GUEST-POST PART II | Employment Arbitration: Short-Term Value but Long-Term Harm

by F. Peter Phillips

This post continues Part I.

As drafted, the Arbitration Fairness Act of 2009 (House Bill 1020) would amend Section 2(b) of the FAA to render invalid any pre-dispute arbitration agreement that purports to require arbitration of “an employment, consumer, or franchise dispute.” (“Franchise dispute?” How did that get in there? I would have thought that, subject to FTC regulation and state disclosure requirements, franchise is a pretty straightforward commercial relationship, eminently suitable to arbitration. But, hey, what do I know?)

Additionally, the Arbitration Fairness Act would amend Section 2(c) of the FAA to provide that “the validity or enforceability of an agreement to arbitrate [ — not just agreements concerning employment or consumer or franchise disputes — any agreement to arbitrate –] shall be determined by the court, rather than the arbitrator.” This mischievous piece of ineptitude, while presumably aimed at ensuring the invalidity of employment and consumer arbitration “agreements,” undermines the established principles of severability and kompetenz-kompetenz that form the bedrock of international commercial arbitration, and threatens to wreak havoc with international arbitrations whose situs is within the United States. Any commercial party seeking to evade its arbitration obligations need only recite that the agreement concerns employees or consumers or franchises, and the matter automatically goes to the place most international businesspeople consider the darkest pits of hell – an American courtroom.

The proposed bill would outlaw all employment arbitration agreements — including agreements contained in contracts negotiated at arm’s-length by senior executives represented by sophisticated counsel. It would ban any arbitration whatsoever, irrespective of the design of the process to ensure procedural fairness. And it seems to be based on the entirely specious assumption that individual employees, the court system, and society at large would be advantaged if the only way aggrieved employees could be vindicated was by suing their employers. (See inferno, above.)

The FAA being gutted, the courts being swamped, the bedrock principles of international commercial arbitration being negated, the status of the United States as a reliable situs for international commercial dispute resolution being impugned – all of these evils I lay at the feet of pre-dispute mandatory employment arbitration and the broad indignation that it prompts.

Going back to my original anecdote, my concern isn’t for the boulder – it’s for the chisel!

The ABA has denounced the proposed legislation, reasoning that “the unintended consequences of arbitration legislation and regulation could materially alter the established legal landscape for international arbitration with respect to the validity of pre-dispute arbitration agreements in a broad range of cases and to the division of authority between the courts and the arbitrators. These changes will have major ramifications for international commercial arbitration in the U.S. and for U.S. businesses in the global marketplace.”

Arbitration is a valuable — indeed irreplaceable — tool for managing mercantile transactions. It is time to acknowledge that it has been misused to manage non-commercial relationships. It matters not at all that the Supreme Court permits employment arbitration — short-sighted companies are permitted to do any number of dumb things, including whacking a 300-lb boulder with a wood chisel.

The lawyers’ operation may have been a success. But the patient is dying. For recent evidence, note that on December 19, 2009 President Obama signed into law an Act authorizing defense spending. Included in the bill was a provision authored by Senator Al Franken (D-Minn.), prohibiting defense contractors receiving more than one million dollars from entering into any arbitration agreements with employees purporting to require private arbitration of claims arising from Title VII of the Civil Rights Act of 1964. Senator Franken had previously held hearings on this issue, featuring (among others) Jamie Leigh Jones, the former Halliburton employee who was forced to arbitrate a claim of sexual assault, and employment attorney Mark A. deBernardo.

Not a great ad for the arbitration process.
Here is part of the text of Section 8116 of the Act:

SEC. 8116. (a) None of the funds appropriated or otherwise made available by this Act may be expended for any Federal contract for an amount in excess of $1,000,000 that is awarded more than 60 days after the effective date of this Act, unless the contractor agrees not to:

(1) enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention; or

(2) take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates that the employee or independent contractor resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention.

(b) None of the funds appropriated or otherwise made available by this Act may be expended or any Federal contract awarded more than 180 days after the effective date of this Act unless the contractor certifies that it requires each covered subcontractor to agree not to enter into, and not to take any action to enforce any provision of, any agreement as described in paragraphs (1) and (2) of subsection (a), with respect to any employee or independent contractor performing work related to such subcontract. For purposes of this subsection, a ‘‘covered subcontractor’’ is an entity that has a subcontract in excess of $1,000,000 on a contract subject to subsection (a).

Are we going to keep doing this until we utterly ruin the practice of arbitration? Institutions are socially accountable, either in the near term or the long term. If employers keep doing stupid stuff, and if lawyers keep helping them do it, then one day when the bath water is drained there are going to be a lot of highly-valued babies in there.

Technorati Tags: law, ADR, arbitration

F. Peter Phillips is an arbitrator and mediator practicing in the New York City area. He teaches ADR and International Commercial Dispute Resolution at New York Law School. This post appeared in a different form at the Business Conflict Blog.