Arbitration Agreements Stir Up a Growing Legal Battle

Employer efforts to keep workplace disputes out of the courts have spawned an unintended side-effect: a backlash in lawsuits challenging the fairness of requiring workers to sign arbitration agreements as a condition of employment.

The California Supreme Court had almost a dozen such cases on its docket last year, and lower courts are routinely asked to rule on the validity of individual arbitration contracts, based on rules established by the state’s high court.

Federal appeals courts are split over whether a 1991 U.S. civil rights law exempts discrimination complaints from employer-imposed arbitration agreements.

And, although it was hailed as a victory for employers, a U.S. Supreme Court ruling last month is expected to encourage more legal skirmishing over the controversial workplace practice.

“Arbitration is the most litigated appellate issue in the past few years, and that’s not going to stop,” said Cliff Palefsky, co-founder of the National Employment Lawyers Assn. “The goal of docket-clearing will never be realized because if people don’t agree with the [arbitration] forum, they are going to use every device to avoid it.”

The U.S. Supreme Court’s decision on a narrow issue did nothing to address the major questions about arbitration brewing in lower courts, the most significant of which is whether someone may be forced to choose between a job and the constitutional guarantee of a jury trial.

“The courts have simply refused to deal with the constitutional issues,” said Palefsky, a San Francisco lawyer who has assisted in several key arbitration cases. “Once they deal with the constitutionality, it should end the debate, simply because the established standard for the waiver of constitutional rights is knowing and voluntary, and there’s no way to pretend that ‘If you don’t accept this, you’re fired’ is voluntary.”

Because the latest U.S. Supreme Court case avoided that issue, the ruling was helpful to employers in the sense that it preserved the status quo, said David Kadue, a partner in Seyfarth Shaw law firm’s Los Angeles office.

“[The case involving] Circuit City isn’t so much a victory for employers. But it did avoid a big defeat,” he said.

Several management lawyers said they hope the ruling means the court will be inclined to eventually agree with employers that mandatory arbitration agreements may be enforced in civil rights disputes.

Two national arbitration trade organizations have taken the opposite position and come out in favor of making workplace arbitration agreements voluntary. And the civil rights community sees the movement to keep workplace discrimination complaints out of court as an increasingly important battleground.

“It has turned into a very hot political issue, not only at the state level but in Washington,” said Tom Makris, a Sacramento-based management lawyer and legislative affairs advisor for the Northern California Human Resources Assn.

More than 8% of American workers are bound by arbitration agreements, a trend that has grown because employers believe private justice is more expedient and less costly than trial courts.

But recently the California Supreme Court and other courts have required arbitration agreements to afford workers the same rights they would have in court, striking down, for example, caps on monetary awards.

“It’s becoming clear that it’s not necessarily a good thing from the employers’ perspective to have these mandatory arbitration agreements,” said Robert Gregory, a senior attorney with the U.S. Equal Employment Opportunity Commission in Washington. “And a lot of employers are having second thoughts about whether they want to have a mandatory arbitration policy.”

Both employers and employees have trouble following the patchwork of laws covering workplace arbitration agreements, and the law is still subject to change.

As long as the law is shifting, attorney Makris said he is advising employers who wish to impose arbitration contracts to include a “preamble, which states, for example, ‘To the extent permitted by law, the parties agree to arbitrate disputes.’ ”

If possible, a worker should consult a lawyer to determine what type of rights he may have, said Brad Seligman, a lawyer who heads the Impact Fund and Discrimination Research Center in Berkeley.

“It’s also worth exploring whether you can negotiate,” Seligman said. “There’s . . . no black-and-white rule.”

Arbitration Act’s Scope

In the case decided by the Supreme Court last month, a salesman in a Santa Rosa Circuit City store who is gay sued in state court under California civil rights laws, alleging he was harassed repeatedly by co-workers and a manager. Circuit City went to federal court to have the suit thrown out because he had signed an arbitration agreement as a condition of employment.

The federal district court agreed with Circuit City that the federal Arbitration Act allowed the enforcement of employment contracts. But the U.S. 9th Circuit Court of Appeals reversed that court decision, ruling the 1925 act did not apply.

The U.S. Supreme Court reversed the case again, interpreting a clause in the law to mean that arbitration contracts may be enforced for all but transportation workers.

Lawyers on both sides of the debate agree that the decision failed to address other pressing questions, including one that remains alive for consideration by the original state court in the Circuit City case--whether disputes under civil rights laws can be forced into arbitration.

New Case for Supreme Court

Having workers sign arbitration agreements is no guarantee that a company won’t be sued. The U.S. Equal Employment Opportunities Commission takes companies to court to enforce antidiscrimination laws even on behalf of workers who have signed arbitration agreements.

“We are not constrained by private arbitration agreements between the individual and the employer. We can go forward in court,” said the EEOC’s Gregory. “The Supreme Court has never decided the question of whether the fact that an individual has entered into an arbitration agreement in any way affects a government agency bringing its own action.”

Last week, the Supreme Court agreed to review EEOC vs. Waffle House, a case that could resolve conflicts between two appellate courts about whether the EEOC can seek damages on behalf of workers who have signed arbitration agreements.

In another case, the EEOC took up the cause of Donald Lagatree, a legal secretary from Signal Hill who has been fired twice for refusing to sign arbitration agreements.

The first time was in 1997 when the Long Beach law firm where he worked introduced arbitration agreements. Lagatree was fired 30 days after he refused to sign because he believed it was not in his interest.

“It just seemed very heavy-handed,” he said. “And I knew the law firm I was working for had defended brokerage houses in arbitration cases so I knew they were experts.”

What’s more, the agreement would have required the loser to pay all costs, he said. “That could be thousands and thousands.”

A few months later, Lagatree got a job with Luce, Forward, Hamilton & Scripps in its Los Angeles office. The law firm asked him to sign its standard arbitration agreement. He refused and was fired on his third day.

Lagatree sued both firms in state court and lost.

Then the EEOC stepped in and filed a federal lawsuit against the Luce firm, alleging that it violated federal law by trying to impose an agreement that would have required Lagatree to arbitrate disputes under certain antidiscrimination laws.

A federal judge in Los Angeles denied the EEOC’s request for damages for Lagatree because he had lost a similar bid in state court. But the judge granted the EEOC’s request to stop the law firm from imposing its arbitration agreements.

The Luce firm is appealing to the 9th Circuit.

The case illustrates how much legal wrangling these days is about perceived inequities in the arbitration agreements themselves as opposed to actual employment-related grievances.

“We have never had an employee arbitration over discrimination or, so far as I know, under any other claim. Nor have we ever had an employee sue us for discrimination,” said Charles Bird, an attorney with Luce, Forward, a national firm based in San Diego. “So what we’re really talking about here is an employer’s right to have this kind of agreement, not about any particular problem in our workplace.”

Bias Disputes Excluded

The 9th Circuit, whose rulings govern employers in California and eight other Western states, has not signaled whether it will review the Lagatree case. It addressed the civil rights issue once already in a highly controversial 1998 decision in Duffield vs. Robertson Stephens & Co.

In that case, Tonyja Duffield signed an arbitration agreement that was standard among brokerage firms doing business with the New York Stock Exchange. She later sued the brokerage firm for alleged sexual harassment and discrimination. She argued that because the arbitration agreement was not voluntary, it violated Title VII, a 1991 addition to federal civil rights laws.

A three-judge panel of the 9th Circuit ruled that Title VII prohibits employers from forcing into arbitration disputes over workplace discrimination on the basis of race, gender, national origin or religion.

Other federal appellate courts have held otherwise, and lawyers on both sides are anxious, for different reasons, for the Supreme Court to take up an arbitration civil rights case.

“If the Supreme Court is going to say that the employer can repeal the civil rights laws unilaterally, then let’s do it, and let’s get the issue back to Congress,” Palefsky said. “Those laws mean nothing if you can be precluded from going to a court.”

California Workers’ Rights

The California Supreme Court sought to level the playing field between employers and workers in a key arbitration decision last year in Armendariz vs. Foundation Health.

“What Armendariz did is lay out what is essentially a bill of rights for all employment contracts,” Seligman said.

Those rights allow workers access to company documents necessary to press an arbitration claim. In addition, California employers must pay most of the costs of arbitration and remove any caps on damage awards.

Also, arbitration agreements must work both ways, meaning employers must arbitrate complaints they wish to bring against workers who are bound by such contracts.

Democratic state Sen. Sheila Kuehl of Santa Monica is carrying a bill that would further expand worker rights by prohibiting mandatory agreements that force disputes under California’s antidiscrimination laws into arbitration.

If adopted, the bill would probably be thrown almost immediately into the courts by employers who believe such a ban exceeds a state’s rights, especially in light of the Supreme Court’s Circuit City decision applying the Federal Arbitration Act to most employment contracts.

“The pending legislation that Sheila Kuehl has authored is probably a nonstarter now,” said Kadue, a management lawyer for Seyfarth Shaw.

“If the court had gone the other way, then Sheila Kuehl’s legislation would have had a clear path.”