Trends in Employment Arbitration

by Judge Lawrence C. Waddington, Ret.
Los Angeles Superior Court

    Arbitration agreements are, as a matter of law, contracts. As a general rule, if the clause in the contract requires arbitration, the courts will apply the relevant body of contract law whether the case is based on contractual or statutorily mandated arbitration. The bulk of criticism directed at arbitration clauses in contracts of employment has been directed at the alleged adhesive nature of the contract, or the unconscionability of a contract dictated by one party who enjoys economic power, or disproportionate power of some kind, over another. In a business relationship which enables the consumer to choose among competitors and reject the. arbitration clause, or select an alternative seller or service provider, the element of adhesion is ameliorated or vitiated. But in the case of employee-employer relationships, the ability of many to seek alternative avenues of employment is marginal or non existent. Workers with limited skills or deficient educational requirements cannot easily transfer to another field of employment. Or those who are nearing the end of a work career cannot easily find employment competing with younger workers.

    Despite continuing judicial support for arbitration in general, some courts have recognized the need for what might be characterized as “procedural fairness” in the arbitration process. Although the term imports rhetorical appeal and an invitation to permit unrestrained judicial interpretation, some basic guidelines have been established. For example, the court, not the arbitrator, decides whether the underlying agreement is subject to arbitration and whether the parties and issues are included within the arbitration clause. Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614 (1995). California courts deciding cases under State arbitration law, have begun scrutinizing arbitration clauses more closely. In a recent decision, the Court examined the nature of the employment agreement and concluded that it did not constitute an indispensable element of a true “arbitration”, i.e., a neutral evaluator who would decide the dispute impartially and absent any relationship to the employer. In Cheng-Canindin v. Renaissance Hotel Associates, 50 Cal.App.4th 676 (1997), the Court concluded the term “arbitration” had been used in the contract to describe a process that did not provide for decisional authority, an element of a “true” arbitration: Another court concluded the service contract, in this case authored by a doctor, held a strategic legal advantage not shared by the patient. Saika v. Gold, 49 Cal.App.4th 1074 (1996). And the California Legislature has attempted to insure an impartial arbitration by requiring disclosure of the arbitrator’s past hearings .in order to minimize potential bias. CCP 1281.9.

    The concept of  “procedural fairness” in an arbitration conducted under the FAA was recently canvassed by the Sixth Circuit Court of Appeals. Cole v. Burns International Security Services, 105 F.3d. 1465 (1997). Constrained by the United States Supreme Court decision in Gilmer approving contractual arbitration of federal statutory rights pursuant to the ADEA if the employee had signed an arbitration clause for employment disputes, the Court concluded the arbitration agreement was enforceable. Id.; Mago v. Shearson Lehman Hutton, Inc.,962 F.2d 932(1992); Golenia v. Bob Baker Toyota, 915 F.Supp. 201 (and by inference statutory rights prohibiting race, gender and disability discrimination). In doing so, the Court reviewed the language of the arbitration agreement, observing that it attempted to provide the employee with a variety of safeguards.. The jury trial waiver was printed in large type; the employee was informed of the right to counsel; the employer agreed to pay the costs of the arbitration, limited discovery was allowed.

    This case, and those cited above, concur that arbitration is a matter of contract, and contract law is applicable. But merely labeling a procedure an “arbitration” does not fore close the courts from examining the true nature of the proceedings, and that a “true” arbitration must consist of certain elements in order for the court to enforce an arbitration clause. In Cole, the employer not only included these elements, it added a modicum of procedural due process to enable the employee to assert and establish a defense. To an extent, this procedure adopts some of the protection available to plaintiffs in a civil case, yet does not unduly delay the proceedings. Employers who draft arbitration clauses do so to avoid the expense and delay incident to civil trials, but incorporating familiar procedural safeguards into a legitimate arbitration process avoids the charge that the proceeding is unfair. The Sixth Circuit has illustrated the advantages of this kind of clause.

    The arbitral forum, said the Court in Patterson v. Tenet Healthcare, Inc., 113 F.3d 832, echoing the United States Supreme Court admonition in Gilmer must “effectively vindicate [the employee’s] statutory causes of action. Vindication, according to Patterson..." must be accomplished through the use of neutral arbitrators, adequate discovery, sufficient types of relief, and the assurance that evidence of coercion which allows the revocation of any contract would likewise relieve an employee from an arbitration agreement. Patterson, at 837.

    Despite an enforceable arbitration clause in an employment contract, procedural fairness, and an impartial arbitrator, the rights and remedies of parties who have filed under Title VII of the Civil Rights Act, 42 USC 2000e et.seq., the Americans with Disabilities Act (ADA) and ADEA cause heightened concern in the context of arbitration.  As a result, the Ninth Circuit Court of Appeals, alone among the. Federal. Circuits, requires a “knowing waiver” by the employee of civil rights protection. See Bender v. A.G. Edwards & Sons, supra, Prudential Ins. Co. v. Lai, 42 F.3d 1299(1994); Renteria v. Prudential Ins. Co., 113 F.3d 1104 (1997) (despite the fact that “waiver” is arguably a question of substantive, i.e., state contract law); First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938(1995). And one Federal District judge concluded that the remedies of federal law constituted a floor below which the arbitrator could not award Johnson v. Hubbard Broadcasting, Inc. 940 F.Supp. 1447. Phrased differently, even if the employee signs an arbitration clause and waives the right to jury trial and other statutory rights, the remedies afforded by the statute must be respected. In California, the courts have. suggested the same rationale. Stirlen v. Supercuts, 51 Cal.App.4th 1519 (1997).

    Part of the difficulty in discussion of employment disputes lies in the distinction between various kinds of arbitration. In labor arbitration, the collective bargaining agreement is negotiated between two entities often of comparable economic strength, each asserting leverage in the negotiations but acknowledging a labor/management relationship will likely continue. Although the contract will govern resolution of disputes, arbitrators are uniquely suited to resolve contractual issues not necessarily included in all terms of the agreement. Closely related to labor arbitration agreements are commercial arbitration clauses included in a contract executed between two or more parties. Arbitration clauses allow each party to select an arbitral forum for the resolution of any future contractual dispute, not necessarily continuing their business relationship with each other but allowing for that contingency. Other forms of arbitration, including tort claims, are either judicially ordered (with trial de novo allowed) or voluntarily entered into between two or more parties. And, in California, arbitration of specific kinds of disputes is statutorily mandated, i.e., uninsured motorist disputes. Calif. Ins.Code 11580.2[f]); condominium disputes,. CC 1354

    In the employment context, critics of arbitration argue the relationship between employer and employee does not mirror any of these formats. The employer often enjoys superior economic power, the parties do not intend to necessarily continue their relationship, and no serious contractual negotiations occurred. As noted above, courts have held this argument insufficient of itself to warrant revocation of the contract.  Unconscionability, or adhesion in the contract, will not necessarily dispose of the arbitration issue.  Doctor’s Associates, Inc. v. Stuart, 85 F.3d. 975(1996); Strotz v. Dean Witter Reynolds, Inc., 223 Cal.App.3d 208 (1990). The arbitrator decides whether the contract should be revoked on that basis.  Revocation of the contract is an issue for the arbitrator, whereas arbitrability, i.e., whether the parties have agreed to arbitration and whether the claim asserted is within the scope of the arbitration clause, is a judicial decision. These issues are substantive. But if the employer institutes “procedural- fairness,” the substantive issues are also indirectly included and criticism of the process ameliorated

    Contractual disputes in business relationships often turn upon standard legal analysis of offer/acceptance, performance, breach and damage. Torts frequently focus on a single event between strangers. Employment litigation includes evidence of a work history marked by promotions, pay raises, bonuses or other perquisites awarded to an employee. But employment is often marked by intangibles, i.e., the, relationship of an employee with a supervisor or co-employee, transfer to different locations, personnel disputes, attendance records, degree of  “ambition” demonstrated, and performance evaluations. Critics of employment arbitration cases argue that a jury is the best judge of these disputes. But as an increasing number of employers require arbitration clauses in employment contracts, the parties should not automatically assume that a court will enforce an arbitration clause in resolving a petition to arbitrate.

    One Federal court has written a cautionary note in FAA arbitrations: “In this age” of complex and costly litigation, the incantation 'ADR'...is an increasingly, popular mantra. However, when arbitration proceedings fail to reach a minimum level of fairness, they become an 'alternative' by which this court will not abide. Congress has placed strict limitations on [the court’s] discretion to review the adequacy of arbitration proceedings. Nevertheless, upon request of either party, this court is committed to post-arbitration review to ensure that any result reached is the product. of a fundamentally fair arbitration proceeding.” Hoffman v. Cargill, Inc., 968 F.Supp. 465 (1997).

    Although the majority of cases are arbitrated under California law, which does provide for a measure of  “procedural fairness”, some arbitration clauses mandate use of FAA rules. See CCP 1282.2;1282.6; 1283; 1283.05.. In whichever jurisdiction ‘the arbitration ‘is conducted, Federal and State courts will continue to review the process.

    Despite an enforceable arbitration clause in a contract, procedural fairness and an impartial arbitrator, the rights and remedies of Title VII, the ADA and ADEA cause heightened concern. As a result, the Ninth Circuit Court of Appeals requires a “knowing waiver” of civil rights protection under these federal statutes. See Renteria, supra.

    Although the courts have blurred the lines between contract and tort litigation in a variety of contexts, the California Supreme Court in the watershed case of Foley v. Interactive Data Corp., 47 Cal.3d 654 (1988) attempted to sharply limit tort remedies in the employment context. But the courts continue to disagree on the scope of  the Foley opinion as demonstrated in Guz v. Bechtel National Inc., 54 Cal.App. 1063, with the dissent entreating the Supreme Court to reconcile subsequent disparate interpretations of its Foley opinion by various Courts of Appeal. Yet the heart of the Foley case, i.e. remedies for wrongful termination, barely touched the recent array of federal and sate statutory rights which prohibit a variety of unacceptable employment practices attributable to decisions predicated on racial, gender, age and disability grounds, not only in termination of employment but also promotion and demotion of employees. In an attempt to obtain a balance in management employment decisions outside the collective bargaining context, federal an state legislature have conferred litigation power, often supplemented by governmental agencies, upon employees. Employers, objecting to perceived governmental interference, argue that litigation, or the threat of litigation, not only increases the economic cost of doing business, but impermissibly intrudes upon legitimate management judgment.

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