The Arbitration Fairness Act: performing surgery with a hatchet instead of a scalpel?

• Author: Hamid, Jyotin

Arbitration of employment disputes has become an increasingly controversial issue in recent years. Many plaintiff-side employment lawyers and other commentators have been intensely critical of predispute arbitration agreements. This groundswell of criticism has crested with the introduction in Congress of the Arbitration Fairness Act ("AFA"). (1)

The AFA was proposed to combat perceived injustice arising from "mandatory" employment arbitration, meaning arbitration pursuant to a pre-dispute agreement. (2) The AFA's supporters assert that such agreements too frequently are entered into unwillingly or unwittingly on the part of employees; moreover, having waived their right to a judicial forum, employees suffer further injustice due to features of the arbitration process that tilt the playing field against them. (3) The AFA seeks to remedy these perceived problems by providing that "no [pre-dispute] arbitration agreement shall be valid or enforceable if it requires arbitration of an employment, consumer, franchise, or civil rights dispute." (4)

The assurance of fair procedures for the resolution of employment disputes is of paramount importance, and, as a prevalent means of dispute resolution, arbitration warrants close examination to ensure that justice is being served. Such examination reveals that, while employment arbitration is controversial, the issues involved are complex. Criticisms of arbitration that may have force with respect to certain categories of employees or employment claims, may have less or no application as to other categories. But, rather than address this complexity, the AFA would prohibit pre-dispute employment arbitration agreements for all employees and any employment claims. (5)

This article suggests a more nuanced approach. Part I offers a brief history of how employment arbitration has been regarded by courts in New York and the U.S. Supreme Court. Part II considers the AFA by examining the perceived advantages and disadvantages of arbitration and, in that context, the shortcomings of the AFA. It proposes that the AFA be more narrowly targeted to address more directly the perceived inequities it is intended to correct.

1. A BRIEF HISTORY OF EMPLOYMENT ARBITRATION IN THE COURTS

   Over the past few decades, New York and federal law regarding employment arbitration has undergone a dramatic change, from suspicion and hostility, to affirmation and support. The roots of this change lie in the Federal Arbitration Act ("FAA"), (6) first enacted in 1925. (7) The purpose of the FAA was "to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." (8) Under the FAA, an agreement to arbitrate is "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (9) The FAA preempts state law on the subject of the enforceability of arbitration clauses, and is controlling even though the dispute itself may arise under state law. (10) Thus, the New York Court of Appeals has recognized that "regardless of what our own State's policies or case law might dictate in other circumstances, we are bound by the policies embodied in the Federal statute and the accompanying case law." (11) The U.S. Supreme Court has taken the lead in shaping law in this area, and the New York Court of Appeals has followed.

   The U.S. Supreme Court's early resistance to employment arbitration was reflected in Alexander v. Gardner-Denver Co., (12) in which the Court allowed an employee to pursue an employment discrimination claim in court despite the fact that a related arbitration had already been conducted. (13) When his employment was terminated, Alexander filed a grievance under a collective bargaining agreement, according to which disputes went to arbitration if they were not resolved in negotiations. (14) After the arbitrator ruled that he was discharged for just cause, Alexander brought a Title VII discrimination claim in federal court. (15) The employer was granted summary judgment by the district court on the basis that Alexander was bound by the prior arbitral decision. (16) The Tenth Circuit affirmed. (17)

   The U.S. Supreme Court reversed, holding that Alexander's statutory right to trial in federal court was not foreclosed by the prior submission of a claim to arbitration under the collective bargaining agreement. (18) Congress had placed "ultimate authority" to secure compliance with Title VII in federal courts, and the private right of action was "an essential means of obtaining judicial enforcement." (19) The Court distinguished between the contractual rights under the collective bargaining agreement and the statutory rights under Title VII, and emphasized that Alexander had the right to vindicate both sets of rights. (20) "[I]n instituting an action under Title VII, the employee is not seeking review of the arbitrator's decision. Rather, he is asserting a statutory right independent of the arbitration process." (21)

   Alexander reflected and validated a resistance to employment arbitration, especially for discrimination claims, found in courts across the country at that time. (22) In New York, the Court of Appeals' general suspicion of arbitration was expressed in Wertheim & Co. v. Halpert. (23) Wertheim held that an arbitration clause was not enforceable in an employment discrimination dispute because the substantive rights at stake were too important to be trusted to arbitration. (24)

   In Wertheim, Halpert had filed discrimination complaints with the New York City Commission on Human Rights and the Equal Employment Opportunity Commission. (25) The employer moved to compel arbitration based on the securities registration application form executed by both parties at the beginning of the employment. (26) Despite the presence of a clause in the form providing for arbitration of any controversy arising out of the employment, the Court of Appeals agreed with the lower court that arbitration should not be compelled. (27)

   Although arbitration is a favored method of dispute resolution, arbitration agreements are unenforceable where substantive rights, embodied by statute, express a strong public policy which must be judicially enforced. This is especially true in the area of discrimination where particular remedies are afforded by both state and federal statutes. Allowing the petitioner to pursue its claim in arbitration at this time risks chilling the exercise of the statutory right and poses the possibility of inconsistent verdicts in the two proceedings. (28)

   Wertheim echoed an earlier decision, in the antitrust context, where the Court of Appeals opined that "[t]he enforcement of our State's antitrust policy cannot be left to commercial arbitration, which ... is not a fit instrument for the determination of antitrust controversies which are of such extreme importance to all of the people of this State." (29)

   Lower courts in New York followed Wertheim by refusing to compel arbitration for discrimination claims. (30) That the parties previously may have agreed to arbitrate the dispute was "not relevant, for 'the broadest of arbitration agreements cannot oust our courts from their role in the enforcement of major State policies, especially those embodied in statutory form.'" (31)

   By 1991, there was a major shift in the case law. In the landmark case of Gilmer v. Interstate/Johnson Lane Corp., (32) the U.S. Supreme Court again addressed the distinction between a claim based on a contractual arbitration provision and a statutory claim. (33) However, in an apparent departure from the attitude expressed in Gardner-Denver, the Court held that a statutory discrimination claim can be subject to mandatory arbitration under the FAA, and expressly rejected the circuit court's resistance to arbitration. (34)

   Gilmer had agreed to arbitration as part of the securities registration application form required by his employer. (35) After his employment was terminated, he brought suit in federal court under the Age Discrimination in Employment Act ("ADEA"), and the employer moved to compel arbitration. (36) The Court observed that statutory claims could be the subject of an arbitration agreement enforceable under the FAA, noting that it had held enforceable arbitration agreements arising under other statutes similarly designed to advance important public policies, such as the Sherman Act, the Securities Exchange Act of 1934, the RICO Act, and the Securities Act of 1933. (37) Thus, Gilmer had the burden of showing that, in enacting the ADEA, Congress intended to depart from the norm and preclude a waiver of judicial forum for ADEA claims. (38) Gilmer did not persuade the Court that there was a meaningful difference between the arbitration of claims under the ADEA and arbitration of disputes under these other statutes. (39) Because Gilmer's argument that compulsory arbitration of ADEA claims was inconsistent with the statute failed, the arbitration clause was enforceable. (40)

   Foreshadowing arguments being advanced today in support of the AFA, Gilmer also argued that arbitration procedures were inadequate to resolve employment disputes due to bias, limited discovery, lack of effective appellate review, lack of public knowledge of decisions, and unequal bargaining power of the parties. (41) The Court rejected each of these arguments in turn. (42) Finally, the Court distinguished Gardner-Denver, reiterating that the employee's contractual rights under the collective bargaining agreement in Gardner-Denver, which were the subject of the arbitration, were distinct from the employee's statutory Title VII rights, which were not covered by the collective bargaining agreement's arbitration clause, and which the employee sought to litigate in court. (43) In Gilmer, by contrast, there was an agreement to arbitrate...