Mandatory Arbitration Agreements: To Be or Not to Be

With the explosion of employment litigation—in particular, wage and hour lawsuits—many employers are turning to arbitration agreements as a strategy to keep defense costs down and avoid class actions. But as more and more companies make mandatory arbitration a condition of employment, the controversy surrounding the legality of such agreements escalates, with employee advocates questioning the fairness of prohibiting employees from airing their grievances to a jury or seeking class-wide relief.

And as employers seek to enforce arbitration agreements, the debate over enforceability of such provisions, including the class-action waivers that are often included in such agreements, has moved to the National Labor Relations Board and the courts.

The surge in arbitration agreements is not surprising, as arbitration presents some benefits over traditional litigation. As the cost of defending employment claims has skyrocketed, particularly given the length and formality of the litigation process and the broad scope of permissible discovery and potential class-wide relief, employers often agree to pay out settlements for even the most meritless claims, simply to avoid the higher cost of defending themselves and exposure, as well as the significant costs associated with e-discovery.

Many employers view arbitration as a quicker and more cost-efficient way of resolving employment disputes, especially avoiding the significant cost burden and risk associated with defending class actions, which allow a single employee to file suit on behalf of many, causing an employer to consider settlement even when the underlying claim is dubious. Employers also are attracted to arbitration's increased predictability; in arbitration, the parties rely on a trained legal professional to decide employment disputes rather than rolling the dice with a jury.

In addition, because arbitrations are private, the proceedings and ultimate outcome ordinarily are confidential, reducing both the risk of copycat plaintiffs and damage to the company's brand and reputation. Arbitration also has its advantages for employees. It provides a cost-effective and accessible way for an employee to address a dispute with his or her employer. Generally, individual arbitrations are likely to reach resolution more quickly than litigation. Further, while arbitration may not, in the eyes of the plaintiffs' bar, as frequently produce windfall damage awards that juries sometimes render, the expeditious and informal nature of arbitration gives more employees an opportunity to effectively resolve their workplace disputes. In addition, individual arbitration affords the employee the right to decide when and for what amount the case may be settled instead of allowing plaintiffs' class action attorneys to settle for pennies on the dollar when the underlying claim for an individual plaintiff may be valued at a greater amount.

Many judges also favor arbitration, as it helps relieve an already overburdened court system. Of course, the increased use of arbitration agreements is not without controversy. Detractors may claim that damages awarded to successful employees at arbitration are substantially lower than jury awards, but these claims cannot be fully evaluated; given the privacy of most arbitration proceedings, hard and comprehensive data are not readily available. Likewise, arbitrators may be less likely to grant dispositive motions than their judicial counterparts and more likely to present "split the baby" outcomes.

Opponents also allege there is an unequal bargaining power between employers and employees, which can result in agreements containing more employer-friendly provisions, such as class-action waivers. Some employers also have been criticized for "burying" arbitration clauses in lengthy, unrelated documents, arguably causing employees to inadvertently sign away their right to litigate claims in court.

Finally, because arbitration awards are entitled to great deference from the courts, even erroneous arbitral awards (both those awarding relief to a plaintiff, as well as those denying relief) are nearly impervious to judicial oversight and review.

Court Decisions

For its part, the U.S. Supreme Court has long held that the Federal Arbitration Act mandates enforcement of arbitration agreements in all but the most unusual circumstances.

See Moses S. Cone Memorial Hospital v. Mercury Construction Corporation , 460 U.S. 1, 22 (1983); Dean Witter Reynolds v. Byrd , 470 U.S. 213, 218 (1985); Nitro-Lift Technologies v. Howard , 133 S. Ct. 500, 503-04 (2012); DirecTV v. Imburgia , 136 S. Ct. 463, 471 (2015).

Those decisions have not stopped plaintiffs' attorneys from working to stem the tide of arbitration, however. One initially successful approach was to attack the inclusion of class-action waivers in arbitration agreements, which require employees to individually arbitrate their employment claims rather than having the option to bring them on a class-wide basis on behalf of all similarly situated employees.

Nevertheless, in 2013, the U.S. Supreme Court in American Express v. Italian Colors Restaurant , 133 S. Ct. 2304 (2013), held that the FAA permits waiver of the class action procedure, so long as the arbitral process would allow redress of an individual claim, as the FAA's "command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low value claims." Nonetheless, life remains in the fight against class action waivers. In In re D.R. Horton, 357 NLRB No. 184 (Jan. 3, 2012), the National Labor Relations Board ruled that mandatory class waivers violate an employee's right to engage in concerted protected activity under the National Labor Relations Act. Although D.R. Horton was ultimately overturned by the U.S. Circuit Court of Appeals for the Fifth Circuit, the NLRB maintains its stance that class action waivers violate the NLRA, and continues to rule that an employer who uses such waivers has committed an unfair labor practice.In the meantime, plaintiffs have relied on D.R. Horton to attack mandatory arbitration provisions though the NLRB, hoping that a favorable board ruling will open the door to class litigation.

While the U.S. Supreme Court has held that mandatory arbitration agreements are generally enforceable, plaintiffs' attorneys continue to creatively challenge enforceability, and some judges find opportunities to chip away at the Supreme Court's rulings.1

As a result, employers seeking the many benefits of a reliably enforceable mandatory arbitration agreement should focus on carefully drafting arbitration provisions in a manner that will be more likely to withstand court scrutiny.

Suggestions on Drafting

Employers can take the following steps in drafting their arbitration policies to help protect against challenges to their enforceability.

• Although arbitration agreements contained in handbooks can be enforced, an employer should present the agreement to employees as a standalone document. That will help guard against an argument that the employee did not knowingly agree to arbitration or was not sufficiently alerted to a provision contained in a lengthier employment document.

While these arguments may lack legal merit (after all, the employee will likely abide by other handbook provisions, such as paid vacations, holidays and benefits), employers face them frequently. Some plaintiffs also may argue that statements in a handbook allowing unilateral employer modification make any arbitration provision contained in the handbook illusory.

• If disseminating an arbitration agreement electronically, employers should provide a clear method by which employees can demonstrate their review and acceptance of the agreement by, for example, including a check box next to the phrase, such as: "I have reviewed the company's arbitration agreement and agree to be bound by its terms." Further, the terms of the agreement could either: (1) be presented in the same document on which the employee accepts the agreement; or (2) be accessible through a clearly marked hyperlink.

Some courts have held that "Clickwrap agreements," in which the agreement's terms are displayed, at least in part, on the user's computer screen, are enforceable, while "browsewrap agreements," in which the terms are accessible only through a hyperlink at the bottom of a web page, potentially are not. See, e.g., Ajemian v. Yahoo! , 987 N.E.2d 604, 613 (Mass. App. Ct. 2013).

• Employers should maintain records demonstrating that employees have reviewed and accepted the arbitration agreement or at least received the agreement and continued working after having been informed that the agreement mutually binds both the employee and employer.

• Agreements should try to ensure that there is mutual employer-employee consent to arbitrate disputes. Courts have consistently viewed an initial offer of employment as sufficient consideration for entering into a mandatory arbitration agreement.

• Employers should broadly identify which claims are covered by the arbitration agreement. For example, some courts refuse to enforce a forum-selection clause of an independent contractor agreement after the individual filed a Fair Labor Standards Act suit in a different state. The court reasoned that the forum selection clause applied only to "disputes arising under" the agreement, and the plaintiff's misclassification claim under the FLSA did not depend upon the existence of the underlying contract. Stewart Organization v. Ricoh , 487 U.S. 22 (1982); Atlantic Marine Construction v. U.S. District Court , 134 S. Ct. 568 (2013). Courts suggested that, had the clause more broadly stated that it applied to any claim "related to the agreement or the relationship of the parties," the employer would have prevailed on its motion to dismiss. See Chebotnikow v. Limo Link, 2015 U.S. Dist. LEXIS 166, 387 (D. Mass., Dec. 11, 2015).

• Arbitration agreements should make the promise to arbitrate claims mutual, so that most potential claims the employer would have against the employee would also be subject to arbitration. It is possible a court may find an arbitration agreement unenforceable where it lacks mutuality. Employers should, however, include provisions applicable to both parties providing for immediate provisional judicial relief (such as a temporary restraining order or preliminary injunction) to prevent irreparable harm.

• Employers should agree to pay for the cost of the arbitration for all but senior level employees (though in jurisdictions like California, even senior level employees cannot in most cases be required to split the arbitrator's fees). As arbitration may impose significant filing and administrative fees on an employee seeking to file a claim, some courts have held that imposing a cost or fee-splitting requirement on employees can make access to arbitration impracticable, thus invalidating the agreement on substantive unconscionability grounds. Greentree Fin. Corp.-Ala. v. Randolph , 531 U.S. 79 (2000); Cole v. Burns Int'l Sec. Servs. , 105 F.3d 1465 (D.C. Cir. 1997); Brady v. Williams Capital Group, LP , 878 N.Y.S. 2d 693 (1st Dep't 2009), aff'd, 2010 N.Y. Slip Op 02434 (March 25, 2010).

• Arbitration agreements should not include provisions limiting individual statutory remedies. Arbitration is an alternate forum for resolving disputes, but many courts draw the line when an agreement limits relief that the law otherwise would allow.

• Arbitration agreements should include a severability clause. A court may deem even the most carefully drafted arbitration agreement as including problematic terms. Moreover, the validity of arbitration agreements is an evolving area of the law. Future court decisions will likely further address and clarify what terms are and are not permissible.

The inclusion of a severability provision may very well serve to save the enforceability of a mandatory arbitration provision by allowing a court to strike any offending provision rather than invalidating the entire agreement.

• If the company is large enough to be a class-action target, arbitration agreements should include an express class-action waiver. Employers should not leave the availability of class relief in arbitration open to question.

• Employers should include a "delegation clause," whereby an arbitrator, and not a court, decides whether the arbitration agreement covers a particular dispute or is otherwise enforceable. See Rent-A-Center, West v. Jackson , 130 S. Ct. 2772 (2010) (delegation clauses, i.e.,"a sentence or two assigning to the arbitrator any disputes related to the validity of the arbitration provision" are presumptively enforceable to resolve any dispute as to an agreement's enforceability, so long as other provisions of the arbitration agreement do not inhibit enforcement of the clause.); see also Monarch Consulting v. National Union Fire Ins. Co. of Pittsburgh, PA , 26 N.Y.3d 659, 27 N.Y.S.3d 97, 47 N.E.3d 463 (2016) (holding that where a contract contains a valid delegation to the arbitrator of the power to determine arbitrability, such a clause will be enforced absent a specific challenge to the delegation clause by the party resisting arbitration); Contec v. Remote Solution Co. , 398 F.3d 205, 205, 211 (2d Cir. 2005) (upholding the ability of the arbitrator to determine the validity of an arbitration clause). The clause enables quicker exit from the court system, as an arbitrator will decide the issues that a plaintiff is likely to raise if he or she wants to attack the parties' agreement. See Allied-Bruce Terminix Cos. v. Dobson , 513 U.S. 265, 280 (1995) ("[A]rbitration … is usually cheaper and faster than litigation … ."). The one exception to delegation should be disputes over the enforceability of a class action waiver. An arbitrator's erroneous decision on this issue would be nearly impervious to appeal. See Folkways Music Publishers v. Weiss , 989 F.2d 108, 111 (2d Cir. 1993) ("Arbitration awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation."); see also Hardy v. Walsh Manning Securities , 341 F.3d 126 (2d Cir. 2003); Dish Network v. Ray, No. 16-cv-00314-LTB, 2016 U.S. Dist. LEXIS 179289 (Dec. 28, 2016) (denying employer's motion to vacate an arbitrator's clause construction award allowing collective/class arbitration). Thus, the agreement should make clear that this particular issue is for a court to resolve.

• Employers should consider including a clause providing that the employee may opt out of the agreement within a set period of time following its receipt. In one recent case, the U.S. Court of Appeals for the Ninth Circuit held that a class-action waiver contained within a mandatory arbitration was not enforceable, but had the employee been given the opportunity to opt out of the agreement (making it not mandatory but instead voluntary) the class waiver would have been enforced. Morris v. Ernst & Young, No. 13. 16599 (9th Cir. Aug. 22, 2016).

• The law in this area is complicated and continues to evolve, in the legislative, regulatory or judicial arenas. Moreover, some employers are subject to special rules that do not apply to others (for example, certain Department of Defense contractors).

The use of arbitration provisions that include class-action waivers has become an increasingly popular way for employers to combat the rising cost and risk associated with court litigation. With careful drafting, such provisions are likely to be an enforceable and reliable means of ensuring the quick and cost-effective resolution of employment-related disputes.


1. Currently, there are four cases seeking to challenge class-action waivers where writs of certiorari to the U.S. Supreme Court have been filed: Murphy Oil USA, Inc . (5th Cir.); Lewis v. Epic Systems Corp. (7th Cir); Morris v. Ernst & Young (9th Cir.); and Patterson v. Raymours Furniture Co. (2d Cir.).

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A. Michael Weber is a shareholder in the New York office of Littler Mendelson. This article is reprinted with permission from the January 11, 2017 issue of the New York Law Journal.© ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.