Is arbitration right for your company?

• Author: Alvarez, Gregory T.
• Position: Arbitration

The dramatic rise in employee lawsuits, the costs associated with defending these lawsuits and the potential for large judgments have employers looking for ways to resolve employment disputes without resorting to the court system. One clear result: Employers are turning to compulsory arbitration programs as an alternative to litigation.

This is hardly a new phenomenon, but it has been accelerating. Recognition of arbitration as a means to resolve disputes dates back to 1925, when the United States Congress passed the Federal Arbitration Act (FAA) to provide a mechanism for individuals and entities to sue in federal court to enforce arbitration agreements.

Through arbitration agreements, parties present their case to a neutral third party empowered to render a decision, instead of to a judge, jury or administrative agency. The arbitrator, who must be independent and impartial, renders a decision after both sides present evidence and legal arguments at an arbitration hearing. Most often, parties agree that the arbitrator's decision is final and binding on the parties. The arbitrator's decision cannot be overturned by the courts, except in rare circumstances.

Recent Supreme Court Decisions On Arbitration

The U.S. Supreme Court has issued two recent decisions pertaining to arbitration of employment disputes that employers should consider before adopting compulsory arbitration agreements.

On March 21, 2001, the top court rendered an opinion in Circuit City v. Adams that greatly enhanced an employer's ability to enforce compulsory arbitration agreements. Circuit City, the electronics firm, required an employee to sign an employment application that contained an arbitration clause. Following his termination, the employee sued Circuit City in state court for discrimination under the state statutes.

In response, Circuit City moved to compel arbitration, relying on the FAA. The Court held that the FAA applied, and that the arbitration agreement was valid and enforceable. The Court's decision made clear that the FAA applied to the vast majority of employees and was available to employers seeking to enforce compulsory arbitration agreements.

While Circuit City may have given employers a greater chance at compelling arbitration, on Jan. 15, 2002, the Supreme Court, in EEOC v. Waffle House Inc., diminished the enforceability of arbitration agreements. The Court upheld the right of the Equal Employment Opportunity Commission (EEOC), the federal agency...