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February 1, 2023

Recent Developments in Arbitration: Don’t Throw the Baby Out with the Bathwater (Part I)

By David Hoffman

One of the many salutary effects of the #MeToo movement in the U.S. has been the light it has shed on mandatory arbitration provisions in employment agreements.  Shortly after Harvey Weinstein’s conviction in 2020 on rape and sexual assault charges, Congress passed (and President Biden signed) the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (“EFAA”).  The EFAA reopens courthouse doors to individuals with claims of workplace sexual harassment and/or sexual assault who might otherwise have been required to arbitrate those claims.

Mandatory arbitration provisions are now included in the employment agreements of more than 60 million American workers, and Democrats in Congress have tried to pass legislation making such requirements unenforceable for all employment disputes – not just claims involving sexual misconduct.

Before considering the merits of such a ban, perhaps we should revisit the origins of this relatively recent expansion of arbitration in the U.S.

Arbitration – defined as “private adjudication,” as distinct from mediation, which is assisted negotiation – has a long history, going back thousands of years to Biblical times.  Here in the U.S., there are records of arbitration being used by Native American tribes and New England colonists.  George Washington provided in his will that any disputes under it would be resolved by arbitration.

In the nineteenth and early twentieth centuries, chambers of commerce and trade associations in various industries used commercial arbitration to prevent the disruption of commercial relationships that might result from litigation.  For example, the Silk Association, which adopted arbitration in 1898, embraced arbitration because it would enable businesspeople to settle disputes according to trade customs and “the ordinary understanding of what is right and wrong.”  In the employment arena, state legislatures and Congress created arbitration boards that were available if the parties to a conflict preferred arbitration to a public courtroom.

Despite the wide use of arbitration, the common law remained hostile to agreements to arbitrate future disputes.  Most courts in the United States held that such agreements were unenforceable because they were seen as infringing on the courts’ jurisdiction to handle disputes.  This view did not change until the early twentieth century.

The modern era of commercial arbitration began in 1920 when New York State adopted the first statute to permit enforcement of agreements to arbitrate future disputes.  In 1925 Congress enacted the Federal Arbitration Act (FAA), which was based on the New York statute, and in 1926 the American Arbitration Association was founded.  And with the enactment of the National Labor Relations Act in 1935, labor unions solidified the rights of workers to get their grievances heard by an experienced arbitrator under the terms of a collective bargaining agreement.

Thus, during much of the last century, arbitration played a useful and relatively non-controversial role in U.S. conflict resolution.

The current controversy over arbitration began in the 1980s when arbitration began to be widely used for the resolution of individuals’ employment disputes in non-union settings.  In prior years, individual high-level employees (CEO’s, etc.) sometimes had arbitration clauses in their employment agreement, but the big change was including such clauses in a company’s entire workforce.

One of the main causes of this change was the dramatic increase in workplace discrimination claims arising from the civil rights legislation beginning in the 1960s (e.g., Title VII and later the Americans with Disabilities Act).  Another contributing factor: a nascent alternative dispute resolution movement was advocating for greater use of mediation and arbitration as a means of reducing docket congestion in U.S. courts, where litigants were sometimes forced to wait 5 years or more for a trial date during the 1980s.  Finally, in a series of sweeping decisions that began in the 1980s, the U.S. Supreme Court ruled that, under the Federal Arbitration Act, employers could legally require employees to sign mandatory arbitration provisions as a condition of employment, and that class-action waivers in those provisions are enforceable.

The results of this dramatic shift of cases from courtrooms to arbitration hearing rooms have been stunningly one-sided.  Data about individual non-union employment cases, reported by the Economic Policy Institute, show that employees win, on average, 36% of their cases in federal court and 57% of their cases in state courts, but only 21% of their cases in arbitration.  And the average damages in the winning cases are similarly skewed: $394,000 in federal court, $575,000 in state courts, but only $110,000 in arbitrations.  No wonder so many employers now embrace arbitration.

There is a bit of irony here, because for more than a century, labor unions in the U.S. have been fighting for the right to have workplace disputes go to arbitration, as part of collective bargaining agreements.  However, in those arbitrations, workers’ union dues pay for representation and the cases are decided by experienced labor arbitrators.

In the non-union setting, individual employees often have a difficult time finding a lawyer to take their cases because they often lack the resources to pay for counsel, and plaintiff’s employment lawyers generally agree to contingent-fee arrangements only where the evidence of liability is quite strong and the employee’s damages are substantial.  Also, with employers imposing class-action waivers, plaintiffs’ employment lawyers cannot aggregate claims to make contingent-fee arrangements economically viable.

So, the moral of the story in employment cases is that employers would prefer that employees remain non-unionized and that individual employees be required to take any employment-related claims to arbitration, where there is no right to counsel, no opportunity for a class action, and where the employer has all the advantages of being a repeat player with greater resources.   (As to the repeat-player advantage, one of my former professors, Elizabeth Bartholet, provided eye-opening testimony in Congress about serving on a commercial arbitration panel, ruling against a company, and then suddenly facing eleven consecutive peremptory challenges by that company, which led her to withdraw from the arbitration panel.)

But employment is not the only arena in which major corporations have been using their market power to compel arbitration and reduce their exposure to claims.  Have you noticed that mandatory arbitration clauses have found their way into almost every corner of consumer transactions – ranging from opening a bank account to buying a car?  Even the software that I am using right now to draft this blog post (Microsoft) is covered by a mandatory arbitration provision and class action waiver.

Some companies have mitigated the harshness of their mandatory arbitration policies by creating opt-out periods at the beginning of a consumer transaction.  For example, Google customers have a 30-day window after purchase in which they can opt-out and preserve their right to go to court in the event of a dispute.

Some banks have gone farther and jettisoned their mandatory arbitration provisions altogether (e.g., Bank of America).  But if you had a dispute with a behemoth institution like Bank of America, are there situations where you might want the informality and privacy of an arbitration rather than having to fight the bank in court?  This is a hard question to answer in advance, since it might depend on the circumstances.  And with the removal of the bank’s arbitration requirement, you might have no choice other than to go to court.

So, here’s another idea: what if employees and consumers had a choice, at the time a dispute arises, to opt for arbitration, and the company was obligated to accept that choice.  In my view, such a policy (which is also the policy for employees at Boston Law Collaborative) allows individuals to have the benefits of arbitration if, under the circumstances, arbitration would be beneficial.

Some might wonder whether this asymmetry makes sense – in other words, why make arbitration optional for one party but mandatory for the other party (if the first party opts in).  That, in my view, is a reasonable objection.  But perhaps the asymmetry makes sense in situations, like employment or consumer contracts, where there is a significant power imbalance.

The bottom line is that arbitration is a creature of contract, and therefore creative arrangements of the kind described above can only be adopted by institutions and individuals by agreement – not dictated by Congress or state legislatures.  However, it does make sense for legislatures to continue acting to address the harm that can be done (and has been done) when large institutions have to the power to dictate the terms of those contracts with no opt-in or opt-out provision.

In my view, arbitration will continue to be useful when parties can freely make the choice.  Having served as an arbitrator in a wide variety of cases, and also as an advocate in arbitrations, I have seen first-hand that arbitration can be far more efficient than courtroom litigation.  And the parties’ right to jointly select the decisionmaker is an important advantage – particularly when a specific type of expertise is needed.

That said, there are many ways in which arbitration practice can be improved, and those ways will be addressed in next month’s blog post.

[To read Part II of this blog post, please click here.]


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