Arbitration of Employment Disputes

posted by Neil Klingshirn  |  Jul 9, 2009 2:49 PM [EST]  |  applies to Ohio

The federal arbitration act (FAA), 9 U.S.C. § 1, et seq. and Ohio’s arbitration act ORC § 2711.01 et seq., both direct a court to stay trial of a matter that is the subject of a written arbitration agreement.  In Ohio's case, ORC § 2711.02 states that:

Avoiding Arbitration

Arbitration agreements are creatures of contract law and must satisfy state law formation requirements. Therefore, arbitration agreements can also be attacked:

Unconscionability. 

Procedural unconscionability

In determining procedural unconscionability, Ohio courts look to "factors bearing on the relative bargaining position of the contracting parties, including their age, education, intelligence, business acumen and experience, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, and whether alterations in the printed terms were possible." Cross v. Carnes, 132 Ohio App. 3d 157, 724 N.E.2d 828, 837 (Ohio Ct. App. 1998)

The crucial question is whether 'each party to the contract, considering his obvious education or lack of it, [had] a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print . . . ?'" Ohio Univ. Bd. of Trs. v. Smith, 132 Ohio App. 3d 211, 724 N.E.2d 1155, 1161 (Ohio Ct. App. 1999) (quoting Williams v. Walker-Thomas Furniture Co., 121 U.S. App. D.C. 315, 350 F.2d 445, 449 (D.C. Cir. 1965), and Lake Ridge Acad. v. Carney, 66 Ohio St. 3d 376, 613 N.E.2d 183, 189 (Ohio 1993))

Substantive unconscionability

Circumstances surrounding the contract that are so unfair as to cause there to be no voluntary meeting of the minds include:

Knowing and voluntary 

Trumbull v. Century Mktg. Corp., 12 F. Supp. 2d 683 (N. D. Ohio 1998) invalidated an arbitration “agreement” because it was only contained in an employee handbook; K.M.C Co., Inc. v Irving Trust Co., 757 F.2d 752 (6th Cir. 1985).

In Adams v. Philip Morris, Inc., 67 F.3d 580, 583 (6th Cir. 1995), the Court held that “[f]actors bearing on a knowing and voluntary execution, include:

Cost Deterrence

If cost will deter a substantial number of employees similarly situated to the claimant from seeking to vindicate their statutory claims, a court should decline to enforce the arbitration agreement or else shift the costs of the arbitration agreement to the party seeking to enforce it. Morrison v. Circuit City, 317 F.3d 646 (6th Cir. 2003). Cost deterrence is considered on a case by case basis. For example, costs are less likely to deter claimants of substantial means.

The burden is on the party seeking to avoid arbitration.  He or she must give the court evidence that the costs of arbitration would deter a substantial number of similarly situated employees from vindicating their rights. To prove cost deterrence:

The cost must be considered from the vantage point of the potential litigant who “must continue to pay for housing, utilities, transportation, food, and the other necessities of life in contemporary society despite losing her primary, and most likely only, source of income.”  Morrison v. Circuit City, 317 F.3d 646 (6th Cir. 2003). In Morrison, the court noted that the “potential costs of arbitrating the dispute easily reach thousands, if not tens of thousands, of dollars, far exceeding the costs that a plaintiff would incur in court.” Id.

Arbitration costs three to fifty times the basic costs of litigating in a judicial, rather than arbitral, forum, according to Public Citizens.  Its Cost of Arbitration report found, for example, that the forum fee for a $80,000 employment discrimination claim in the Circuit Court of Cook County, Illinois is $221. The forum fees for the same claim before the National Arbitration Forum (NAF) would be $11,625 a 5,260% difference. For the same $80,000 claim, the American Arbitration Association (AAA) would charge the plaintiff up to $6,650, and the Judicial Arbitration and Mediation Services (JAMS) would charge up to $7,950, amounting to a 3,009% and 3,597% difference in cost, respectively.

Even where the arbitration agreement capped a fee to 3% of the employee’s salary ($1,622 of a salary of $54,060), the benefit of arbitration as too “uncertain” and the cost too high, such that it would deter “a substantial number of similarly situated persons . . . from seeking to vindicate their statutory rights under these circumstances.”  Morrison, supra.

The Forum is not Neutral. 

Where an arbitration agreement gave the employer exclusive control over the pool from which the arbitrator was selected,  the “procedure prevents Meijer’s [arbitration clause] from being an effective substitute for a judicial forum because it inherently lacks neutrality. . . ” McMullen v. Meijer, 355 F.3d 485 (6th Cir. 2004)   The Meijer court remanded the case to determine whether the arbitrator selection provision could be severed out of the agreement.

Limitations on Remedies

A party does not forgo the substantive rights "afforded by [a] statute [when she agrees to arbitrate a statutory claim but] only submits to their resolution in an arbitral, rather than a judicial, forum." Gilmer v. Interstate/Johnson Lane Corp, 500 U.S. 20, 26 (1991).

A limitation on remedies is substantively unconscionable when it undermines the rights protected by the statute. See  Gilmer, 500 U.S. at 26-27. See also   McCaskill v. SCI Mgmt. Corp., 285 F.3d 623, 626 (7th Cir. 2002) (holding that arbitration agreement that did not provide for award of attorney fees to successful Title VII claimant was unenforceable because "the right to attorney's fees . . . is central to the ability of persons to seek redress from violations of Title VII"); Perez v. Globe Airport Sec. Servs., Inc., 253 F.3d 1280, 1286 (11th Cir. 2001) ("Federal statutory claims are arbitrable only when arbitration can serve the same remedial and deterrent functions as litigation, and an agreement that limits the remedies available cannot adequately serve those functions.") (citing Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054, 1061-62 (11th Cir. 1998))

An arbitration agreement's limitation on remedies clearly impedes Title VII's remedial goal of "making persons whole for injuries suffered through past discrimination."  See Morrison, supra, and the cases cited therein.    

However, limits on the number of interrogatories and subparts (20) and depositions (5) and a one year limitations period for filing a claim did not render an agreement unenforceable, at least in the specific case where the employee failed to show that such restrictions would deter a substantial number of employees from vindicating their rights.

Courts will Sever Unconscionable Provisions

While courts will not enforce unconscionable arbitration agreements, they will use severability” and “automatic modification” provisions to conform the arbitration agreement to remove the unconscionable provisions. As a result, unconscionability challenges may not permit an employee to avoid an arbitration agreement altogether. Rather, such challenge is more likely to result in the employee avoiding arbitration costs and limitations on remedies, but not arbitration altogether.

Other Arbitration Avoidance Arguments 

The agreement must cover the dispute at issue. See, e.g., McManus v. Eicher, 2003 Ohio App. LEXIS 5965 (2nd App. Dist. 2003) (arbitration agreement limited arbitration to resolving ambiguities in a contract)

Binding Non-signatories

Generally speaking, a court will not compel a non-signatory to arbitrate. Council of Smaller Enters. v. Gates, McDonald & Co., 80 Ohio St. 3d 661 (1998); Jankovsky v. Grana-Morris, 2001 Ohio App. LEXIS 3938, 2001 WL 1018337 (Ohio Ct. App., 2001) (“Arbitration is strictly a matter of contract; if the parties have not agreed to arbitrate, the courts have no authority to mandate that they do so”).

However, courts will enforce arbitration agreements against third parties using the doctrines of:

Jankovsky v. Grana-Morris, supra citing Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773 (2d Cir., 1995).  See also I Sports v. IMG Worldwide, Inc. 157 Ohio App. 3d 593 (8th App. Dist. 2004) (non-signatory could not compel arbitration based on an agreement between two other parties, even though the agreement related to the same underlying transaction); Milo Corp. v. Carlson-Miller, 2001 Ohio App. LEXIS 3104, 2001 WL 824260 (8th App. Dist. 2001) (estoppel; third party could not avoid arbitration after accepting the benefit of other provisions of the same agreement).

For example, non-signatory owners and supervisors can be bound as agents of the company that signed the arbitration agreements  Arnold v. Arnold Corp., 920 F.2d 1269, 1282 (6th Cir. 1990) (“We therefore will follow the well-settled principle affording agents the benefits of arbitration agreements made by their principal”); Roby v. Corp. of Lloyd’s, 996 F.2d 1353, 1360 (2d Cir. 1993) (“Courts in this and other circuits consistently have held that employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement”); Pritzker v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 11 10, 1122 (3d Cir. 1993) (“Because a principal is bound under the terms of a valid arbitration clause, its agents, employees, and representatives are also covered under the terms of such agreements”); Trott v. Paciollu, 748 F. Supp. 305, 309 (E.D. Pa. 1990) (“An entity such as Merrill Lynch can only act through its employees, and an arbitration agreement would be of little value if it did not extend to [them].”)   

Waiver of the Right to Arbitrate

Arbitration is a waivable right.  Thus, when a dispute arises, the employee does not have to demand arbitration.  The employee may, and usually does, file suit.

The employer can also waive its right to arbitrate and may do so by participating in the litigation. A party will waive its right to arbitrate a dispute “if it acted inconsistently with the right to arbitrate." Thornton v. Haggins, Cuyahoga App. No. 83055, 2003 Ohio 7078, quoting Harsco Corp. v. Crane Carrier Co. (1997), 122 Ohio App.3d 406, 410, 701 N.E.2d 1040.

Courts consider the following four factors to determine waiver:

Phillips v. Lee Homes, Inc. (Feb. 17, 1994), Cuyahoga App. No. 64353, 1994 Ohio App. LEXIS 596, citing Rock v. Merrill, Lynch, Pierce, Fenner & Smith, Inc. (1992), 79 Ohio App.3d 126, 606 N.E.2d 1054; Brumm v. McDonald & Co. Securities, Inc. (1992), 78 Ohio App.3d 96, 603 N.E.2d 1141

However, the burden is heavy on the party seeking to prove waiver of arbitration.  Independence Bank v. Erin Mechanical (1988), 49 Ohio App.3d 17, 550 N.E.2d 198, (strong presumption against the waiver of such rights); Phillips v. Lee Homes, 1994 Ohio App. LEXIS 596 (Ohio Ct. App., 1994) (“waiver of arbitration is not to be lightly inferred “). 

Appealing from an Arbitration Decision

Once an Arbitrator makes a decision in a matter, the aggrieved party has a very limited right to appeal from the arbitration award. The appeal is made by a motion to the court of common pleas See ORC § 2711.13

Court may vacate the award if:

In the rare case where a party successfully challenges an arbitration award on appeal, the court should vacate the award and refer the matter back for a new arbitration. ORC § 2711.10.

Court may modify the award if:

ORC § 2711.11

External Links

Links to external sites with additional information about this topic.

• Federal arbitration act.
• Ohio arbitration act.
• Ross Runkel Arbitration Law Memo
  

posted by Neil Klingshirn  |  Jul 9, 2009 2:49 PM [EST]  |  applies to Ohio