Chapter 2

• Jurisdiction: United States

Chapter 2

Background and ADR Legal Development

§ 2.01 Introduction to Employment Related Federal Statutes and ADR

There are relatively few federal statutes that directly mention alternate dispute resolution, mediation, or arbitration. The key federal statute governing employment related arbitration for employees who are not union represented is the Federal Arbitration Act (FAA).¹ Chapter 1 of the Act relates to employment.² Chapters 2 and 3 of the FAA are concerned with the recognition and enforcement of foreign arbitral awards and international commercial arbitration, respectively, and are therefore outside the scope of this text. There are several other employment related federal statutes which, while they contain no references or only brief ones to alternate dispute resolution, have been the focus of considerable legal activity concerning their interaction with the Federal Arbitration Act or other federal laws enabling arbitration. These statutes will be discussed in this chapter.

While the focus of this chapter is necessarily statutory, cases will be cited as necessary to illustrate the history of a statute or the development of alternate dispute resolution law. Case citations in this chapter are not intended to provide a complete history and history is explored only to the extent necessary for a basic understanding of the current law surrounding alternate dispute resolution. State statutes are explored in the following chapter.

It is important to remember that alternate dispute resolution statutes are largely enabling statutes. Generally, although not in all cases,³ the structure and nature of the alternate dispute resolution process is left to the parties, with the statutory provisions allowing the parties wide latitude in shaping the particulars of alternate dispute resolution systems. While in collective bargaining, employers and unions create alternate dispute resolution procedures that reflect substantial power on each party’s side and that result from the give and take of bargaining, alternate dispute resolution procedures for employees who are not union represented are written unilaterally by employers. Nothing in federal statutory law explicitly restrains these employers from building favorable bias into the system they create. However, the Ninth Circuit, applying California law related to unconscionable contracts, has struck down arbitration clauses that “tilt the playing field” when the parties have imbalanced bargaining power.⁴ Arbitration may differ greatly from the process followed in federal court litigation. Depositions and interrogatories are unusual and there is rarely a specified period for discovery.⁵ Neutrals usually have no power to compel or to direct pre-hearing discovery without the consent of the parties.⁶

As the FAA and most other federal statutes merely enable alternate dispute resolution, protection of employee rights and fundamental fairness as a condition of enforcement has been left to the courts. Questions concerning “knowing and voluntary” agreements to arbitrate, remedies, and the right of a complaining employee who prevails to recover attorney’s fees are the thrust of active legal development.⁷

Although the statutes outlined in this chapter generally make alternate dispute resolution a favored policy but not a compelled one, at least two exceptions exist. Employers in the private sector engaged in the railway and airline transportation businesses are covered by a detailed comprehensive scheme of arbitration spelled out in the Railway Labor Act (RLA).⁸ Employers in most private sector businesses that are subject to the National Labor Relations Act must at least notify the Federal Mediation and Conciliation Service of upcoming labor contract expirations.⁹

Nothing in federal statutes enabling arbitration prevents employers from excluding statutory claims in general from the scope of an agreement to arbitrate.¹⁰ However, the Ninth Circuit, applying California law, found an employer’s pre-dispute employment related mandatory arbitration provision unconscionable because, among other things, the employer excluded from arbitration a number of items selected to favor its own interests.¹¹ Under federal law, however, it would seem that employers could selectively exclude certain statutory rights from arbitration while including all or selected others. The absence of statutory language again leaves employers with considerable room to shape alternate dispute resolution procedures, at least within certain fundamental fairness limits.

We will now turn to an examination of the most pertinent provisions of the FAA and of other employment related federal statutes that interact with the FAA. In this chapter, only statutes impacting the private sector are considered.

§ 2.02 The Federal Arbitration Act

The key federal statute related to arbitration is the Federal or U.S. Arbitration Act.¹² Although chapter one of the Act is set out in its entirety in an appendix to this book,¹³ in this section the critical provisions of the Act will be reviewed with attention to the legal problems they create. The Act is relatively old, having been first enacted in 1925, and amended in 1954. Two sections were added in 1988, and one section was amended in 1990.¹⁴ A brief review of the history of the Act and the court cases interpreting it in relation to commercial and securities issues is necessary to an understanding of how it came to be applied in the employment context.

[1]—Origins and History

More than a half century ago, in 1920, an American Bar Association committee acted on the Association’s instruction to consider and report on the “further extension of the principle of commercial arbitration.”¹⁵ In 1925, a bill was drafted by an American Bar Association Committee and considered by Congress, which, in the same year, was enacted by Congress as the United States Arbitration Act.¹⁶ The purpose of the Act was to reverse judicial hostility toward arbitration agreements,¹⁷—a hostility the United States courts had borrowed from English common law.¹⁸ Until 1991, the bulk of the statutory rights pursued under arbitration covered by the FAA were related to commercial rights under the Sherman Antitrust Act,¹⁹ the Securities Act of 1933,²⁰ the Securities Exchange Act of 1934,²¹ and the Racketeer Influenced and Corrupt Organizations Act (RICO).²²

Notwithstanding the FAA, for many years after its passage the courts continued to express grave distrust of alternate dispute resolution through arbitration. In a case under the Securities Act of 1933 which was heard in 1953, the Supreme Court holding invalid an agreement for arbitration of issues under the Act, stated its concerns about arbitration, to include that arbitrators would be required to make subjective findings without judicial instruction on the law, awards might not be sufficiently explained, a complete record of the proceedings might be lacking, the arbitrator’s conception of the legal meaning of statutory requirements such as burden of proof, reasonable care, or material fact could not be examined, and judicial review of awards was limited.²³ In 1989, the Court reversed this position, holding that the old judicial hostility to arbitration had been steadily eroded and that to the extent the Court’s prior decision rested on suspicion of arbitration it was “out of step” with the more recent judicial endorsement of arbitration as an alternate dispute resolution method.²⁴

Although the Supreme Court had found federal policy to favor arbitration of labor disputes with management as early as 1957, this policy was pursuant to the National Labor Relations Act,²⁵ not under the FAA, and was concerned with rights under collective bargaining agreements and not statutory rights.²⁶ In the 1960 Steelworkers trilogy, the Court advanced the policy by declaring that an order to arbitrate would not be denied “unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”²⁷ The Court held that “so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.”²⁸ Finally, the Court found that arbitration clauses were to be given broad scope and that the courts must refrain from deciding arbitral questions.²⁹

By 1974, the Supreme Court made clear that even in the context of unionized labor relations, when statutory rights were involved, the Court still took a dubious view of arbitration.³⁰ In permitting an employee with a Title VII race-based civil rights claim to pursue both final and binding arbitration under a collective bargaining agreement containing language barring race discrimination and pursuit of litigation, the Court based its decision on two grounds, first that the same facts gave rise to independent private contractual rights and separate statutory rights, and second that arbitrators could not be trusted with statutory civil rights. The Court found that Title VII vested courts with plenary power to enforce statutory rights and that the purpose and procedures of Title VII indicated that Congress intended federal courts to exercise final responsibility for enforcement of Title VII, while deferral to arbitration would be inconsistent with that goal. The Court went on to specific criticism of arbitration, stating:

“Respondent’s deferral rule is necessarily premised on the assumption that arbitral processes are commensurate with judicial processes and that Congress impliedly intended federal courts to defer to arbitration decisions on Title VII issues. We deem this supposition unlikely.

“Arbitral procedures, while well suited to the resolution of contractual disputes, make arbitration a comparatively inappropriate forum for the final resolution of rights created by Title VII. This conclusion rests first on the special role of the arbitrator, whose task is to

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