limitations, required workers
to pay half the costs of arbitration (including arbitrator fees and
expenses), and failed to require fee- or cost-shifting as required by
Why would any reasonable worker knowingly and
voluntarily agree to such a forum, given the alternative of litigating
those claims before a jury of the worker's peers? Can such an ADR
system honestly be defended as merely substituting one forum for
another, without affecting the workers' substantive rights? Not many
lawyers would counsel a victim of workplace discrimination to opt for
such a system over a jury trial - no matter how speedily arbitrators
issue their rulings.
No one disputes the benefits of ADR where all
parties knowingly and voluntarily agree to arbitration or mediation as
an alternative to fighting out their dispute in court. But when
employers with overwhelmingly superior bargaining power force their
workers to give up the right to sue in court over future violations,
and when those same employers dictate non-negotiable rules and
procedures to govern the arbitration, they're simply asking for more
litigation than they could possibly avoid by imposing a system of
arbitration in the first place.
Before Circuit City, workers had three lines of
argument available to challenge the enforceability of a mandatory,
pre-dispute arbitration agreement: 1) a challenge under state contract
law (because FAA §2 incorporates state law contract doctrines of
general applicability), as endorsed by the Supreme Court in Doctor's
Associates Inc. v. Casarotto, 517 U.S. 681 (1996), and as applied in
cases such as Armendariz v. Foundation Health, 24 Cal.4th 83 (2000);
2) a challenge that the agreement deprives the worker of non-waivable
statutory rights, as endorsed by the Supreme Court in Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991), and as applied
in cases such as Duffield v. Robertson Stephens, 144 F.3d 1182 (9th
Cir.), cert. denied, 525 U.S. 982 (1998), and Graham Oil v. ARCO
Products, 43 F.3d 1244 (9th Cir. 1994), cert. denied, 516 U.S. 907
(1995); and 3) a challenge to the agreement as involuntary or
unknowing, as endorsed in Gilmer and Mastrobuono v. Shearson Lehman
Hutton Inc., 514 U.S. 52 (1995) (reiterating that arbitration must be
a matter of "consent, not coercion"), as applied in cases such as
Renteria v. Prudential Ins. Co., 113 F.3d 1104 (9th Cir. 1997),
Prudential Ins. Co. v. Lai, 42 F.3d 1299, 1305 (9th Cir. 1994), and
Nelson v. Cyprus Bagdad Copper Corp., 119 F.3d 756 (9th Cir 1997).
Each of those three lines of argument remains
fully available after Circuit City - as they must, because Circuit
City did not raise any issue as to the enforceability of mandatory
arbitration agreements. As a result, employers who impose mandatory
arbitration agreements on their workers face the prospect of more
litigation over the protection of workplace and civil rights.
Hundreds of cases now pending in state and
federal court challenge the enforceability of non-negotiable,
mandatory employment arbitration agreements. By contrast, there are
virtually no cases challenging the enforceability of arbitration
agreements where the parties voluntarily decided, post-dispute, to
submit their dispute to an arbitration procedure agreeable to both
parties. So whose interests are really being served?
Until employers learn to provide arbitration
programs that their workers will accept as fair alternatives to the
judicial system, employers will continue to be faced with legal
challenges to the enforceability of their arbitration agreements.
The solution to the problem of too much
litigation isn't to force workers to arbitrate employment claims,
but to design arbitration programs that will be perceived by both
sides as attractive alternatives to the present system, so both
parties will knowingly, intelligently and voluntarily choose to
resolve their dispute in that alternative, non-judicial forum.
contracts treat workers
and employers fairly and
provide both with
By PAUL W. CANE JR.
Does this sound familiar? Your client is in a
lawsuit. It believes that it is in the right. You are reasonably
confident that you can prevail. But your client asks, "How much will
it cost to take this to trial?" The answer is: "Well into six
figures." The client pales. So it asks, "If we win, will the loser
have to pay our attorney's fees?" Almost certainly not, you
Enter a mediator. "I can settle this case for
you for less than the costs of defense," she says.
And so you settle. Neither you nor your client
likes it, but you settle anyway.
Too often, that's the real world of litigation
(especially employment litigation) these days. Transaction costs
frequently batter the parties into submission.
But that's not justice. Justice that costs too
much isn't justice at all.
Transaction costs should not make it impractical to reach the
merits. That's why arbitration has such appeal.
Circuit City Inc. v. Adams, 69 U.S.L.W. 4195
(U.S. March 21, 2001), presented an arcane question of statutory
interpretation: whether the 1925 Federal Arbitration Act protects
agreements to arbitrate employment claims. Scintillating reading it is
not. The majority and
dissenting opinions advanced dueling principles of statutory
interpretation (note how these principles often are revered as
"canons" when they support your position and dismissed as
"bromides" when they don't). The end result no doubt has the
editors of Sutherland on Statutory Construction in a frenzy
("there's a new case to cite in the next pocket part!"), but the
rest of us mostly are content to know the bottom line.
Which is that - Michael Rubin's superb brief
and oral argument notwithstanding - most predispute agreements to
arbitrate employment claims are protected as a matter of federal law.
(The exception, based on §1 of the Federal Arbitration Act, is for
persons who actually carry goods in interstate commerce; this is what
Professor Sam Estreicher has called "the schlepper exception.")
Because the federal act pre-empts state law, the
decision bars state courts and legislatures from tampering with the
enforceability of FAA-covered arbitration agreements.
Michael Rubin's article, accompanying this one,
cites the amicus filings of a number of states in support of his
client's position and laments the existence of pre-emption.
Respectfully, however, he is only an occasional
exponent of the virtues of federalism. "States rights" is fine, in
Michael's view, if the states are doing what he wants them to do -
but not otherwise.
As for the number of states who were amici on his
side, my response is: Well, sure. One could review the Supreme Court
Reports for the last century and find few if any instances, on any
issue, in which states argued in favor of federal preemption. "Stop
me before I legislate again!" is not the states' typical refrain.
No doubt Michael and his colleagues will ask
Congress to amend the Federal Arbitration Act. Congress should resist,
because arbitration contracts are a good thing, in the workplace as
elsewhere. Arbitration was a good thing more than 40 years ago when
the Supreme Court decided the famous Steelworkers Trilogy.
It's a good thing now. Arbitration is fast, fair and
efficient. You can litigate and win (or lose) on the merits, without
being cowed into submission by litigation costs.
No new ground
Almost every court to consider the issue had
correctly anticipated the Circuit City majority opinion, so in a sense
Circuit City broke no new ground. Yet the publicity the case has
received has reignited a debate over predispute arbitration -
witness these very articles - so it may be advisable to review first
some principles and dispel some myths (some of which Michael would
perpetuate in his piece alongside).
"Don't arbitration agreements take away
substantive rights?" No, arbitration agreements at their core simply
change the forum in which substantive rights are adjudicated. Even
after Circuit City, arbitration agreements that substantively
overreach may be attacked, case by case. The California Supreme Court
last year in Armendariz v. Foundation Health Psychcare Services, 24
Cal. 4th 83 (2000), articulated (1) a (mostly) reasonable due process
protocol that prevents overreaching, and (2) severability principles,
so that courts do not throw the arbitration baby out with the bath
water in evaluating agreements that are challenged.
"Won't arbitrators favor employers over
employees?" No. The plaintiffs' bar is well organized and well
informed. An arbitrator who issues unsound decisions favoring
employers soon will have to find another line of work.
"But what choice do you have if presented with
an arbitration agreement at the time of hire?" You have the same
choice you have when presented with any term or condition of
employment that you don't like. You ask that it be changed; if
unsuccessful, you work for an employer that has terms and conditions
more to your liking. Individuals applying for work often are presented
with more or less non-negotiable terms.
Unless the terms are unconscionable (which
virtually every court in the country, including the unanimous
California Supreme Court in Armendariz, has said arbitration is not),
a valid contract is formed. Arbitration actually is among the more
innocuous of typical employment terms and conditions.
Job applicants often are required to sign
detailed employment-at-will agreements: documents that say that never,
ever, no matter how long employment lasts, will an individual secure
freedom from an arbitrary discharge. Such an agreement unquestionably
alters the parties' substantive rights, and such agreements often
are imposed as a condition of hire. Arbitration agreements, by
contrast, do not destroy substantive rights; they simply change the
forum in which the rights will be adjudicated.
"But what if the arbitrator is just wrong on
the law?" If this is a concern, the parties can contract for a
limited form of appellate review. In LaPine Technology Corp. v.
Kyocera Corp., 130 F.3d 884 (9th Cir. 1997), the court noted that
judicial review was not at all inconsistent with the notion of
arbitration. (In a colorful concurring opinion, Judge Kozinski
emphasized that the standard of judicial review (there, de novo on
questions of law, substantial evidence on questions of fact) had to be
reasonably conventional. Should the parties stray too far from
conventional standards of review - as Judge Kozinski put it, should
a court be asked to review an arbitration award by odd methods such as
"flipping a coin or studying the entrails of a dead fowl" - then
the rule would be otherwise.)
Enough, then, of the myths and misperceptions on
the plaintiffs' side. Michael
Rubin may be surprised to learn that I still get skeptical questions
about arbitration from employers:
"If we have an arbitration program, won't we
get more frivolous claims?" No. I've advised dozens of employers
who have instituted arbitration programs. Not one has reported an
increase in claims, let alone in baseless claims.
"Will a predispute arbitration agreement hurt
our recruiting?" No. I'm not aware of any company that has
reported applicant push-back, even in the overheated job market of the
past few years.
This, then, is the response to the argument that
arbitration is unfair. Employees have no objection to it; employees'
lawyers, the beneficiaries of the costs-of-defense settlement
phenomenon described at the outset, are the persons who most often
complain. (Michael argues that only post-dispute arbitration
agreements should be enforced and asks why employees do not embrace
that sort of arbitration program instead of a predispute program. The
answer is that it never would work, because plaintiffs' lawyers
rarely are willing to surrender the leverage inherent in their ability
to lay on the employer a costly litigation siege.)
The Duffield case
"Hasn't the Ninth Circuit ruled that most
discrimination claims cannot be arbitrated?" Yes, in Duffield v.
Robertson Stephens & Co., 144 F.3d 1182 (9th Cir. 1998), a case
that Michael argued and won.
But Duffield is a dead man walking. Virtually
every court in the United States has criticized the reasoning in
Duffield. The pages of Shepard's Citations devoted to Duffield would
be an instructive teaching aid in any law school research and writing
course. The sheer number of critical references screams, "This case
is bad law." You can take it to the bank: The Supreme Court will
overrule Duffield soon (if the Ninth Circuit en banc doesn't do so
"Isn't arbitration itself costly,
particularly where the employer is required to pay all or
substantially all of the arbitration's costs and fees?"
The costs are not trivial. But they pale by comparison to the
transaction costs of court litigation. (Michael notes that there has
been a lot of expensive litigation over arbitrability. He is right,
but I expect that kind of litigation to subside, now that the ground
rules have become reasonably clear.)
"Why are you preaching this gospel? Isn't
arbitration going to reduce the need for lawyers like you?" Maybe
so. But we all know what Shakespeare said should be done about
lawyers. Maybe it's in our enlightened self-interest to make dispute
resolution work for our clients rather than preserving it as an
expensive game for ourselves.