Recognizing the Need for Excluding Employment Contracts: A Proposal to Amend the Federal Arbitration Act.

• Date: 22 March 2023
• Author: Proudfoot, Briana N.

"Courts have little leeway to avoid enforcement of an arbitration clause. Indeed, the United States Supreme Court has spilt much ink reinforcing the power and scope of the Federal Arbitration Act ..., the legislation requiring that courts compel arbitration of claims subject to an arbitration clause." (1)

I. INTRODUCTION

In June of 1980, the National Foundation for Cancer Research (NFCR) entered into a customer agreement with A.G. Edwards & Sons, Inc. (Edwards) which included a provision stating that arbitration would be the only method of dispute resolution. (2) Implementing this arbitration only policy, followed the notion of alternative dispute resolution, which avoids the expenses, uncertainty, and delays associated with traditional litigation. (3) After years of Edwards handling NFCR's account, NFCR sued Edwards alleging violations of federal securities laws arising from Edwards' questionable trading activity within NFCR's account. (4)

After almost two years of extensive discovery, settlement discussions, and pretrial conferences, Edwards moved to compel arbitration of the case, in response to which NFCR argued Edwards had waived that right by participating in abundant pretrial litigation. (5) When examining whether Edwards waived its right to arbitration, the D.C. Circuit required NFCR to show only that Edwards acted inconsistently with the agreement to arbitrate, not that it would be prejudicial to move the case to arbitration. (6) The court, reviewing only Edwards' actions, denied Edwards' motion in light of its extended silence and delay in moving to compel arbitration. (7)

Contemporaneously, the Second Circuit grappled with the same question of whether or not a party waived their right to arbitration after nearly two years in litigation; only this time, the court required a showing of prejudice as a necessary element to prove waiver. (8) The court held that the appellees did not show any proof of prejudice resulting from the two-year delay, and found that the moving party had not waived their right to arbitration. (9) Many courts, including the Second Circuit, have issued similar decisions following the longstanding federal policy favoring arbitration, encouraging courts not to take waiver of an arbitration agreement lightly, no matter how the dispute arises. (10)

In 1925, with arbitration becoming a popular means of alternative dispute resolution, Congress enacted the Federal Arbitration Act (FAA) to alleviate tension between arbitration and judicial resolution by mandating that courts enforce arbitration agreements and their defenses as they would any other contract. (11) In the years since, courts have followed the FAA in their assessment of waiver of arbitration, yet they disagree on whether the language of the FAA must include a showing of prejudice as a necessary element to prove waiver of arbitration. (12) This circuit split revealed a pressing issue: The language of the FAA does not, itself, possess a prejudice requirement; yet, some courts have insisted upon applying an arbitration-specific procedural rule requiring a showing of prejudice, arguing that the FAA's policy favoring arbitration necessitates it. (13)

In Morgan v. Sundance, (14) the Supreme Court granted certiorari to address this circuit split by examining the prejudice requirement and reexamined whether federal courts could create "arbitration-specific" rules concerning waiver; the Court's holding will have a significant impact on arbitration laws moving forward. (15) The ruling of this case is particularly important within employment contracts-- including discrimination cases and until recently, sexual assault claims--where large corporate employers continue to use mandatory arbitration agreements to remove their employees ability to utilize the court systems, forcing them into arbitration. (16) The impact of corporations using mandatory arbitration agreements means the employee faces an arbitrator with impartial ties to the corporation, an inability to bring systemic issues embedded within the corporation to light because of the confidentiality of arbitration, and a lower awarded fee should the employee end up winning. (17)

This Note first explores the history arbitration and the inconsistencies of courts interpreting the enforcement of arbitration agreements. (18) Part II then discusses the Morgan v. Sundance decision that removes the prejudice requirement (19) Part III then opines that avoiding arbitration may be difficult because of FAA standards, and because the language of the FAA may be unfair in cases relating to employer-employee contract agreements. (20) This Note concludes by arguing that the FAA should be revised so that employee cases are exempt from mandatory arbitration agreements whose enforcement would vastly disadvantage the employee. (21)

II. HISTORY

A. Understanding the Need for Congress to Have Pushed for the Passing of the Federal Arbitration Act

Arbitration as a method to resolve conflict was in practice prior to the establishment of the judicial system. (22) Historically, even before the American Revolution, many American merchants and tradesmen followed English dispute resolution methods. (23) Countries with close connections to Europe experienced a boom in arbitration popularity due to their increased business relationships. (24) Despite historical showings of human preference for arbitration, the growth of arbitration remained in tension with courts. (25) Courts initially disfavored arbitration because they believed arbitration agreements were subject to the common law revocability doctrine. (26) This doctrine allowed for termination of the arbitrator at any time, thus resulting in a party's inability to enforce an arbitration agreement. (27)

As the United States began to industrialize and the use of commercial arbitration agreements increased, courts that enforced the revocability doctrine had the perception that the existence of genuine mutual assent between parties was "suspect." (28) Courts were further hesitant because of the belief that agreeing to an arbitration clause as a dispute mechanism could be a trap for unwary and uninformed parties. (29) What began as a seemingly mutual agreement between two contracting parties who sought the efficiency and timesaving benefits of arbitration, courts now view arbitration clauses as unenforceable and against public policy. (30)

In 1925, with courts hesitant to enforce arbitration agreements in an effort to guard against the potential dilution of their jurisdiction, Congress enacted the FAA to provide the processes and procedures necessary to execute, create, and enforce arbitration agreements. (31) By passing the FAA, Congress required courts to enforce and recognize arbitration agreements as they would any other contractual agreement. (32) Enactment of the FAA demonstrated that Congress valued arbitration, given its use of proficient arbitrators who decide the factual issues of disputes more expeditiously than litigation. (33) Essentially, Congress sought to overrule courts' refusal to enforce arbitration agreements via Section 2 of the FAA, thus abolishing antiarbitration efforts and making arbitration agreements specifically enforceable and subject to generally applicable contract principles. (34)

B. Arbitration Procedure Today and its Implication on Employee Contracts

Today, mandatory arbitration agreements are a common issue among corporate employment contracts, binding any employee seeking to bring a claim to refer the dispute to a "neutral" arbitrator rather than a judge or jury. (35) The arbitrator, typically a legal professional, will hold private meetings, read documentary evidence, hear testimony, and collect further information. (36) After examining and reviewing the necessary evidence, the arbitrator will issue an opinion on liability and damages known as an arbitral award. (37) Challenging or appealing an award is rarely successful, and there are very few ways for a party to challenge it, usually varying by state law. (38) The arbitration process is also commonly held in a private setting and not open to third parties, thus keeping common disputes like discrimination and wage theft hidden from the public eye. (39) While some are quick to argue that an employee is entitled to retain a lawyer for arbitration, the effects of obtaining one commonly fall flat given that the employer will also hire their own counsel, which often offsets any impact the employee's attorney may have had. (40)

The restrictions that arbitration places on employees have been largely contested and efforts have been taken to reduce mandatory arbitration agreements within certain employment contracts. (41) For example, Congress has recognized that it is necessary to limit the scope of employment arbitration agreements to protect employees from being subject to mandatory arbitration following sexual harassment claims. (42) The tension of arbitration as a method for corporate employers to stifle sexual assault claims has now bled into similar arguments urging Congress to recognize claims--such as wage theft and discrimination--as invalidating forced arbitration agreements in employment contracts. (43)

C. The Court's Inconsistent Assessment and Dissection of the FAA Following a Dispute

Given that Section 2 of the FAA holds arbitration agreements to be valid, irrevocable, and enforceable--subject to the same principles of law and equity required to revoke any other contract--post-FAA courts started to assess when a party actually waived their right to arbitration rather than revoking arbitration proceedings as they had done for so long. (44) When a party brought a lawsuit where the contractual agreement included an arbitration provision, courts began routinely granting the other party's request to submit the dispute to arbitration even after courtroom proceedings were well underway. (45) Courts justified allowing proceedings to move to arbitration based on the widely held...