Legal E-Bulletin - August 2001

Supreme Court Limits Discrimination Claimants Access To Courthouse: Arbitration Agreements and Title I of the ADA

A. Supreme Court Rules That Victim of Employment Discrimination Cannot Proceed in Court Where There Is an Agreement to Arbitrate.
  1. Federal Arbitration Act Trumps Civil Rights Remedies.
  2. Employees May Now Condition Offers of Employment on Agreements to Arbitrate.
  3. Court Gives Effect to the Federal Policy in Favor of Arbitration over Litigation.
B. In What Context do These Issues Arise.
C. Circuit City v. Adams Illustrates the Tension Between Individual and Collective Rights.
  1. Collective Rights of Employees Are Distinguished from Individual Rights.
  2. In Gilmer the Court Holds That Individual Employee Rights Claims Can Be Arbitrated Despite Comprehensive Administrative and Judicial Remedies Enacted by Congress.
D. Ruling Has Adverse Effect on the Civil Rights of Workers.
  1. Supreme Court Views Arbitration as a Substantial Equivalent to Proceeding in Court.
2. Significant Procedural Differences May Deny a Remedy.
E. Supreme Court Will Have More to Say on this Issue in EEOC v. Waffle House.

A. Supreme Court Rules That Victim of Employment Discrimination Cannot Proceed in Court Where There Is an Agreement to Arbitrate.

In March 2001, Supreme Court ruled that victims of employment discrimination cannot proceed to court if they had signed an agreement to arbitrate. In Circuit City Stores v. Adams, a computer salesman sued his employer for employment discrimination under California's civil rights law
for an alleged pattern of harassment and discrimination. He wanted a jury trial in court. However, Circuit City sought to enjoin the action in court and compel Adams to have the case heard by a private arbitrator, who's decision would be final and binding, leaving Adams with no right of appeal. Circuit City pointed out that it was merely holding Adams to his employment contract - which Adams had signed. It stated that he agreed to "settle any and all" disputes through arbitration.

1. Federal Arbitration Act Trumps Civil Rights Remedies.

The Ninth Circuit Court of Appeals held that Adams had a right to try his case before a jury, because the state law under which he sued provided remedies that included the right to a jury trial. In March 2001, however, the Supreme Court reversed the Ninth Circuit holding that the
Federal Arbitration Act of 1925 requires the arbitration of claims under the more recent state and federal employment discrimination laws. 

The United States Supreme Court considered the issue of whether an employee who claims that he has been the victim of employment discrimination has a statutory right to have his claim heard in court, or whether the worker must be compelled to arbitration. The Court held in a 5-4
decision that if an employee agrees to arbitration, even if the agreement is entered into before the act of discrimination occurs, the worker is bound by the agreement and the federal arbitration act will compel the party to use arbitration.

2. Employees May Now Condition Offers of Employment on Agreements to Arbitrate.

The significance of the decision is that employers may offer employment on the condition that the prospective employee agrees to resolve any future dispute arising out of the employment by arbitration. If the applicant agrees, he gets the job. If not, someone else does. The consequence is that the employer can force the employee into waiving the comprehensive administrative and judicial remedies enacted by Congress in the ADA and Title VII of the Civil Rights Act as a condition of employment. The terms on which the law becomes enforceable is up to the employer to decide when it drafts the arbitration clause.

3. Court Gives Effect to the Federal Policy in Favor of Arbitration over Litigation.

The Congress enacted the Federal Arbitration Act (FAA) in 1925 to establish a national policy in favor of resolving disputes by arbitration. The FAA simply required that "an agreement in writing to submit to arbitration an existing controversy arising out of ... a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. However, Section 1 of the FAA excluded from the Act's coverage "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." 9 U.S.C. § 1.

B. In What Context do These Issues Arise.

Agreements to arbitrate employment discrimination claims commonly arise in three circumstances. First, the agreement to arbitrate may appear within the context of a collective bargaining agreement. Collective bargaining agreements typically contain a clause in which management and the employees subject to the agreement prospectively agree to submit their dispute to arbitration, rather than resolve them in court. Arbitration clauses may be drawn broadly enough to include claims of employment discrimination.

The second common way arbitration agreements may arise is within the context of an individual employment contract (as opposed to a collectively bargained contract) in which the individual agrees to submit any claim of discrimination to arbitration rather than to an administrative
body or to a court. In both the collective and the individual contracts, the agreement to arbitrate is made prospectively before any claim of discrimination arises.

The third circumstance in which an agreement to arbitrate may arise is after the claim for discrimination has arisen, and the parties agree to arbitration as a form of alternative dispute resolution. In this third circumstance, the central issues are whether the waiver of the statutory right to assert the claims in court was knowing and voluntary.

The court in Circuit City v. Adams dealt with an arbitration agreement that was included as part of a individual employment contract. 

C. Circuit City v. Adams Illustrates the Tension Between Individual and Collective Rights.

1. Collective Rights of Employees Are Distinguished from Individual Rights.

Before Circuit City v. Adams, the case law on this issue was divided into two principal lines of authority that demonstrate the tension between collective and individual rights. The first line of authority is represented in Alexander v. Gardner-Denver Co., which held that arbitration
under a collective bargaining agreement does not cause an employee to forfeit his right to a judicial forum for a claim of discriminatory discharge in violation of Title VII of the Civil Rights Act of 1964 (42 U.S.C. §2000e et seq.). Alexander v. Gardner-Denver Co., 415 U.S. 36, 49
(1974). In Gardner-Denver, the plaintiff did not elect a judicial remedy over a remedy in arbitration. Rather, he first pursued his grievance to final arbitration under the nondiscrimination clause of a collective-bargaining agreement. Gardner-Denver, 415 U.S. at 49. After the
arbitration resulted in a decision in the employer's favor, he initiated a charge of discrimination and civil action.

In Gardner-Denver, the Supreme Court reasoned that a grievance is designed to vindicate a contractual right under a collective bargaining agreement. However, a lawsuit under Title VII asserts an independent statutory right granted to individuals by Congress. Id., at 49-50. The
statutory cause of action was not waived by the union's agreement to the arbitration provision of the collective bargaining agreement. The court held that "there can be no prospective waiver of an employee's rights under Title VII." Id., at 51.

Because the ADA and Title VII share the same enforcement procedures and remedies, the Gardner-Denver principle should apply equally to claims arising under the ADA. The Supreme Court has followed its holding in Gardner-Denver in several subsequent cases deciding the effect of collective bargaining agreement arbitration upon employee claims under other statutes. See McDonald v. West Branch, 466 U.S. 284 (1984) (claim under 42 U.S.C. §1983); Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728 (1981) (claim under Fair Labor Standards Act, 29 U.S.C. §201 et seq.). However, the Supreme Court's later decision in Gilmer v.
Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) takes a different course, which the Court reaffirms in Circuit City. 

2. In Gilmer the Court Holds That Individual Employee Rights Claims Can Be Arbitrated Despite Comprehensive Administrative and Judicial Remedies Enacted by Congress.

In Gilmer, the Supreme Court held that a claim brought under the Age Discrimination in Employment Act of 1967 (ADEA), could be subject to compulsory arbitration pursuant to an arbitration clause in a securities registration form, or other form of employment contract. In Gilmer the court relied on the Federal Arbitration Act's presumption favoring arbitration to conclude that statutory claims could be subject to compulsory arbitration under such an agreement. Gilmer, 500 U.S. 20 at 26 (citing Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477 (1989); Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).

The Gilmer and Gardner-Denver lines of authority apparently conflict on the issue of whether an individual may prospectively waive the individual's statutory right to proceed in court. However, whatever uncertainty may have existed, seems to have been resolved with Circuit City. The justices themselves characterized Circuit City as "Gilmer revisited" and confirmed the view that employment discrimination claims can be compelled to arbitration despite comprehensive administrative and judicial remedies enacted by Congress.

D. Ruling Has Adverse Effect on the Civil Rights of Workers.

1. Supreme Court Views Arbitration as a Substantial Equivalent to Proceeding in Court.

There are many concerns about what Circuit City v. Adams will mean for workers with discrimination claims. The Supreme Court thinks that arbitration is the substantial equivalent of proceeding in court. Justice Kennedy commented that "a party does not forego the substantive rights afforded" by the law when their claim is submitted to arbitration. The Supreme Court's view is based on the assumption that arbitration systems are fair and produce just results.

However, there is almost no rule of law that requires arbitrations to be fair or produce justice. Indeed, unfairness, mistake of law or mistake of fact are insufficient reasons to challenge an arbitrator's decision. If the arbitration clause calls for binding arbitration, then there is no way of challenging the decision except upon a showing of fraud in the process - which is a standard that rarely ever is able to be shown by a party unsatisfied with the result of an arbitration.

2. Significant Procedural Differences May Deny a Remedy.

a. Arbitration Is Costly Too.

Even if there is no difference in the substantive law between arbitration and litigation, the procedural differences may effectively deny a truly aggrieved plaintiff of a remedy. In Circuit City v. Adams, the Court noted that "There are real benefits to the enforcement of arbitration
provisions." According to the Justices, arbitration "allows the parties to avoid the costs of litigation." Perhaps there are genuine cost savings with arbitration, but avoiding the costs of litigation is not the same thing as avoiding all costs. Arbitration has its cost as well.

Arbitration agreements typically require both parties to split the fee of the arbitrator. The fees are generally 10% of the amount in controversy, or at least several thousand dollars. If a plaintiff is
seeking full relief under the lowest damage cap of $50,000 (See 42 U.S.C. §1981a), his share of the arbitration fee will be $2,500. This is a relatively small sum for the employer with 15 to 100 employees, but a prohibitively expensive sum for a worker who may have just been fired for
discriminatory reasons.

b. Few Challenges to Arbitration on the Grounds of Cost Are Successful.

At least two plaintiffs have been successful in challenging arbitration clauses in employment matters on the grounds of unfairness. In these cases, the trial courts ruled that there is a substantive difference in judicial remedies and arbitration when the employer insists on the employees paying half the cost. In one of these cases, the court observed that "We are unaware of any situation in American jurisprudence in which a beneficiary of a federal statute has been required to pay for the services of the judge assigned to hear her or his case." Cole v. Burns Internal Security Services, 105 F. 3d 1465 (D.C. Cir. 1997).

The court in Cole concluded that the employer is entitled to insist on arbitration, but if it also insisted on the employee splitting the arbitration fee then the employer would be placing the employee at a substantial disadvantage that he would not experience in court. In the other successful challenge to the arbitration clause, the California Supreme Court similarly held that if an employee is to be compelled to arbitration, the conditions under which the claim is arbitrated must have a minimum standard of fairness. Armendariz v. Foundation Health Psychcare Services, 6
P.3d 669 (Cal. 2000).

c. Class Actions May Have No Place in the Arbitration of Employment Discrimination Matters.

Many discrimination suits are brought as class actions against large employers. Arbitration clauses may prohibit the arbitration of class or group actions. In many class action cases, the individual damages are very small, and the cases are only viable because of the efficiencies of aggregating all the claimants into a single action. Arbitration agreements may require that each plaintiff proceed individually, thereby making it unlikely that a single plaintiff will proceed at all.

d. No Right to Discovery of Evidence in Arbitration.

In a civil action the plaintiff has a right to discover information from the employer about its employment practices. In fact, the way that most plaintiffs in employment cases are able to prove their claims is to discover the evidence of wrong doing in the employer's internal records through the established rules of civil procedure. In arbitration, there are no standard rules for discovery and in many instances there is no opportunity for the plaintiff to have access to the information that would prove their claim of discrimination.

e. Damages Remedies May Be Limited in Arbitration.

The range of damages may not be the same in arbitration as in a civil action. The American Arbitration Association insists that its rules provide for the same remedies in arbitration as in court. Yet, the AAA will also give effect to the parties' agreement to arbitrate as expressed in the
arbitration clause. So, if the arbitration clause limits remedies - such as excluding punitive damages - only those limited remedies will be available to the plaintiff. After all, it is the employer who writes the arbitration clauses, and the employee has to accept those terms in order to accept
employment.

E. Supreme Court Will Have More to Say on this Issue in EEOC v. Waffle House.

Circuit City will not be the Supreme Court's last word on this issue. Indeed, only one week after ruling in Circuit City, the Court granted writ of certiorari in EEOC v. Waffle House, 99-1823. In this case, the claimant Eric Baker was employed as a cook at a Waffle House restaurant earning minimum wage. Baker had a brief seizure on the job on one occasion, and that day left work a bit early. When the Waffle House fired him, Baker sued for disability based employment discrimination under the Americans with Disabilities Act.

Before this incident, Baker had entered into an arbitration agreement which provided that all disputes arising from his employment be submitted to arbitration. The arbitration fee for his case was several thousand dollars, which was impossible for him or any other minimum wage earner to pay. After investigating his charge of discrimination, the EEOC sued Waffle House based on Baker's charge. The Court of Appeals ruled that the arbitration agreement precluded both Baker and the EEOC from pursuing in court any claim that arose from his employment. The dissenting opinion observed that the practical effect of the Fourth Circuit's ruling in the Waffle House case is to "close the door" on all discrimination claims by making remedies cost prohibitive.

The Waffle House case will be heard by the Supreme Court this autumn.