“Mandatory Pre-Dispute Arbitration Agreement” is Not a Four-Letter Word by M. Nycole Hearon

M. Nycole Hearon

The ongoing complaint concerning mandatory pre-dispute arbitration employment agreements is that they run counter to statutory rights. No so fast. If an employee has a dispute against his or her employer under such a contract, he or she still has recourse to litigate statutory claims. More to the point, employees will still have money in the bank if they fight the good fight in arbitration as opposed to litigating their cases in court.


Historically, arbitration agreements were usually unenforceable until Congress enacted the Federal Arbitration Agreement to make court’s comfortable with enforcing agreements. [i]

Under the Act, Arbitration The Act made arbitration agreements equal with other contracts and established a federal policy in favor of arbitration that pre-empted any state law that hindered arbitration agreements.[ii]In 1991, the U.S. Supreme Court decided Gilmer v. Interstate/Johnson Lane Corporation.[iii] The Gilmer Court held that “statutory claims may be the subject of arbitration agreement, enforceable pursuant to [Federal Arbitration Act].”[iv] The Court reasoned that “by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than judicial forum.”[v] The Court further noted that individuals subject to mandatory pre-dispute arbitration agreements still have recourse to file a statutory claim in court.[vi] Mandatory arbitration agreements do affect an employee’s right to enforce statutory causes of action (e.g., Equal Employment Opportunity Commission (“EEOC”), Age Discrimination Enforcement Act (“ADEA”)) because both serve to further public policy and the statutes do not expressly disallow arbitration of claims.[vii]

The case seemed to send a call across the nation that employer mandated arbitration will be upheld even if it seemed to curtail statutory rights. The Gilmer Court reasoned that the plaintiff was not denied recourse for litigating his statutory rights when the pre-dispute arbitration contract was enforced; only the forum for such litigation had changed.

For instance, in the California case of Armendariz v. Foundation Health Pyschcare Services, Inc.,[viii] the California Supreme Court reasoned that a statutory claim brought under the California Fair Employment and Housing Act “[was] in fact arbitrable if the arbitration permits an employee to vindicate his or her statutory rights.”[ix] Basing its decision to uphold the requirement of arbitration on Gilmer progeny, the California Supreme Court reasoned that a mandatory pre-dispute employment contract is lawful if it “(1)  provides for neutral arbitrators, (2) provides for more than minimal discovery, (3) requires a written award, (4) provides for all of the types of relief that would otherwise be available in court, and (5) does not require employees to pay either unreasonable costs or any arbitrators’ fees or expenses as a condition of access to the arbitration forum.”[x]

With the Gilmer decision, companies began requiring employees, or potential employees, to sign employment contracts in which the employees agreed that any and all disputes arising from their employment would be resolved through arbitration.  The signed agreement included any potential claims based in statutory rights.[xi] Litigants began responding to such agreements by claiming the contracts were unconscionable under FAA section 2, which in essence, make arbitration agreements unenforceable under the same reasons any contract is unenforceable.[xii]

The legislative response to the Supreme Court cases upholding mandatory employee pre-dispute arbitration agreements were the introduction of bills cited as Arbitration Fairness Act (“AFA”)of 2009 and AFA of 2011, respectively.  Both bills were introduced to amend Title 9 of the United States Codes which deals with Arbitration.  The most recent incarnation of the bill, AFA of 2011[xiii], sought to remove consumer and employment contracts from Title 9.[xiv] The federal legislature argued that the Supreme Court decisions have contravened the purpose of the FAA.  They further argued that consumer and employment contracts were not contemplated when the original act was passed in 1925 and that the bill was to aid parties who were knowledgeable and had equal bargaining power.[xv]

The purpose of the bill sounds wonderful on its face—striving to address perceived trampled rights of the disenfranchised.  But what about the money? What blue-collar worker, who does not have the bargaining power of a head-hunted CEO, can put up a good defense in the court allow with non-existent funds? Perhaps the battle cry against all mandatory arbitration of employee claims involving alleged violations of statutory rights is both too soon and too broad.


In their article The Arbitration Fairness Act: Performing Surgery With A Hatchet Instead of a Scalpel?, Jyotin Hamid and Emily J. Mathieu argue that the Arbitration Fairness Act fails to address the complexity of issues involved in employee disputes because the AFA places, among other issues, all employees in the same category and bargaining position.[xvi] The overarching argument against mandatory pre-dispute agreements is that they are unfair to employees and when an employee is forced to waive his/her right to a judicial forum, then critical injustices can occur.[xvii] For example, arbitrators may be susceptible to bias on the side of the employer, because the employer (re “repeat-player”) provides for the arbitrator’s livelihood.[xviii] Moreover, the confidentiality of arbitration decisions “may lead to arbitrary or inconsistent decisions [and] the development of public law is inhibited by the movement of dispute resolution away from courts and into arbitration.”[xix] On the other hand, however, employment arbitration offers speedy resolution of conflict.[xx] Employees are not required to wait for extended periods of time to have their case heard, the decision is usually final, and the cost, if any at all for the employee, is nominal and the process is confidential. [xxi]  Attention is given over the fact that public policy cannot be advanced because arbitration decisions are private; yet, an employee may not want their grievance to become public. Confidentiality is critical for the employee when the subject involves personal details or compensation.[xxii] Moreover, with mandatory arbitration, the employee has access to an arbitrator who is knowledgeable, or an expert, in the area of the dispute. In a specific area like construction law, a judge and jury may know too little about the subject.

The most salient reason, however, which supports mandatory employment arbitration is that employee litigants are unlikely to be able to afford the cost of litigation. Attorneys who handle employment litigation generally receive payment on a contingency basis.[xxiii]  If the attorney calculates that her “take home pay” is not enough to make litigation feasible, the employee is left with arbitration as the only option.[xxiv]

The foregoing echoes the sentiment stated in Mandatory Arbitration: Why It’s Better Than Looks.[xxv] In that empirical study, author Theodore St. Antoine writes of Professor Paul Weiler of Harvard’s opinion that “mandatory arbitration provided employees with an access they might not otherwise have to relief for employment wrongdoing.”[xxvi] St. Antoine’s study focused on how well parties, both employer and employees, faired under mandatory arbitration agreements.[xxvii] He used as comparison the union labor process, noting that mandatory arbitration agreements are applicable where unions do not exist.[xxviii]

Several salient points resulted from St. Antoine’s study: (1) “experienced plaintiffs’ attorneys have estimated that only about 5% of the individuals with an employment claim who seek help from the private bar are able to obtain counsel; and (2) that “individual employees with discrimination claims may find little relief from the [Equal Employment Opportunity Commission due to a severely overburdened and underfunded Commission, which resorted to a triage procedure in the mid-1990s where cases are classified ‘A,’ ‘B,’ or ‘C’ depending on merit and importance, and tossing out many charges after the briefest of investigations.”[xxix]

The study indicated that there is no evidence that a litigant would fare better in court than in arbitration. Rather, where companies had instituted an in-house step-by-step grievance process with arbitration as the last resort, disputes were resolved much more quickly through conciliation and mediation without resulting to external sources.[xxx] The real time should be spent on assuring that if an employee is subject to mandatory pre-dispute arbitration that sufficient due process standards are in place.[xxxi] 

In another study, authors David Sherwyn (“Sherwyn”), Samuel Estreicher (“Estreicher”) and Michael Heisse (“Heisse”), briefly examined the concept of the repeat player in mandatory pre-dispute arbitration.[xxxii] A repeat-player is “defined as an employer appearing in more than one award during a study period.”[xxxiii] Employees do well (63% win rate) in arbitrations against employers. Yet if the employer is a repeat player, the employee does significantly worse (16% win rate).[xxxiv]This is considered an evergreen problem. While research does not support the theory that the arbitrator is bias, it is more likely that the employer has become more experienced than the first-time employee plaintiff and was able to identify cases that were likely to bring success to the employer.[xxxv] Regardless, the repeat-player syndrome is just as likely in a courtroom setting where an employee may be up against an experienced employment defense attorney. The employee has access to expensive resources that he or she could never afford litigating the case in court.

[i] Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (2002).

[ii] See id. at 892 (citations omitted).

[iii] 500 U.S. 20, 111 S.Ct. 1647 (1991).

[iv]  Id. at 26.

[v] Id. (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. 473 U.S. 614 (1985)).

[vi] Id. at 27.

[vii] Id.

[viii] 24 Cal.4th 83 (2000).

[ix] Id. at 90.  (Emphasis in the original).

[x] Id. at 102.

[xi] See Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) (“Adams II”).

[xii] The United States (Federal) Arbitration Act, 9 U.S.C. 1 et seq. (1990) (originally enacted as Act February 12, 1925, 43 Stat. 883) (emphasis added).

[xiii] Arbitration Fairness Act of 2011, S.987, 112th Cong.(2011)

[xiv] Id. at §402 (a). Validity and Enforceability (In General – Notwithstanding any other provision of this title, no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, or civil rights dispute).

[xv] See generally, ADR Brief, Congressional Arbitration Forum Returns –But It’s Not Moving Soon, 29 Alternatives to High Cost Litig. 139 (2011).

[xvi] 74 Alb. L. Rev. 769 (2010-2011).

[xvii] Id. at 778.

[xviii] Id.

[xix] Id. at 779.

[xx] Id. at 780.

[xxi] Id.

[xxii] Id.

[xxiii] Id. at 780-81.

[xxiv] Id. at 780-81.

[xxv] St. Antoine, supra, at 798.

[xxvi] Id.

[xxvii] Id. at 812.

[xxviii] Id.

[xxix] Id. at 791-92.

[xxx] Id. at 794.

[xxxi] Id. at 796. See also, Alexander J.S. Colvin, From Supreme Court to Shopfloor: Mandatory Arbitration and the Reconfiguration of Workplace Dispute Resolution, 13 Cornell J.L. & Pub. Pol’y 581 (2002). In that study of one company, TRW, created a step-by-step grievance procedure which included mandatory arbitration that proved successful due to the process of making mandatory arbitration a final step to “other workplace resolution procedures.”

[xxxii] See,  Assessing the Case For Employment Arbitration: A New Path For Empirical Research, 57 Stan L. Rev. 1557 (2005).

[xxxiii] Id. (citing Lisa B. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Employee Rts. & Emp. Pol’y J. 189).

[xxxiv] Id. at 1570.

[xxxv] Id.

© Conflict Change Consulting Ltd.  2014