U.S. Supreme Court Developments.  During its current term, the U.S. Supreme Court will likely resolve the longstanding question whether employees covered by a collective bargaining agreement (CBA) that forbids discrimination on the basis of race, sex, and other protected characteristics can be required to arbitrate claims of employment discrimination exclusively through the CBA’s grievance and arbitration procedures, with no access to the courts.  After the Court’s 1973 Alexander v. Gardner-Denver decision, it had been generally believed that CBA provisions could never detract from an employee’s right to sue in court under federal and state anti-discrimination statutes.

Ten years ago, the Supreme Court seemed to hint in Wright v. Universal Maritime Service that a CBA could waive covered employees’ “rights to a judicial forum for federal claims of employment discrimination” if the CBA contained a “clear and unmistakable waiver” of those rights.  But the Court did not actually hold that such a waiver would be enforceable; in fact, it declined to reach that question.  Since then, only the U.S. Court of Appeals for the Fourth Circuit has endorsed the idea that a CBA’s explicit waiver of union members’ rights to a judicial forum would be valid.

Now, a case from the Second Circuit, 14 Penn Plaza LLC v. Pyett, squarely presents the question.  Long-service night watchmen in a New York City office building were reassigned to less desirable positions as night porters and light duty cleaners.  The CBA contained a mandatory arbitration clause for claims under all anti-discrimination statutes and declared all such claims “subject to the grievance and arbitration procedure as the sole and exclusive remedy for violations.”  The appellate court, like the trial court, held that this clause did not require dismissal or stay of the age discrimination lawsuit the former watchmen filed in court after their union refused to take their age discrimination claims to arbitration. 

The facts of 14 Penn Plaza illustrate why collectively bargained arbitration provisions may warrant a different rule from that governing individual employment contracts.  Unions retain complete control over whether, and how vigorously, to pursue members’ complaints – including claims of discrimination – at both the grievance and arbitration stages.  Unions must also deal with competing interests of employee groups within a bargaining unit.  Because the union in 14 Penn Plaza had consented to the arrangement that brought in the employees who displaced the plaintiffs, it did not wish to pursue their age discrimination claims in arbitration.  Thus, its view of its own interests and the interests of its membership as a whole prevented the displaced watchmen from vindicating their rights through arbitration – the only forum that the CBA allowed them.

The 14 Penn Plaza case is set for argument on December 1, 2008.  Among the many amicus briefs filed, the EEOC and the Solicitor General of the United States have weighed in to support the Second Circuit’s conclusion that the displaced watchmen could proceed with their lawsuit. 

The Supreme Court was also active on the arbitration front in its 2007-2008 term.  In Preston v. Ferrer, the Court again emphasized the force of the federal policy favoring arbitration.  In that case, the California Court of Appeals had stopped Preston from arbitrating his claim that Ferrer owed him management fees under a contract containing a broad arbitration clause, until the California Labor Commissioner (before whom Ferrer was challenging the contract’s enforceability under state law) addressed the dispute.  The Supreme Court reversed, rejecting the notion that arbitration was not appropriate if a specialized administrative agency would otherwise have jurisdiction. 

A second major arbitration decision from the 2007-2008 term was Hall Street Associates, LLC v. Mattel, Inc.  The Court held that a court asked to vacate or modify an arbitration award pursuant to the Federal Arbitration Act (FAA) may only do so on the limited grounds stated in that Act.  While this may sound obvious, many courts had not seen the FAA as establishing such a clear boundary.  This ruling has several important practical consequences for parties entering into arbitration agreements. 

First, Hall Street invalidates “customized” standards of review.  Many employers and businesses, desiring an escape route from an arbitration result that seems to ignore the law, have incorporated some form of judicial review for “clear legal error” into their arbitration agreements (both pre-dispute and post-dispute).  At the same time, a number of federal appellate circuits have tacked a “manifest disregard of the law” ground onto the FAA.  Hall Street says, in essence, that neither courts nor parties have any business expanding the limited grounds for judicial review (i.e., corruption, partiality, misconduct, lack of jurisdiction) that Congress included in a law intended to promote quick dispute resolution outside of the courts.  This likely means there is no room left for the “manifest disregard” standard in FAA jurisprudence.  At a minimum, employers who provided for expanded judicial review in pre-dispute arbitration agreements can no longer rely on those agreements.

Second, the Hall Street ruling may prompt increased use of state laws that permit closer judicial scrutiny of arbitration awards.  For example, it has long been established that the Michigan Arbitration Act allows courts to vacate an arbitration award if it contains an error of law “so material or so substantial as to have governed the award, and but for which the award would have been substantially otherwise.” 

Federal Appellate Decisions.  Two recent federal decisions confirm that only a very rare statute exempts claims from arbitration.  In Landis v. Pinnacle Eye Care, LLC, decided August 11, the Sixth Circuit held that claims brought under the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) fell within a broad arbitration clause in an optometrist’s employment agreement because neither USERRA’s text nor its legislative history showed that Congress intended to preclude employees from waiving the right to bring USERRA claims in court.  USERRA may present a closer case on this point than most statutes because it explicitly pre-empts contracts or practices arising under state law (e.g., an arbitration agreement?) that establish “additional prerequisites to the exercise or receipt of rights and benefits under the statute.”  The Sixth Circuit ultimately decided that this provision did not immunize USERRA claims from mandatory arbitration, but one judge noted in a concurrence that Congress should clarify what it intended.

In Guyden v. Aetna, Inc., decided October 2, the Second Circuit reached the same result – arbitration was required – with respect to a whistleblower’s claims under the Sarbanes-Oxley Act.  The court noted that not only did the statute fail to prohibit arbitration of such claims, but that Congress had actually chosen to delete a provision that would have done so. 

In June, the Sixth Circuit applied familiar arbitration contract principles in an unusual setting.  A female equity partner had signed a law firm partnership agreement that required the firm and its partners to arbitrate disputes involving any “controversy or claim arising under or related to [the] Agreement or its interpretation.”  After differences between the partner and the firm developed, primarily over compensation, she filed a federal lawsuit alleging discrimination based on sex, pregnancy, and disability, as well as retaliation.  The appeals court affirmed the trial court’s holding that the partner’s claims must be arbitrated because they could not be resolved without reference to the partnership agreement.  Determining whether she was paid less than comparable male partners, for example, would require determining how much she should have been paid, a question that inevitably implicated the partnership agreement.  Also, analysis of firm governance terms would be central to determining whether the partner qualified as an “employee” entitled to sue under anti-discrimination statutes.  KOHP represented the prevailing law firm in this case. 

Noel D. Massie

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