Arbitration|Conflict Resolution|Employment

Arbitrating Employment Disputes: Misusing a Valuable Tool? Part II

The first part of this post analogized the use of arbitration to resolve employee disputes to using a wood chisel to smash a boulder — the wrong tool for the job.  At its conclusion I said that, sympathetic as I am to employees, it was the effect on chisel, not the rock, that concerned me.  This part explains why there is cause for concern.

What do you think will happen when someone is told that her statutory workplace rights will not be heard in court but rather by a private judge?  And that the private judge’s decision is binding even if the judge mistakes the facts, or applies the law incorrectly, or both, with no way to correct the error?  And that each employee who alleges similar harm from the same event must do the private judging separately rather than being joined in a coordinated proceeding?  And that the outcome will be confidential?  And that the employer hires this judge all the time, while she are going to do it only this once?  And that if she doesn’t agree to this process she’ll be fired, or not hired?

What happens is, you get challenges to this system. 

And right away we stop managing the workplace — we start to lawyer-ize the workplace.  We figure out ways that final and binding arbitration can withstand challenge, through Supreme Court opinions and Due Process Protocols and enlightened arbitration providers and so on.  And sure enough, if you lawyer this thing up enough, pre-dispute arbitration programs can be tweaked to survive judicial challenge.

But is this what business managers wanted?  Is the best we can do, to have dispute resolution processes “survive judicial challenge”?  Is this what we wanted for workplace conflict management?

More to the point, is this what we wanted for arbitration?  The Federal Arbitration Act and the New York Convention are purposely designed to eliminate almost every basis for judicial challenge of an arbitration award and — on the contrary — to ensure the enforceability of arbitration awards on a global scale.  Arbitration is freely selected in open negotiation between merchants on the understanding that, yes, maybe today the arbitrator will make a mistake that hurts you, but tomorrow she may make a mistake that helps you, and in any event over time she usually doesn’t make many mistakes.  Arbitration is freely selected by merchants because it has more advantages than disadvantages when compared to litigation.  And because it addresses rights that lie in a commercial contract that was negotiated by the parties, not rights that lie in a statute that was enacted by the United States Congress.

There comes a point when the enforceability of pre-dispute employment arbitration “agreements” ceases to be the point — the distrust and suspicion and resentment that the practice creates makes it bad business.  Much more troublesome, however, the resentment that builds from legal, but stupid, employee arbitration schemes threatens to hurt arbitration itself, right where it matters — in merchant-to merchant, international business.

As drafted, the House bill 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, it would amend Section 2(c) of the Federal Arbitration Act 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 latter provision, while presumably aimed at ensuring the invalidity of employment and consumer arbitration “agreements,” undermines the established principles of severability and kompetenz-kompetenz in 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 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 arbitration 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 thing aggrieved employees could do was sue their employers in court. (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 the practice of pre-dispute mandatory employment arbitration and the broad indignation that it prompts.

As noted previously on this blog, 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.”  Yet despite many dismissive shrugs, as my excellent colleague blogger Victoria VanBuren recently pointed out, how many House bills have 99 co-sponsors?  And the Fall 2009 issue of the ABA’s Dispute Resolution Magazine features a prominent article by Jean R. Sternlight titled “Fixing the Mandatory Arbitration Problem: We Need the Arbitration Fairness Act of 2009.”

Arbitration is a valuable — indeed irreplaceable — tool for managing mercantile transactions.  It has been misused to manage non-commercial relationships.  It matters not at all that the Supreme Court permits it — 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.

  1. Franchise disputes got included on the theory that franchisees, like consumers and employees, lack bargaining power and that arbitration clauses are foisted upon them as contracts of adhesion.

    Phil Loree just called our attention to a study saying that consumers, or at least some of them, don’t do all that bad in arbitration. We should check it out, although I doubt that the members of Congress who are pushing the Arbitration Fairness Act would be interested.

  2. Michael,

    Thanks for the mention!

    I agree that those pushing the Arbitration Fairness Act are going to take the study or others like it very seriously.

    Peter, I applaud you for the unique perspective you have taken on this troublesome issue. I may not entirely agree with your theory, but I believe it it is a very interesting and creative one. And you may be right! But whether you are or not, I appreciate intelligent, creative commentary on important issues, and you certainly provide that.


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