Supreme Court validates arbitration

While the Supreme Court, by the narrowest of margins, has affirmed the validity of mandatory arbitration clauses in em-ployment contracts, local attorneys urge caution in drafting such clauses.

"With the glut of employment litigation that is in the courts right now, (arbitration) is a really attractive option," said local attorney Virginia Fry, of Black-well Sanders Peper Martin LLP. "It's good for the employer and it's good for the employee be-cause it's a much quicker resolution of an issue."

Mandatory arbitration is "a tool that's been around for a long time," Fry said, "but it's gotten a lot of attention this year because of the Circuit City case that came down from the Su-preme Court" on March 21.

Circuit City vs. Adams

The "Circuit City case" is Circuit City Stores Inc. vs. Adams, which the Supreme Court decided 5-4 in favor of Circuit City.

Initially, Saint Clair Adams, a 37-year-old gay salesman in Santa Rosa, Calif., complained to Circuit City management that he was insulted by co-workers because of his sexual orientation, according to the opinion.

Adams sued the company un-der a state law that made it illegal to discriminate against gays or lesbians. A federal judge intervened before the trial could be held and sent the case to arbitration as required by the language in Adams' employment application.

Adams appealed and the 9th Circuit agreed with him, following its long history of not en-forcing arbitration of employment disputes.

But when the U.S. Supreme Court decided the case, it determined that only transportation workers are exempt from being required to arbitrate work-related claims.

The arbitration act

The case was based on the Federal Arbitration Act of 1925, which specifically excludes from its jurisdiction employment contracts for workers en-gaged in foreign or interstate commerce, sailors and railroad workers.

"The court has been quite specific in holding that arbitration agreements can be enforced under the (Federal Arbitration Act)," wrote Justice Kennedy in the Supreme Court opinion.

"There are real benefits to the enforcement of arbitration provisions," he wrote. It "allows parties to avoid the cost of litigation."

However, four of the justices dissented. Justice John Paul Stevens wrote in his dissent "It is clear that (the legislation) was not intended to apply to employment contracts at all."

The dissenting justices also worried about the "disparity in bargaining power" between the employer and employee, Ste-vens wrote.

Fry said she thinks the decision will stick, despite the divided court, and attorney Tim O'Reilly, of O'Reilly & Jensen LLC, agreed. "Unless the pro-business stance of the court changes, it will be in force for a long time," he said.

However, he added that employers should beware of loopholes in arbitration contracts that a savvy plaintiff's lawyer can exploit.

Careful draftsmanship

To avoid problems with mandatory arbitration contracts, Fry looks to the issues the courts worry about like how the costs of arbitration are apportioned.

Mandatory arbitration clauses have been thrown out if they appear to be too one-sided for instance if the employee has to bear the brunt of the costs or if he has no choice as to who will arbitrate the case, Fry said.

O'Reilly said the employer should be sure the employee knows what he's signing. For instance, he said don't slip a mandatory arbitration agreement into a big stack of documents that the employee is supposed to sign and read.

Fry advises putting in a mediation step before arbitration. "Mediation is an informal at-tempt to resolve differences. Many times it is effective."

Sometimes, she said, "an employee has a complaint they just want to talk to somebody about, and if communication will facilitate resolution which it usually does then these things get worked out at that level."

Why arbitration?

In its October newsletter, Fry's law firm reported statistics from the U.S. Department of Justice which show that em-ployment litigation has in-creased nearly 300 percent in the last 10 years, with plaintiffs winning at trial about 35.5 percent of the time.

Of the 261,651 civil cases filed in federal court in 1999, 8.6 percent of those were em-ployment-related disputes, ac-cording to the Justice Depar-tment.

Mandatory arbitration provisions can save court costs be-cause they require the employer and employee to resolve job-re-lated suits using an arbitrator a neutral third party trained in resolving disputes outside the courtroom setting.

Parties may still be represented by counsel, but the rules of evidence are waived. There is usually little of the expensive, time-consuming and paper-in-tensive evidence-gathering as-sociated with a jury trial the discovery process so parties may spend less time and money resolving conflicts.

Jury trial pitfalls

And for the employer, particularly, the courtroom often is not the best option for an em-ployment-related case.

According to Fry's statistics, "More than 70 percent of typical jurors are more likely to believe a discharged employee's view of facts than an employer's." She added that only 10 percent of typical jurors reported they "would be predisposed to believe an employer's witnesses."

Just because a party wins at the trial level, it's not necessarily over, which is another reason to have binding arbitration the Justice Department reports that about 26.6 percent of all federal employment claims are appealed and reach oral argument, compared to 16.2 percent of all other civil cases.

Arbitration review

The Federal Arbitration Act allows vacation of an award un-der four circumstances if the award was procured by fraud, if the arbitrator was biased, exceeded his authority or re-fused to hear material evidence or postpone a hearing for good cause.

A written record is necessary for there to be a review. The American Arbitration Associa-tion's National Rules for the Resolution of Employment Dis-putes require opinions in writing that are reasoned, but not all arbitration associations have that requirement.

Both parties in binding arbitration should be aware of the rules used in their particular situation.