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Spring 2011 marks two significant anniversaries in the development of the law permitting mandatory arbitration of employment-related claims brought by nonunion employees, particularly those under various employee-protective statutes. Twenty years ago, on May 13, 1991, the U.S. Supreme Court decided Gilmer v. Interstate/Johnson Lane Corp., which has been described as one of the most significant employment cases of the last 25 years. Ten years later, on March 21, 2001, the Supreme Court decided Circuit City Stores, Inc. v. Adams, which affirmed an interpretation of the Federal Arbitration Act (FAA) that permits — and arguably promotes — having a non-union employee’s claims against his or her employer resolved through arbitration instead of through the courts.

Some Historical Background. As most of our readers know, Gilmer decided that arbitration agreements or policies that otherwise meet the requirements of the FAA (originally enacted in 1925) and state contract law can be used to mandate arbitration of employee claims asserted under federal and state anti-discrimination statutes. This outcome surprised many observers, who had read the Supreme Court’s 1974 decision in Alexander v. Gardner- Denver Co. as holding that arbitrators were generally not authorized to decide such statutory claims. En route to its conclusion, the Gilmer majority rejected arguments that arbitration was an inferior forum and thus unsuited to protecting employees’ statutory rights.

Gilmer had argued that the federal Age Discrimination in Employment Act (ADEA), under which he had brought his claim, did not contemplate arbitration, but the Supreme Court took exactly the opposite approach: Because the ADEA did not explicitly forbid arbitration or other non-judicial resolution of claims, Congress could not have intended to confine their resolution to the courts. In addition, employees’ reservations about limited discovery in arbitration were swept aside as a necessary part of the arbitration “bargain” that would benefit both sides through expedited resolution. The courts could still, of course, guard against biased arbitrators and skewed arbitrator selection mechanisms. Most importantly, the Court observed that “mere inequality in bargaining power” between employers and employees did not justify a general rule that arbitration agreements were not enforceable in the employment setting.

One key issue that Gilmer left open involved the section of the FAA that made the statute inapplicable to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Since the great majority of American workers have some connection with interstate commerce in their jobs, could this provision mean that the FAA was not intended to apply to employment contracts?

It would be another ten years before the Supreme Court put that issue to rest in the Circuit City case. In the meantime, most lower courts read the exclusion as limited to workers directly engaged in transporting goods. The Supreme Court agreed, thereby removing the last hurdle to mandatory arbitration in the employment setting.

Arbitration Catches On. In the 1990s, many employers rushed through the Gilmer door and implemented “pre-dispute” arbitration policies for their nonunion employees’ claims. That was a period of heightened alarm about proliferating employment litigation and runaway jury verdicts. Employers felt threatened by the widespread demise of the employmentat- will doctrine in the 1980s and 1990s, and by the enactment of the Civil Rights Act of 1991, which allowed Title VII plaintiffs for the first time to recover compensatory and punitive damages.

Although arbitration cannot occur unless both parties agree, employers obtained agreements to arbitrate all future work-related claims by, for example, having job seekers consent to arbitration in their employment applications and having current employees agree to arbitration as a condition of receiving promotions or raises. Some employers told employees that their continuing employment beyond a certain date would be an expression of consent to a newly adopted arbitration program.

Employers who boarded the arbitration train expected it to take them to expedited resolution of claims, higher success rates, better predictability of risk, and reduced legal costs. Other employers, however, made a policy choice to continue resolving employee claims through the courts.

What Has Happened In 20 Years? Today, the arguments against arbitration that the Supreme Court rejected in Gilmer seem quaint. The arbitrability analysis the Court applied to the ADEA in 1991 has been applied to an array of other employee-protective statutes, and it is now well established that Title VII, the ADA, and the FMLA, among others, evince no Congressional disapproval of arbitrating such claims. Many state appellate courts have used the same logic to enforce arbitration agreements as to claims under analogous state laws. In Michigan, the pivotal decision approving of mandatory employment arbitration was Rembert v. Ryan’s Family Steak Houses, decided in 1999.

While there is not yet universal consensus, there has been an orderly evolution of case law on how much discovery is essential to make arbitration a meaningful forum, to what extent an employee can be required to pay the costs of the arbitration proceeding, whether statutory remedies can be limited or time periods shortened, and other procedural issues. Recently, the American Arbitration Association and JAMS, the chief providers of neutral administrative services, have made it their policy not to administer any employer-promulgated arbitration policies that require employees to pay any part of the arbitrator’s fee.

Despite judicial evolution favoring arbitration, there seems to be a growing perception today that arbitration has not been the panacea many employers had hoped for. In the Spring 2010 issue of the Journal of the ABA Section of Labor and Employment Law, professor and sometime arbitrator Theodore St. Antoine observed that mandatory arbitration had lost its popularity, for basically three reasons: “Employees win too often; it is hard to get summary judgment in arbitration; and full appellate review is not available.” One might add another objection: Some arbitrations come to resemble full-blown lawsuits because the lawyers representing the parties are now often courtroom litigators who are not comfortable foregoing extensive discovery and motion practice, and arbitrators indulge them, earning sizeable fees in the process.

Although in some quarters there is still a basic distrust of arbitral adjudication, several empirical studies have shown that mandatory arbitration policies do not discourage employees from bringing claims, and on the whole employees fare as well in arbitration as they do in litigation. There may be fewer “jackpot” recoveries, but there are also fewer summary judgments, with a roughly comparable percentage of employee-favorable outcomes.

Arbitration Is Here To Stay — But Is It For You? It is not difficult today to design and set up a mandatory www.kohp.com PAGE 3 employment arbitration policy that will withstand procedural challenges. Each employer must, however, evaluate its own needs and culture in deciding whether mandatory arbitration of such disputes is the right choice.

The clearest advantages of mandatory arbitration continue to be reduced cost per case and greater assurance that an employer will not encounter an aberrant jury or be rocked by a huge verdict. In this sense, there is greater predictability for the employer and less fear of the unknown. For these reasons, some plaintiffs’ lawyers avoid cases that must be arbitrated, or seek earlier and cheaper settlements. Furthermore, as a result of the Supreme Court’s just-issued decision in AT&T Mobility v. Concepcion (a consumer contract case), it would likely be possible to avoid class actions by establishing an arbitration program that precludes them. In that case a California rule invalidating as unconscionable an arbitration provision that banned class-wide proceedings was held preempted by the FAA. Also, it is possible to keep the pendency and results of arbitrations relatively confidential, while court dockets and proceedings are public.

From our perspective, large employers that would expect a substantial number of employment claims in any event and are prepared to accept the occasional loss are the most likely ones to be satisfied with mandatory arbitration policies. Employers that cannot take that long view may see things differently.

Whatever procedural protections may apply, though, there is in every case the risk of being “stuck” with a “bad” arbitrator or one who reacts badly to a given set of facts. (Three-arbitrator panels are unlikely to accomplish anything other than grossly inflating costs.) As noted, arbitrators are inherently reluctant to grant summary judgment, and the likelihood of overturning an arbitrator’s award in court is minimal. The FAA permits awards to be vacated for only a few narrow reasons, including corruption, fraud, blatant arbitrator partiality, and procedural irregularities. Courts will not disturb an arbitrator’s findings of fact, and errors of law are also insufficient for reversal. Over the years many federal circuits had recognized an arbitrator’s “manifest disregard of the law” — i.e., willfully flouting governing law, not just misunderstanding or misapplying it — as an additional ground for vacating an award, but the Supreme Court’s 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc. may have interred that judge-created doctrine. In all events, a “bad” arbitration award can be far more difficult to overturn than a jury’s verdict or trial court’s ruling.

So, what should you do? If your organization boarded the arbitration train some years ago, and you have been well served and satisfied, you may want to continue with the status quo. The same may be true if you opted against arbitration and feel no regrets. But if you think you would like to try life on the other side, feel free to talk to us.

Noel D. Massie