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Pre-Dispute Arbitration of Discrimination Claims

By Jeffrey S. Klein, Nicholas J. Pappas and Janet Goldberg

Last September, the Second Circuit held for the first time that a pre-dispute individual agreement to resolve in arbitration statutory employment discrimination claims did not violate Title VII of the Civil Rights Act of 1964.1  The ruling in Desiderio v. National Association of Securities Dealers, Inc.2

followed the majority of federal circuits that have considered the legality of pre-dispute arbitration of statutory discrimination claims, and declined to follow the contrary position of the Equal Employment Opportunity Commission and a case decided by the Ninth Circuit Court of Appeals.3

The Second Circuit’s decision in Desiderio should end any remaining uncertainty among New York employers as to the legality of pre-dispute arbitration of statutory discrimination claims following the Supreme Court’s 1991 decision in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647 (1991).  In that case, the Supreme Court held that a claim arising under the Age Discrimination in Employment Act (“ADEA”) of 1967 would be resolved in arbitration pursuant to an arbitration agreement contained in a securities registration application.  

The Desiderio case also adds one more nail in the precedential coffin of the Supreme Court’s 1974 decision in Alexander v. Gardner-Denver Co., 415 U.S. 36, 94 S.Ct. 1011 (1974).  In Alexander, the Supreme Court held that employees generally will not be held to have waived the right to a trial and to pursue all available remedies regarding statutory discrimination claims even where its union has agreed to arbitrate such claims as part of a collective bargaining agreement.4  

Based on the weight of authority of the cases following Gilmer, employers have considerably greater legal endorsement for requiring employees to enter into pre-dispute arbitration agreements covering employment discrimination claims as a condition of employment.  Such agreements may be particularly attractive to employers in the securities industry who can no longer take advantage of mandatory pre-dispute arbitration requirements imposed by the rules of the National Association of Securities Dealers (“NASD”) and the New York Stock Exchange (“NYSE”).  In 1998, the Securities and Exchange Commission approved amendments to the rules of both the NASD and the NYSE which ceased requiring SEC-registered brokers to agree to resolve all employment discrimination claims with member companies in NASD- or NYSE-sponsored arbitration unless the parties to any dispute entered into a post-dispute arbitration agreement.5  Although the NASD no longer requires arbitration of all employment discrimination claims, the NASD will continue to honor any pre-dispute arbitration agreement a member may choose to enter with an employee.  By contrast, the NYSE will no longer provide a forum for resolution of employment discrimination claims under any pre-dispute arbitration agreement.6  Thus, employers in the securities industry that wish to ensure their continued ability to resolve employment discrimination claims in arbitration may wish to enter into individual pre-dispute agreements to arbitrate discrimination claims with employees that select arbitral tribunals other than the NASD or NYSE, such as the American Arbitration Association.

In this article, we analyze the Desiderio decision and discuss issues employers should consider in structuring mandatory pre-dispute arbitration programs.

Susan A. Desiderio was hired by Florida’s Suntrust Bank (“Suntrust”) in March of 1996 as a registered securities representative.  As a condition of her employment, she was required to complete a Uniform Application for Securities Registration or Transfer Form (“Form U-4”), an agreement in which securities broker employees prospectively agree to mandatory arbitration of statutory discrimination claims.  At the time of her application, completion of the Form U-4 was required by state and federal law.  Although Desiderio completed the Form U-4 in all other respects, she struck out the mandatory arbitration provision.

While Suntrust did not object to the modification of the Form U-4, the NASD would not accept the altered form for registration.  When Desiderio refused to execute an unaltered Form U-4, Suntrust withdrew its offer of employment because Desiderio could not become registered with the NASD as required by state and federal law.

Desiderio subsequently filed suit against both the NASD and the SEC, challenging the NASD’s adoption and the SEC’s approval of the requirement that securities brokers prospectively agree to arbitrate employment disputes involving statutory discrimination claims as a condition of employment.7  The defendants moved for judgment on the pleadings for failure to state a cause of action after Desiderio filed her complaint.  In dismissing Desiderio’s complaint and finding in favor of both the NASD and the SEC, the District Court concluded that the Form U-4 arbitration requirement lawfully precluded suits in court under Title VII.8

The Second Circuit, following the lead of the majority of circuits to address this issue,9 affirmed the District Court’s dismissal of Desiderio’s claims.  It concluded that Desiderio had not satisfied her burden of showing that Congress intended to exempt Title VII claims from prospective waiver of judicial remedies,10 and stressed its disagreement with the Ninth Circuit’s interpretation of § 118 of the Civil Rights Act of 1991.11  Section 118 provides “‘[w]here appropriate and to the extent authorized by law, the use of ... arbitration[] is encouraged’ to resolve Title VII claims.”12  Finding this language clear and unambiguous on its face, the Court declined to consider the legislative history of the 1991 Act, holding that the text plainly exhibited a Congressional intent to encourage arbitration of Title VII disputes, and not to preclude the use of the arbitral forum to resolve such disputes.

In Duffield, the Ninth Circuit had arrived at a contrary conclusion, however, finding the language of § 118 to be ambiguous.  The Court then relied on the statute’s legislative history to conclude that Congress enacted § 118 “to codify its position that ‘compulsory arbitration’ of Title VII claims was not ‘authorized by law,’ and that compelling employees to forego their rights to litigate future Title VII claims as a condition of employment was not ‘appropriate.’”13

The Second Circuit rejected the Ninth Circuit’s holding that arbitration was inconsistent with the general purpose of the 1991 Act’s provision of additional rights and remedies for Title VII plaintiffs.  It emphasized that arbitrators also have the power to award compensatory and punitive damages and to mandate fee shifting.  Furthermore, the Court saw no conflict between compulsory arbitration clauses and the 1991 Act’s provision of the right to a jury trial in Title VII cases.  It noted that the Supreme Court had enforced a mandatory arbitration clause in Gilmer, which had involved a dispute under the ADEA, a statute that also provided for civil jury trials.

The Second Circuit rejected the remainder of Desiderio’s arguments that the Form U-4 was unenforceable as an unconscionable contract of adhesion.  The Court emphasized that both sides were bound by the requirement to submit disputes to arbitration, and that as previously noted in Gilmer, “‘[m]ere inequality in bargaining power’ between employers and employees is not alone sufficient to hold arbitration agreements unenforceable.”14

Vindication of Rights
Although Desiderio establishes that pre-dispute agreements requiring the mandatory arbitration of statutory employment discrimination claims as a condition of employment are enforceable in the Second Circuit, such agreements may be unenforceable in whole or in part in the event a court concludes that the prospective litigant is unable to vindicate effectively the statutory cause of action in the arbitral forum.15  Even when enforcing agreements to arbitrate the substance of the dispute, several circuit and district courts have highlighted situations in which at least portions of agreements to arbitrate statutory discrimination claims may be unenforceable.  For example, courts have sometimes stricken portions of arbitration agreements relating to the sharing of the costs of arbitration or the limitation of the employee’s statutory remedies.

Cost Sharing
Arbitration agreements often require both parties to split arbitration costs and fees, although plaintiffs have argued that such costs are prohibitive to seeking arbitration and the vindication of their statutory rights.  The circuits that have addressed the issue are split as to the enforceability of a clause requiring the plaintiff to share the costs and/or fees of arbitration.  The Tenth, Eleventh, and District of Columbia Circuits16 have invalidated such requirements, while the First and Seventh Circuits have upheld such clauses, reasoning that the arbitration panel may not require the payment of such fees or that the plaintiff can seek judicial review of allegedly excessive fees.17

Precluding Relief
Courts generally will enforce arbitration agreements, even those that waive certain statutory rights and remedies,18 unless such a waiver would preclude remedies necessary to uphold the plaintiff’s substantive rights under the anti-discrimination statutes.  For example, in Paladino v. Avnet Computer Technologies, Inc., involving a Title VII claim, the Eleventh Circuit refused to compel arbitration of statutory claims where the arbitration agreement provided damages only for breach of contract.  The arbitration clause at issue explicitly stated that the arbitrator was only authorized to award damages for breach of contract “and shall have no authority whatsoever to make an award of other damages.”19  In refusing to compel arbitration of Paladino’s statutory discrimination claims, the Court declared the arbitration clause “woefully deficient” because it did not fairly inform Paladino that it covered Title VII claims and because the language of the agreement “is fundamentally at odds with the purposes of Title VII because it completely proscribes an arbitral award of Title VII damages.”20

A Court may refuse to uphold portions of an arbitration award, however, even after the arbitration of the substantive dispute, to the extent that an arbitration clause violates public policy or impedes the employee’s ability to vindicate statutory rights effectively.  In DeGaetano v. Smith Barney, Inc., for example, the Court voided as against public policy that portion of the arbitral award that prevented the employee from recovering attorney’s fees as such relief was available to a prevailing plaintiff under Title VII.21

The Second Circuit has now joined the majority of federal courts of appeals in holding that pre-dispute arbitration agreements are valid under the federal anti-discrimination laws.  The Desiderio case should encourage employers to consider adopting mandatory arbitration programs.  

The benefits of arbitration programs are many.  One significant benefit is the avoidance of inherently uncertain jury trials, with protracted and expensive pre-trial discovery proceedings and motion practice.  Similarly, arbitration provides the possibility of greater confidentiality to the proceedings, as opposed to judicial proceedings which occur in whole or in part in public view.  Finally, arbitration offers limited judicial review and, therefore, greater finality to arbitral awards.

There also are significant disadvantages to mandatory pre-dispute arbitration that should be considered.  The greater accessibility to employees of arbitration actually may encourage employees to assert claims that they otherwise would not have brought if they were required to hire a lawyer to proceed in court.  In addition, the informality of arbitration and the looseness of evidentiary rules applied by some arbitrators could prejudice employers in certain cases where the employer would otherwise preclude the introduction of damaging, but inadmissible, evidence.

Employers considering whether to adopt arbitration programs should weigh all of these issues carefully.  Employers also should exercise great care in drafting arbitration agreements to maximize their enforceability.  For example, courts are split as to whether agreements to arbitrate will be enforceable if employees have not “knowingly” and “voluntarily” waived their statutory rights in entering into the agreement to arbitrate.  Accordingly, employers would be prudent in prophylactically drafting the arbitration agreement to highlight the existence of the arbitration agreement, the types of claims subject to arbitration, and the remedies available to employees for a violation of the employee’s statutory rights.22

If employers do adopt arbitration programs, employers should be mindful that many courts have indicated that arbitration will be enforced only if the program provides an adequate forum in which to vindicate statutory rights.  For example, in determining the adequacy of the arbitral forum, employers may consider whether or not their programs include some or all of the following elements:  (1) neutral arbitrators, (2) more than minimal discovery, (3) a written award, (4) relief similar to that available in court, and (5) no requirement that the employee share arbitrator’s fees or unreasonable costs of arbitration.23  Employers also may wish to check the remedies that courts in their jurisdictions have held may be waived in the arbitration agreement and those that may not be waived because they are considered necessary to vindicate the employee’s statutory rights.

Finally, employers with facilities located in the Ninth Circuit, encompassing California, Nevada, Arizona, Oregon, Washington, Idaho, Montana, Alaska, and Hawaii, must recognize that the circuit’s highest court has prohibited enforcement of mandatory arbitration of Title VII claims and claims under California’s Fair Employment and Housing Act.24  It should be noted that even in the Ninth Circuit, however, the courts may enforce mandatory arbitration agreement of certain claims, such as state tort and contract claims.25

Despite the benefits of arbitration, many employers to date have been reluctant to adopt mandatory pre-dispute arbitration programs.  As the courts settle on the legality of such programs, employers may wish to reconsider their prior conclusions about arbitration.  

1.        The Equal Employment Opportunity Commission (“EEOC”) still retains the right to investigate discrimination claims and to bring class actions and to seek equitable relief, however.  Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32, 111 S.Ct. 1647, 1655.
2.        191 F.3d 198 (2d Cir. 1999).
3.        See Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 7 (1st Cir. 1999); Desiderio v. National Association of Securities Dealers, Inc., 191 F.3d 198, 205-06 (2d Cir. 1999); Seus v. John Nuveen & Co., 146 F.3d 175, 182 (3rd Cir. 1998), cert. denied, — U.S. — , 119 S.Ct. 1028 (1999); Austin v. Owens Brockway Glass Container, Inc., 78 F.3d 875, 882 (4th Cir. 1996), cert. denied, 519 U.S. 980, 117 S.Ct. 432 (1996); Alford v. Dean Witter Reynolds, Inc., 939 F.2d 229, 230 (5th Cir. 1991); Willis v. Dean Witter Reynolds, Inc., 948 F.2d 305, 307 (6th Cir. 1991), Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361, 365 (7th Cir. 1999), cert. denied, — U.S. —, 120 S.Ct. 44 (1999); Patterson v. Tenet Healthcare, Inc., 113 F.3d 832, 837 (8th Cir, 1997); Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1487 (10th Cir. 1994); Bender v. A.G. Edwards & Sons, Inc., 971 F.2d 698, 700 (11th Cir. 1992); Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1482-83 (D.C. Cir. 1997).   For the

Ninth Circuit’s and EEOC’s contrary views, see Duffield v. Robertson Stephens & Co., 144 F.3d 1182, 1190 (9th Cir. 1998), cert. denied, — U.S. —, 119 S.Ct. 445, 465 (1998) (holding that employees cannot be required prospectively to waive the right to bring Title VII claims in Court as a condition of employment) and EEOC, Notice No. 915.002, Policy Statement on Mandatory Binding Arbitration as a Condition of Employment (1997).  The New York Court of Appeals has also enforced arbitration of state racial and gender anti-discrimination claims in the securities industry.  See Fletcher v. Kidder, Peabody & Co., Inc., 81 N.Y.2d 623, 638, 601 N.Y.S.2d 686, 693-94 (1993).
4.        See also Austin v. Owens Brockway Glass Container, Inc., 78 F.3d 875 (4th Cir. 1996), cert. denied, 519 U.S. 980, 117 S.Ct. 432 (1996), in which the Fourth Circuit extended Gilmer to cover collective bargaining agreements that required resolution of statutory discrimination claims to arbitration.  In Wright v. Universal Maritime Service Corp., 525 U.S. 70, 119 S.Ct. 391, 396 (1998), the Supreme Court explicitly declined to address whether Gardner-Denver’s complete prohibition of a union’s waiver of a judicial forum survived Gilmer.  The Supreme Court held, however, that it would not infer that the parties intended to waive a judicial forum for statutorily-protected rights from a general contractual arbitration provision, stating that any waiver of a judicial forum must be “clear” and “unmistakable.”  Id.

5.        See SEC Release No. 34-30109, 63 Fed. Reg. 35299,35303 (June 29, 1998), 1998 WL 339422; SEC Release No. 34-40858, 64 Fed. Reg. 1051 (January 7, 1999), 1999 WL 3315.
6.        Id.
7.        Desiderio v. National Association of Securities Dealers, Inc., 2 F. Supp. 2d 516 (S.D.N.Y. 1998).
8.        Id. at 519-20.
9.        See cases cited in note 2.
10.        See Desiderio, 191 F.3d at 202.
11.        Desiderio, 191 F.3d at 203.
12.        Id.
13.        Duffield, 144 F.3d at 1196.
14.        Desiderio, 191 F.3d at 207.
15.        See Gilmer, 500 U.S. at 28, 111 S.Ct. at 1653.
16.        See Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230, 1235 (10th Cir. 1999); Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054. 1062 (11th Cir. 1998) (Cox , J. and Tjoflat, J., concurring); Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1484-85 (D.C. Cir. 1997).
17.        See Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361, 366 (7th Cir. 1999), cert. denied, — U.S. —, 120 S.Ct. 44 (1999); Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 16 (1st Cir. 1999).

18.        See, e.g., DeGaetano v. Smith Barney, Inc., No. 95 Civ. 1613 (DLC), 1996 WL 44226, *6 (S.D.N.Y. 1996) (enforcing agreement to arbitrate statutory claims although punitive damages, attorneys’ fees, and injunctive relief were unavailable under the terms of the arbitration agreement).
19.        134 F.3d 1054, 1057 (11th Cir. 1998).
20.        Id. at 1059-60.
21.        983 F. Supp. 459, 470 (S.D.N.Y. 1997).
22.        See Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 18-19, 21 (1st Cir. 1999); Seus v. John Nuveen & Co., Inc., 146 F.3d 175, 183, n.2 (3d Cir. 1998).  To the extent that an agreement to arbitrate is viewed as a “waiver” of statutory rights, employers should also consider the legal requirements for obtaining a valid waiver of rights under the law.
23.        See Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1482 (D.C. Cir. 1997).
24.        Duffield, 144 F.3d at 1202-03.
25.        Id.  (finding that mandatory arbitration of state tort and contract claims were not prohibited by Congress in the Civil Rights Act of 1991).