Chapter 9

JurisdictionUnited States

Chapter 9

Entering ADR, Waiver, and “At Will” Employment

§ 9.01 Entering ADR

This section is concerned with private sector employers and employees only and excludes court annexed alternate dispute resolution. In this context, alternate dispute resolution is entirely voluntary and rests on the consent of the parties, although the parties may consent in advance to alternate dispute resolution or may do so only after a controversy has arisen between them.

[1]—Agreements to Enter ADR and to Determine Its Scope

There are two basic forms of agreements to enter alternate dispute resolution: pre-dispute agreements, which cover future controversies that may arise within a defined scope, or agreements to enter alternate dispute resolution, which are created after a dispute has arisen and its nature is known to the parties. Reliance upon pre-dispute provisions, particularly when the employer uses its power to effectively require employees to agree to the clauses, is far more controversial than use of its post-dispute cousin.

May an arbitration agreement require the arbitration of statutory rights? The answer to this question depends on which statutory rights are covered and whether the result is the substitution of an arbitral forum for a judicial one without substantial prejudice to the employee’s right to a remedy and Due Process to vindicate those statutory rights. The Supreme Court addressed this question in the 2012 CompuCredit case,1 holding that when a statute is silent on whether claims under the Act can proceed in an arbitral forum, the FAA requires the arbitration agreement to be enforced according to its terms.

CompuCredit arose under the Credit Repair Organizations Act (CROA). The controversy in the case centered on the CROA provision stating: “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act. . . . Any waiver by any consumer of any protection provided by or any right of the consumer under this subchapter— (1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person.”2 The majority opinion held in essence that this provision did not bar the substitution of an arbitral forum for a judicial one.

The CompuCredit Court stated: “If the mere formulation of the cause of action in this standard fashion [access to judicial remedy] were sufficient to establish the ‘contrary congressional command’ overriding the FAA . . . valid arbitration agreements covering federal causes of action would be rare indeed. But that is not the law.”3 The Court added: “[W]e have repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of civil liability in court.”4

CROA, however, contains an explicit non-waiver provision. The Court found that because a cause-of-action provision mentioning judicial enforcement does not create a right to initial judicial enforcement, the waiver of initial judicial enforcement is not the waiver of a “right of the consumer.” The Court concluded: “It takes a considerable stretch to regard the nonwaiver provision as a ‘congressional command’ that the FAA shall not apply.”5 Mention of the right to sue was construed by the Court as simply notice to consumers of a right to sue, but not as precluding arbitration.6 Finally, the Court noted that at the time of the passage of CROA, arbitration provisions were common and Congress was aware of them, and could have included in the statute an explicit prohibition of arbitration, as it did in some other statutes.7

What CompuCredit teaches is that an arbitration agreement substituting an arbitral forum for a judicial one in statutory rights cases will be sustained unless the statute at issue clearly forbids such a substitution. This, of course, presumes that the substituted arbitral forum provides adequate due process and is not otherwise substantively or procedurally unconscionable. CompuCredit is an additional example of the Supreme Court’s disposition toward sustaining arbitration whenever possible.

What are the disadvantages of entering into compulsory alternate dispute resolution clauses? For many employers, the use of alternate dispute resolution represents a strategy to reduce the cost of their legal disputes, with 90 percent of corporations responding to a survey reporting that they view mediation as a cost-saving device and 54 percent stating that cost pressures affected their decision to use alternate dispute resolution.8 However, compulsory alternate dispute resolution, in giving employees easy and inexpensive access to its processes, may result in more process filings and thereby require the employer to spend time and money on claims that employees might not have considered important enough to go to court over.9 Moreover, if an alternate dispute resolution process is to be creditable to employees, the employer will likely have no way to screen out frivolous claims. Employees may be disadvantaged by the loss of trial by jury or limitations on damage recoveries.10 They may be faced with filing fees to a mediation or arbitration agency.11 Either side may be negatively impacted by limited appeal rights from binding arbitration awards.12

What are the advantages of entering into pre-dispute alternate dispute resolution agreements? For employers, it may be argued that substituting alternate dispute resolution for litigation systematically reduces their legal liability, even to the point of deregulating themselves from statutory requirements.13 Agreements may incorporate the mediation or arbitration rules of an organization such as the National Association of Securities Dealers, rules which have been developed by employers or their industries and which naturally do not favor employees more than necessary to obtain legal validation. These rules may limit whom an employee may select as a neutral. Alternate dispute resolution may insulate the employer from pro-employee civil juries. It will also tend to limit publicity.

For employees, alternate dispute resolution will usually, but not always, result in a more rapid decision.14 If the issues involved are sensitive, such as in sexual harassment matters, employees will gain a more private forum. The process will usually be less formal and the standard rules of evidence will not usually be applied.

The agreement to utilize alternate dispute resolution in the private sector will also define the scope of matters that are covered. For example, a pre-dispute alternate dispute resolution clause may make use of the process mandatory for “any dispute, claim, or controversy . . . arising out of the employment or termination of employment. . . .”15 There is no requirement of law that coverage be broad.16In practical terms, employers will choose the parameters of coverage since few employees will be able to resist when an employer requires an alternate dispute resolution agreement as a condition of employment or continued employment.

When an employer first introduces a mandatory pre-dispute arbitration clause or if the employer is not diligent in having all employees sign an arbitration provision, some employees may be bound to arbitrate while other employees are not. The Third Circuit found that when a mixed group of arbitration provision signatories and non-signatories brought suit, the court would stay the litigation as to those subject to arbitration but not as to the non-signatories. The court found that for a party to be subject to a mandatory stay under § 3 of the FAA, the party had to have committed itself to arbitrate one or more of the issues in the suit. Otherwise, the court reasoned, non-signatories’ litigation rights would be burdened by requiring them to arbitrate what they had not agreed to arbitrate. For signatories, the court found that their bargain called for arbitration and arbitration should be enforced.17

Other circuits have taken similar positions.18 However, the Fifth Circuit has taken a different approach. While acknowledging that § 3 of the FAA regarding stays applies only to parties to an arbitration agreement, the Third Circuit holds that the interests of the non-signatory are not the ultimate issue, but cases will turn on whether going ahead with the litigation will destroy the right of parties to the arbitration to have a meaningful arbitration. For the Fifth Circuit to refer a non-signatory to arbitration several factors are to be considered: the arbitrated and litigated disputes must involve the same operative facts; the claims asserted in the arbitration and litigation must be “inherently inseparable;” and the litigation must have a “critical impact” on the arbitration.19

When mandatory pre-dispute arbitration is imposed in the work place, an employer can solve the signatory and non-signatory issue by insuring that all employees have signed the arbitration agreement. New employees may be required to sign upon application for employment or before commencing work while continuing employees may be required to sign at the initiation of the mandatory arbitration agreement as a condition of continued employment.

Can a Massachusetts employee outside a collective bargaining unit be bound to arbitrate without special notice of arbitration and when the arbitration provision is incorporated by reference into another agreement? In a commercial case, the First Circuit held that under Massachusetts law, an employee could be bound by an agreement to arbitrate when the arbitration clause was incorporated by reference as a matter of state law.20 The court held: “Massachusetts law, which governs this dispute, does not impose any such special notice requirement upon these commercial contractual provisions. Such a requirement, in any event, would be preempted by the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq., which requires courts to place such arbitral agreements upon the same footing as other contracts.”21

What if an agreement to arbitrate has expired? May a...

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