United States: Circuit City Case Provides Little Direction to Drafters of Arbitration Agreements

Arbitration provisions in employment agreements have received significant attention following the Supreme Court's Circuit City decision handed down in March.¹ But while that decision confirmed the viability of employer-mandated arbitration, the Supreme Court did not address what terms are acceptable or required in an arbitration clause. Lower court decisions in cases where employees challenged the enforceability of arbitration agreements have helped to fill the gaps that were not addressed in Circuit City. In order to withstand employee challenges to enforcement, the following list addresses some of the items an arbitration clause should include:

1. An employee must not be deprived of substantive due process rights. (Limiting the amount or type of damages that can be awarded, unduly restricting discovery, and prohibiting fee-shifting are some of the ways employers can run afoul of due process concerns.)
2. Procedures defined in the agreement must be fundamentally fair to the employee. (In particular, the process for choosing the arbitrator must allow for the selection of an objectively unbiased individual on whom both parties can agree.)
3. The option to arbitrate must be contractually binding upon both the employee and employer. (In light of this requirement, employers must be careful about placing arbitration agreements in employment handbooks because handbooks typically contain a statement disclaiming the formation of any contractual obligations. If an arbitration agreement is included in the employee manual, a specific disclaimer should be used detailing which provisions are contractual.)
4. The agreement should provide that arbitration will be conducted in accordance with the American Arbitration Association's National Rules for the Resolution of Employment Disputes, and that the arbitrator's award will be final and binding.
5. Agreements should provide that disputes under existing statutory and common law doctrines, as well as doctrines subsequently enacted or adopted, are subject to arbitration. (Drafting the policy with a prospective bent should refute an employee's attempt to avoid arbitration of a dispute arising under a law not in existence at the time the agreement was executed.)
6. Arbitration should be required for claims brought against the employer as well as co-workers and supervisors. (Broad provisions relating to the applicability of the arbitration agreement will encompass claims asserting individual liability.)
7. To avoid the absurdity of arbitrating every disagreement in the workplace, the arbitration policy should contain limiting language relating to the type of dispute subject to arbitration. (For example, an agreement could contain a provision that limits arbitration only to legal or equitable claims. Furthermore, it may not be in a company's best interest to mandate arbitration of all employment-related disputes. In some situations, like those involving non-compete agreements or other restrictive covenants in effect, the daunting prospect of lengthy and expensive litigation may serve as a greater deterrent to employees than the relatively quick, low-cost option of arbitration. Conversely, employers seeking to protect trade secrets may prefer the confidentiality of arbitration rather than the public forum of a courtroom when resolving disputes involving misappropriation of proprietary information.)
8. A severability clause should be included to help ensure that an unenforceable term does not void the entire agreement. (Although some courts have refused to sever parts of an arbitration agreement, and instead, have declared the entire policy unenforceable, other courts have carved out the invalid portion and allowed the remaining provisions to survive. The absence of a severability clause was a factor in at least one court's refusal to enforce the valid sections of an arbitration agreement.)
9. The arbitration agreement should specify how the costs of arbitration will be covered by the parties. At the very least, in order to avoid placing too heavy a burden on the employee, the employer should agree to split the costs associated with the arbitration. Some employees have challenged cost splitting clauses on the basis that requiring the employee to cover even one-half of the cost creates an undue burden on the employee, and limits her ability to pursue arbitration. To help eliminate any such challenge, an arbitration clause should state that costs shall be split, unless the arbitrator determines otherwise.
10. Last, in order to avoid a challenge based on insufficiency of consideration, employers should require new hires to sign the agreement as a condition of employment. For existing employees, to ensure enforceability, it is advisable to tie the agreement to receipt of some employee benefit, such as a year end bonus, an annual raise, or a one-time payment.

Whether arbitration is advantageous for an employer depends upon many factors, including the number of lawsuits typically brought by employees, the desire to have employment disputes remain confidential, and the preference of having a comparatively quick resolution versus the prospect of a drawn out, costly legal battle. While arbitration awards remain subject to judicial review, employees will find it difficult to challenge a requirement that claims be submitted to arbitration when agreements contain terms that preserve the fairness of the proceeding. In addition, the items outlined above should be considered in drafting any arbitration agreement, however, employers should consult with counsel to ensure that specific agreements meet their particular needs and concerns, and are consistent with other employment policies, and all applicable laws in their particular jurisdiction.

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