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Pros and Cons of Arbitration After Recent FAA Amendments

On Feb. 10, 2022, Congress passed H.R. 4445, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (the Act). The Act became effective immediately on March 3, 2022 when President Biden signed it into law. The Act amends the Federal Arbitration Act, 9 U.S.C. §1, et seq. (FAA), to empower persons alleging conduct constituting a “sexual harassment dispute” or a “sexual assault dispute” to make an “election” invalidating a pre-dispute agreement to arbitrate “with respect to a case” that “relates to” the dispute. The Act further empowers complainants to invalidate “pre-dispute joint action waivers” with respect to such “cases”. Thus, any pre-dispute waiver of the right to file a class or collective action in court will no longer preclude the filing of a case relating to sexual harassment or sexual assault.

Although the Act by its terms does not require employers to amend their arbitration policies or agreements, it will greatly impact how private sector employers resolve disputes with their workers. According to a 2018 report by the Economic Policy Institute, more than half of the non-union private sector workforce is subject to mandatory pre-dispute arbitration procedures. Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Economic Policy Institute (April 18, 2018).

Accordingly, employers with arbitration programs may wish to take a fresh look at mandatory pre-dispute arbitration. One practice employers may now consider is whether to offer employees the option to arbitrate some or all employment claims only after any employment dispute has arisen. The Act does not preclude such “post-dispute” arbitration agreements.

In this article, we review the pros and cons of arbitration agreements and programs in light of Congress’s recent amendment of the FAA to make mandatory pre-dispute agreements to arbitrate sexual harassment and sexual assault disputes unenforceable.

Background

Prior to the Act, a number of states had already targeted arbitration provisions in employment agreements. See, e.g., 2018 N.Y. C.P.L.R. §7515 (prohibiting the use of arbitration agreements for claims of sexual harassment); Cal. Assembly Bill 51 (prohibiting employers from requiring employees to enter into arbitration agreements as a condition of employment, continued employment, or the receipt of any employment-related benefit). Courts have come to varying conclusions regarding whether or not the FAA preempts such legislation. See Latif v. Morgan Stanley & Co., 2019 WL 2610985 (S.D.N.Y. June 26, 2019) (holding that the New York ban on mandatory arbitration in sexual harassment cases was preempted by the FAA); Chamber of Commerce v. Bonta, 13 F.4th 766 (9th Cir. 2021) (holding that the California bill was not preempted in its entirety by the FAA because it “does not make invalid or unenforceable any agreement to arbitrate,” but instead mandates “that employer-employee arbitration agreements be consensual”). The Act has mooted these cases, in part, by making unenforceable mandatory pre-dispute agreements to arbitrate cases related to sexual harassment and sexual assault. However, absent further Congressional action, the FAA’s mandate that pre-dispute arbitration agreements covering cases unrelated to sexual harassment or sexual assault remains enforceable.

Congress enacted the FAA in 1925 with the intention of ending judicial hostility towards arbitration agreements and strengthening enforcement of agreements to arbitrate. Gilmer v. Interstate/Johnson Lane, 500 U.S. 20, 24 (1991). Section 2 of the FAA provides that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. (emphasis added). That section declares “a liberal federal policy favoring arbitration agreements.” See Moses H. Cone Mem’l Hosp. v. Mercury Constr., 460 U.S. 1, 24 (1983). The scope and applicability of the FAA continues to be litigated, and employers should continue to monitor such developments. (The Supreme Court is currently considering three cases regarding the enforceability of arbitration agreements as related to employment disputes. See Southwest v. Saxon, Dkt. No. 21-309 (considering an airline whose job included loading and unloading airplane cargo could avoid arbitration of FLSA claims under an exemption to the FAA for transportation workers); Viking River Cruises v. Moriana, Dkt. No. 20-1573 (considering whether the FAA requires the enforcement of an arbitration agreement that would require representative action claims, including those under California’s Private Attorney General Act, to be arbitrated); Badgerow v. Walters, Dkt. No. 20-1143 (considering whether federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award when the only basis for the jurisdiction is that the underlying dispute involved a federal question).)

Additionally, the Supreme Court’s 2018 decision in Epic Systems v. Lewis upholds the enforceability of pre-dispute class action waivers. 138 S. Ct. 1612 (2018). Such class action waivers continue to be enforceable for cases unrelated to claims of sexual harassment or sexual assault.

Arbitration Program Amendments

In light of the Act, employers should strongly consider amending their pre-dispute arbitration programs and agreements in order to exclude cases related to sexual assault and sexual harassment claims. If an arbitration program does not expressly exclude coverage of such cases, employees might theoretically commence arbitration of a case related to a claim of sexual harassment or sexual assault and then belatedly elect to avoid arbitration on the eve of the arbitration hearing. The timing of such an election would appear to be both wasteful and possibly prejudicial in the event the employee were subsequently to commence a judicial action armed with information gleaned in the terminated arbitration process.

In addition to amending pre-dispute arbitration programs and agreements to exclude arbitration of cases subject to the Act, employers also should consider amending their programs and agreements to require employees to make their elections to proceed with or to avoid arbitration at the inception of the arbitration process. For example, the arbitration program or agreement may be amended to require the employee to affirm at the outset of an arbitration proceeding that the case is not related to a sexual harassment or sexual assault dispute. Such an affirmation would provide employers with a reasonable basis for avoiding the expenditure of time and resources on an arbitration only to later be presented with the employee’s election to avoid arbitration.

Alternatively, employers may choose to enter into arbitration agreements with employees to submit disputes to arbitration after such disputes arise. Post-dispute agreements to arbitrate are outside the scope of the Act, and their enforceability would be determined under the FAA, subject only to defenses available under the FAA such as contract formation defenses, like fraud duress, or unconscionability. See, e.g., Johnson v. AT&T Mobility, 2010 WL534285, at *3 (S.D. Tex. Dec. 21, 2010) (stating that a post-dispute arbitration agreement is valid under the FAA if “it meets the requirements of general contract law of the applicable state”). A post-dispute arbitration agreement should specify the nature of the dispute, and confirm that the employee is knowingly and voluntarily agreeing to proceed to resolve the dispute in arbitration.

Finally, employers may choose to end their practices of entering into agreements to arbitrate altogether, and revert to allowing employees to pursue any employment claims in court. As further discussed below, there are many reasons favoring arbitration, but there also are many reasons employers may find the protections available from courts to be more beneficial.

When deciding what role arbitration will play in how workplace disputes are resolved, employers may wish to consider the following benefits and drawbacks of arbitration.

Benefits of Arbitration

Speed: Arbitrators tend to resolve disputes more quickly than courts, thereby lowering the total amount of time and resources incurred by both parties. Courts in many jurisdictions are congested and trials often do not take place for years after the commencement of an action. By contrast, arbitrators may limit discovery and pretrial motion practice, allowing cases to move more quickly. The parties also can agree to such a limitation in their arbitration agreement. Additionally, arbitration hearings can usually be scheduled around the parties’ availability, unlike most court calendars, which are often inflexible.

Efficiency: Arbitration proceedings typically have more relaxed rules of evidence and procedure, and may not involve the oftentimes-laborious discovery process required by courts. Unlike litigation in courts, arbitration allows the parties to control who the decision maker is, allowing them to select an arbitrator who is a specialist in the relevant field. In arbitration, the parties have easier access to the arbitrator than they would to a judge in court, and in the event disputes arise, they typically can be resolved more quickly, often through informal communications.

Confidentiality: Litigating employment disputes in a public judicial forum may harm an employer’s goodwill with customers and lessen employee morale and productivity. The confidential nature of arbitration proceedings and decisions may similarly benefit employees who may prefer to litigate their disputes in private in order to avoid publicizing embarrassing, personal, or even traumatizing information. Employees who want to vindicate their rights without notifying their colleagues or the public of the details will benefit from the safeguards provided by arbitration’s confidentiality.

Case outcomes: Although data on outcomes can be difficult to gather and interpret (see, e.g., Samuel Estreicher et al., Evaluating Employment Arbitration: A Call for Better Empirical Research, 70 Rutgers Univ. L. Rev. 375 (2018)), some employers believe arbitration awards can be less than awards for similar claims brought in court. Litigating in court brings with it the risk of a “runaway” jury that may be more open to emotional appeals or otherwise inclined to decide in favor of the employee. Additionally, larger, multi-jurisdictional employers or employers that rely heavily on independent contractors rather than traditional employees may be at greater risk for class action claims. Arbitration can mitigate such risk for labor claims (other than sexual harassment or sexual assault claims) that are amenable to certification as class or collective actions, such as certain wage and hour or discrimination claims.

Drawbacks of Arbitration

Cost of forum: The cost of the arbitration forum may be a drawback for employers. In arbitration, employers frequently pay the cost of the arbitrator, as courts have imposed limits to the extent to which the cost can be allocated to employees. (For more on the landscape of cost sharing provisions in arbitration agreements and the legal standards for enforceability, see Jeffrey S. Klein & Nicholas J. Pappas, Enforceability of Cost-Sharing Provisions in Arbitration Agreements, NYLJ (July 31, 2018).) In court actions, the taxpayer bears the cost of the judge and other associated costs. Arbitration fees can also be substantial where employers must defend multiple, unconsolidated arbitrations.

Limited judicial review: Arbitration provides a limited scope of judicial review, whereas courts allow multiple levels of review by appellate courts. Review by appellate courts of legal issues is often de novo, and certainly more robust than is available in arbitration.

Negative publicity: Whatever the true benefits of arbitration may be, the Act and the press surrounding it have resulted in some viewing arbitration less favorably than they did in the past. Even before the Act became law, many companies ended their practices of entering into mandatory pre-dispute arbitration agreements in the face of growing pressure from their employees. See Queenie Wong, Facebook scraps forced arbitration for sexual harassment claims, CNET (Nov. 9, 2018).  An employer who is willing to allow employees’ claims to be openly litigated in court may be seen as one that is committed to transparency into their workplace practices, whereas an employer who maintains an arbitration program, and one that is mandatory in certain contexts, may be seen as one that has something to hide or keep secret.

Conclusion

In addition to weighing the benefits against the drawbacks of arbitration programs, employers should continue to monitor legal developments. The Biden Administration has stated that it anticipates working with Congress on broader legislation to extend unenforceability of arbitration agreements to claims such as race and gender discrimination, wage theft, and unfair labor practices. Executive Office of the President Office of Management and Budget, Statement of Administration Policy: H.R. 4445- Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (Feb. 1, 2022). Members of Congress have already introduced H.R. 123, the Forced Arbitration Injustice Repeal Act, which would broaden the scope of employment claims to be excluded from arbitration. Given the changing landscape in this area, employers should consult with counsel to implement any necessary changes in their arbitration policies and practices.

Reprinted with permission from the April 6, 2022 edition of the NEW YORK LAW JOURNAL © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com

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