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The rise (and risks) of mandatory arbitration agreements

mankes & greenWith the explosion of employment litigation — in particular, wage and hour lawsuits — many employers are turning to mandatory arbitration agreements as a strategy to keep defense costs down and avoid class actions.

But as more and more companies make mandatory arbitration a condition of employment, the controversy surrounding the legality of such agreements escalates, with employee advocates questioning the fairness of prohibiting employees from airing their grievances to a jury.

And as employers seek to enforce arbitration agreements, the debate over enforceability of such provisions, including class action waivers that are often included in such agreements, has moved to the courts.

While the U.S. Supreme Court has consistently held that mandatory arbitration agreements are generally enforceable, plaintiffs’ attorneys continue to creatively challenge enforceability, and some judges find opportunities to chip away at the Supreme Court’s rulings. As a result, employers seeking the many benefits of a reliably enforceable mandatory arbitration agreement must focus on carefully drafting arbitration provisions in a manner that will be more likely to withstand court scrutiny.

Rise of mandatory arbitration in employment setting

The surge in mandatory arbitration agreements is not surprising, as arbitration presents many benefits over traditional litigation.

The cost of defending employment claims has skyrocketed, particularly given the length and formality of the litigation process and the broad scope of permissible discovery. Indeed, employers often agree to pay out settlements for even the most meritless claims, simply to avoid the higher cost of defending themselves.

Many employers rightly view arbitration as a quicker and more cost-efficient way of resolving employment disputes, not to mention a way to avoid the significant cost burden and risk associated with defending class actions, which allow even a single employee to file suit on behalf of many, forcing an employer to consider settlement even when the underlying claim is dubious.

Employers also are attracted to the increased predictability resulting from a trained legal professional deciding their employment disputes rather than the prospect of rolling the dice before a jury.

In addition, because arbitrations are private, the proceedings and ultimate outcome are confidential, reducing both the risk of copycat plaintiffs and damage to the company’s brand and reputation.

Arbitration also has its advantages for employees. It provides a quicker, more cost-effective and accessible way for an employee to address a dispute with his or her employer. Generally, arbitrations reach resolution more quickly than litigation.

Further, while arbitration may not, in the eyes of the plaintiffs’ bar, as frequently produce the windfall, “win-the-lottery” damage awards that juries sometimes render, the expeditious and informal nature of arbitration gives more employees an opportunity to effectively resolve their workplace disputes.

Many judges also favor arbitration, as it helps relieve an already over-burdened court system. Every matter that goes to arbitration is one less matter on the court docket. That not only conserves valuable court resources, but results in employment disputes being resolved without the use of taxpayer dollars and without disrupting the lives of potential jurors.

Of course, the increased use of arbitration agreements is not without controversy.

Detractors may claim that damages awarded to successful employees at arbitration are substantially lower than jury awards. Opponents also criticize the unequal bargaining power between employers and employees, which can result in agreements containing more employer-friendly provisions, such as class action waivers.

Some employers also have been criticized for “burying” arbitration clauses in lengthy, unrelated documents, arguably causing employees to inadvertently sign away their right to litigate claims in court.

Finally, because arbitration awards are entitled to great deference from the courts, even erroneous arbitral awards are nearly impervious to judicial oversight and review.

Judicial view on mandatory arbitration  

For its part, the U.S. Supreme Court has routinely held that the Federal Arbitration Act mandates enforcement of arbitration agreements in all but the most unusual circumstances.

In Moses S. Cone Memorial Hospital v. Mercury Construction Corporation, 460 U.S. 1, 22 (1983), the court explained that the FAA amounts to a “congressional declaration of a liberal federal policy favoring arbitration agreements.”

In Dean Witter Reynolds v. Byrd, 470 U.S. 213, 218 (1985), the court went so far as to instruct that the FAA “eliminates district court discretion and requires the court to compel arbitration of issues covered by the arbitration agreement.”

Those decisions have not stopped plaintiffs’ attorneys from working to stem the tide of mandatory arbitration, however. One initially successful approach was to attack the inclusion of class action waivers in arbitration agreements, which require employees to individually arbitrate their employment claims rather than having the option to bring them on a class wide basis on behalf of all similarly situated employees.

At first, courts showed a willingness to invalidate such clauses in which a plaintiff could show that the waiver was effectively a bar to relief. For example, in Feeney v. Dell, Inc., 465 Mass. 470 (2013), the court held that class action waivers may be invalidated when “class proceedings are the only viable way for a [] plaintiff to bring a claim against a defendant, as may be the case where the claims are complex, the damages demonstrably small and the arbitration agreement does not feature the [appropriate] safeguards.”

In 2013, however, the Supreme Court in American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), held that the FAA nonetheless permits waiver of the class action procedure, so long as the arbitral process would allow redress of an individual claim, as the FAA’s “command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims.”

Nonetheless, life remains in the fight against class action waivers. In In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012), the National Labor Relations Board ruled that class waivers violate an employee’s right to engage in concerted protected activity under the National Labor Relations Act.

Although D.R. Horton was ultimately overturned by the 5th U.S. Circuit Court of Appeals, the NLRB maintains its stance that class action waivers violate the NLRA and continues to rule that an employer who uses such waivers has committed an unfair labor practice.

By and large, courts have rejected the NLRB’s position, but due to the significance of the issue, as well as the possibility that appellate courts may become divided, it appears that only the Supreme Court will settle the controversy.

In the meantime, plaintiffs have relied on D.R. Horton to attack mandatory arbitration provisions though the NLRB, hoping that a favorable board ruling will open the door to class litigation.

Suggestions for drafting agreements

While Massachusetts courts principally adhere to the Supreme Court’s directive that arbitration agreements should generally be enforced, employers can take the following steps in drafting their arbitration policies to help protect against the inevitable challenges to their enforceability.

Although arbitration agreements contained in handbooks can be enforced, an employer should present the agreement to employees as a standalone document. That will help guard against an argument that the employee did not knowingly agree to arbitration or was not sufficiently alerted to a provision contained in a lengthier employment document. While these arguments may lack legal merit (after all, the employee will happily abide by other handbook provisions, such as paid vacations, holidays and benefits), employers face them frequently. Some plaintiffs also may argue that statements in a handbook allowing unilateral employer modification make any arbitration provision contained in the handbook illusory.

If disseminating an arbitration agreement electronically, provide a clear method by which employees can demonstrate their review and acceptance of the agreement by, for example, including a check box next to the phrase: “I have reviewed the company’s arbitration agreement and agree to be bound by its terms.” Further, the terms of the agreement should either: (1) be presented on the same page on which the employee accepts the agreement; or (2) be accessible through a clearly marked hyperlink. In Ajemian v. Yahoo!, Inc., 987 N.E.2d 604, 613 (Mass. App. Ct. 2013), the court held that “clickwrap agreements,” in which the agreement’s terms are displayed, at least in part, on the user’s computer screen, are enforceable, while “browsewrap agreements,” in which the terms are accessible only through a hyperlink at the bottom of a webpage, are not.

Maintain records demonstrating that employees have reviewed and accepted the arbitration agreement or at least received the agreement and continued working after having been informed that the agreement mutually binds both the employee and employer.

Ensure that there is mutual employer-employee consent to arbitrate disputes. Courts have consistently viewed an initial offer of employment as sufficient consideration for entering into a mandatory arbitration agreement. Most Massachusetts courts also have held that continued employment after notice of a new or existing agreement to arbitrate is suitable consideration for an arbitration agreement.

Broadly identify which claims are covered by the arbitration agreement. For example, in a recent decision, Chebotnikov, et al. v. LimoLink, Inc., 2015 U.S. Dist. LEXIS 166367 (D. Mass. Dec. 11, 2015), a Massachusetts federal court refused to enforce a forum-selection clause of an independent contractor agreement after the individual filed a Fair Labor Standards Act suit in a different state. The court reasoned that the forum selection clause applied only to “disputes arising under” the agreement, and the plaintiff’s misclassification claim under the FLSA did not depend upon the existence of the underlying contract. The court suggested that, had the clause more broadly stated that it applied to any claim “related to the agreement or the relationship of the parties,” the employer would have prevailed on its motion to dismiss.

Make the promise to arbitrate claims mutual, so that most potential claims the employer would have against the employee would also be subject to arbitration. It is possible a court may find an arbitration agreement unenforceable where it lacks mutuality. Employers should, however, include provisions applicable to both parties providing for immediate provisional judicial relief (such as a temporary restraining order or preliminary injunction) to prevent irreparable harm.

Agree to pay for the cost of the arbitration. As arbitration may impose significant filing and administrative fees on an employee seeking to file a claim, some courts have held that imposing a cost or fee-splitting requirement on employees can make access to arbitration impracticable, thus invalidating the agreement on substantive unconscionability grounds.

Do not use an arbitration agreement to include provisions limiting individual statutory remedies. Arbitration is an alternate forum for resolving disputes, but many courts draw the line when an agreement limits relief that the law otherwise would allow.

Include a severability clause. A court may deem even the most carefully drafted arbitration agreement as including problematic terms. Moreover, the validity of arbitration agreements is an evolving area of the law. Future court decisions will likely further address and clarify what terms are and are not permissible. The inclusion of a severability provision may very well serve to save the enforceability of a mandatory arbitration provision by allowing a court to strike any offending provision rather than invalidating the entire agreement.

If the company is large enough to be a class action target, include an express class action waiver. Do not leave the availability of class relief in arbitration open to question.

Consider including a “delegation clause,” whereby an arbitrator, and not a court, decides whether the arbitration agreement covers a particular dispute or is otherwise enforceable. The clause enables quicker exit from the court system, as an arbitrator will decide the issues that a plaintiff is likely to raise if he or she wants to attack the parties’ agreement. The one exception to delegation should be disputes over the enforceability of a class action waiver. An arbitrator’s erroneous decision on this issue would be nearly impervious to appeal. Thus, the agreement should make clear that this particular issue is for a court to resolve.

Get expert legal advice. The law in this area can be complicated and continues to evolve, both in the legislative or judicial arenas. Some employers are subject to special rules that do not apply to others (for example, certain Department of Defense contractors).

The use of mandatory arbitration provisions that include class action waivers has become an increasingly popular way for employers to combat the rising cost and risk associated with court litigation. With careful drafting, such provisions are likely to be an enforceable and reliable means of ensuring the quick and cost-effective resolution of employment-related disputes.

Michael Mankes is the Boston office managing shareholder at Littler Mendelson. He counsels management in all matters of employment and labor law. He can be contacted at mmankes@littler.com. Sarah E. Green is an associate at Littler, where she advises and represents employers in a broad range of employment matters arising under state and federal laws. She can be contacted sgreen@littler.com.

 

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