REGULARS

Employment Arbitration after Circuit City: Will the ruling cause more employee litigation or does it offer fair and cost-effective justice for American workers and employers?

Voluntary ADR is preferable to mandatory arbitration agreements which are sure to result in more litigation

Arbitration contracts treat workers and employers fairly and provide both with cost-effective justice

Paul W. Cane Jr. and Michael Rubin have different ideas about the wisdom and legality of predispute employment arbitration agreements.

Cane is a partner in Paul, Hastings, Janofsky & Walker LLP in San Francisco, representing employers in the appellate courts in employment law matters.

Rubin, who argued Circuit City Inc. v. Adams in the Supreme Court, is a partner in Altshuler, Berzon, Nussbaum, Rubin & Demain in San Francisco, representing labor unions and employers.

This is not the first time the two have opposed each other. Twenty years ago, they often found themselves on opposite sides of issues as Supreme Court law clerks: Cane for Justice Lewis F. Powell and Rubin for Justice William J. Brennan.

Voluntary 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 arbitration reform.

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 the time.

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 arbitration.

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 principles?

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 voluntarily?

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 FEHA.

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.

Three options

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.

Arbitration contracts treat workers and employers fairly and provide both with cost-effective justice

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 explain.

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.")

No tampering

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.

Same choices

"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 first).

"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.

REGULARS

Employment Arbitration after Circuit City: Will the ruling cause more employee litigation or does it offer fair and cost-effective justice for American workers and employers?

Voluntary ADR is preferable to mandatory arbitration agreements which are sure to result in more litigation

Arbitration contracts treat workers and employers fairly and provide both with cost-effective justice

Paul W. Cane Jr. and Michael Rubin have different ideas about the wisdom and legality of predispute employment arbitration agreements.

Cane is a partner in Paul, Hastings, Janofsky & Walker LLP in San Francisco, representing employers in the appellate courts in employment law matters.

Rubin, who argued Circuit City Inc. v. Adams in the Supreme Court, is a partner in Altshuler, Berzon, Nussbaum, Rubin & Demain in San Francisco, representing labor unions and employers.

This is not the first time the two have opposed each other. Twenty years ago, they often found themselves on opposite sides of issues as Supreme Court law clerks: Cane for Justice Lewis F. Powell and Rubin for Justice William J. Brennan.

Voluntary 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 arbitration reform.

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 the time.

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 arbitration.

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 principles?

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 voluntarily?

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 FEHA.

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.

Three options

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.

Arbitration contracts treat workers and employers fairly and provide both with cost-effective justice

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 explain.

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.")

No tampering

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.

Same choices

"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 first).

"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.