United States: Mandatory Arbitration - Do Your Employees´ Duties Cross State Lines?

Nature of the Dispute

Many employers favor arbitration as a means to resolve disputes with their employees and therefore enter into contracts with their employees to require arbitration of claims. Benefits cited by employers for arbitration include the following:

1. Reduction of costs associated with litigation;
2. Faster resolution of claims;
3. Little likelihood for a runaway verdict/judgment;
4. Decision makers are more experienced in employment litigation;
5. Limited basis for appeal from arbitration decisions;
6. Decreased risk of adverse publicity because of the private nature of arbitration; and,
7. Fewer available remedies.

For many of these same reasons, employees attempt to circumvent mandatory arbitration clauses by filing lawsuits on the underlying claims and fighting the enforcement of mandatory arbitration clauses in court. Arguments frequently raised to strike mandatory arbitration clauses include:

1. The contract lacks mutuality (i.e. the clause binds the employee but not the employer);
2. The contract lacks consideration;
3. The employee is barred from seeking the arbitral forum because costs render it inaccessible;
4. The contract terms are "substantively" unconscionable;
5. The manner in which the employee was forced to accept the contract term is "procedurally" unconscionable;
6. The contract is confusing or ambiguous; and,
7. Mandatory arbitration is against public policy given the nature of the claims.

The court system is empowered by statute to determine whether the parties contracted to arbitrate the specific claims in question and whether the arbitration clause is enforceable. Either party has the right to demand a jury trial concerning the validity or existence of an arbitration agreement provided certain procedural steps are followed. If any doubts or questions arise with respect to the scope of the arbitration agreement, the agreement is construed in favor of arbitration unless the reviewing court is satisfied the agreement cannot be interpreted to cover a particular dispute. The appellate court reviews the trial court's decision affecting the arbitrability of a claim on a de novo basis, i.e. it reviews the record and revisits the underlying determination as if it had not previously been made

In determining whether the parties intended to arbitrate their claims, the court will examine the contract language. In interpreting the provisions of a contract, Washington courts apply the "context rule". In doing so, the court will analyze the intent of the contracting parties by viewing the contract as a whole, including the subject matter and objective of the contract, all circumstances surrounding its formation, the subsequent acts and conduct of the parties, statements made by the parties in preliminary negotiations, and usage of trade and course of dealings. The application of the context rule leads the courts to discover the intent of the parties based on their meeting of the minds, as opposed to the four corners of the written document.

Under the context rule, the presentation, wording, and explanation surrounding the arbitration clause is significant and an employer should prepare accordingly with contract language and policies addressing these issues. Some helpful tips include wording the clause carefully to include all potential claims (common law, state and federal statutory claims including violations of the Title VII, WLAD, and wage and hour statutes, and whistle blower statutes); putting the arbitration clause in a separate contract with a separate signature line; providing the arbitration contract to the employee with the application for employment; providing appropriate consideration for signing the arbitration agreement.

3. Washington favors enforcement of arbitration clauses.

Washington courts apply a strong presumption favoring arbitration. Washington's Arbitration statute states in pertinent part:

Two or more parties may agree in writing to submit to arbitration, in conformity with the provisions of this chapter, any controversy which may be the subject of an action existing between them at the time of the agreement to submit, or they may include in a written agreement a provision to settle by arbitration any controversy thereafter arising between them out of or in relation to such agreement. Such agreement shall be valid, enforceable and irrevocable save upon such grounds as exist in law or equity for the revocation of any agreement.(emphasis added)

4. Arbitration clauses have been found invalid if unconscionable or against public policy.

Despite the fact that Washington has a strong policy favoring arbitration, courts have stricken arbitration clauses in several instances. Mandatory arbitration clauses have been unenforceable where they have been deemed unconscionable. Here, the court's goal is to prevent oppression and unfair surprise. For example, a contract allocating costs to the employee so that it effectively renders the arbitral forum inaccessible would likely be found unconscionable. For this reason, it is important for arbitration clauses to include provisions providing the employee with no fee access to the arbitrator and a fair division of arbitration costs.

Courts have also stricken mandatory arbitration agreements on public policy grounds where employment contracts require the employee to forego a common law or statutory right to pursue judicial remedies. This type of attack has been particularly successful where egregious facts exist supporting workplace safety. Examples of such claims include the termination of an employee because he/she refused to install unsafe valves in a nuclear waste facility; refused to operate trucks carrying liquefied petroleum gas products over highways with inoperable emergency gas shutoff valves; and, reported to the Washington State Department of Ecology that the employer was recirculating sewage sludge through the plant, resulting in illegal discharges into the Skykomish River. In these instances, the courts have held that the employee's right to be free from wrongful termination in contravention of public policy may not be altered or waived by private agreement, and is therefore a nonnegotiable right.

With the uncertain application of public policy arguments against arbitration clauses, employers welcomed the U.S. Supreme Court's decision in Circuit City Stores Inc. v. Adams. Here the High Court ruled that arbitration agreements can be enforced under the FAA without contravening congressional mandates that employees be protected against discrimination. Furthermore, the Court held that "by agreeing to arbitrate a statutory claim, an employee does not forego the substantive rights afforded by statutes; he or she only submits their resolution in an arbitral, rather than a judicial, forum."

The Federal Arbitration Act (FAA) benefits employers because the Act's purpose is to overcome the courts' historical reluctance to enforce agreements to arbitrate. To achieve this purpose, the FAA compels judicial enforcement of a wide range of arbitration agreements. The FAA places arbitration agreements on the same footing as other types of contracts and requires courts to rigorously enforce written provisions. The United States Supreme Court recognizes Section 2 of the FAA as a Congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. This statement is sometimes referred to as the "Moses H. Cone principle. "The effect of the principle is to create a body of federal substantive law of arbitrability applicable to any arbitration agreement within the coverage of the Act. . . . The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability. With respect to determining the terms and enforcement of the agreement, "the parties' intentions control, but those intentions are generously construed as to issues of arbitrability."

Furthermore, the United States Supreme Court dispensed with the argument that arbitration should not be compelled because the agreement cuts off an employee's common law or statutory right to the judicial process, stating:;

There is no reason to depart from these guidelines where a party bound by an arbitration agreement raises claims founded on statutory rights. Some time ago this Court expressed "hope for [the Act's] usefulness both in controversies based on statutes or on standards otherwise created, and we are well past the time when judicial suspicion of the desirability of arbitration and of the competence of arbitral tribunals inhibited the development of arbitration as an alternative means of dispute resolution."

For the FAA to apply to a given case, two requirements must be met. There must be showing that the parties entered into a contract requiring arbitration for the claim in question and the contract must involve interstate commerce.

Assuming an agreement to arbitrate the claims in question exists, the employer must then demonstrate that the terms of the contract evidence an undertaking involving interstate commerce. Division One of the Washington Court of Appeals, recently held that an agreement requiring an employee as Division Manager to actively participate in the expansion of the employer's business in the Northwestern United States through growth of its existing business into new geographic markets was deemed sufficient to affect commerce. Employers intending to rely upon the benefits of the FAA should include language in their employment contracts, arbitration clauses, or other pertinent documents describing with as much detail as possible each employee's duties involving interstate commerce.

A third requirement applies to arbitration clauses in collective bargaining agreements. In such instances, an arbitration clause made part of a collective bargaining agreement will not waive an employee's right to a judicial forum unless such a waiver is clear and unmistakable.

Conclusion

While all arbitration clauses are subject to attacks based on contract law, Washington courts begin their analysis of arbitration clauses with a presumption favoring enforcement. As such, employers enter such disputes from a better vantage point than many employers in other states. Successful challenges have been made to arbitration clauses in Washington where an employee can demonstrate unconscionability or a violation of public policy.

However, for those employees whose duties involve interstate commerce, the federal presumptions favoring enforcement are much stronger and an employee will be required to bring forward exceptional and compelling evidence to convince a court that an arbitration agreement should not be enforced under the FAA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.