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Legislative Issues: Arbitrating Legal Rights

May 1, 2001
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A Supreme Court decision is expected to prompt a movement toward arbitration clauses in employment contracts and greatly expand the use of arbitration processes in general.

“Mr. Employer, you are discriminating against me. I’m going to sue you.”
“You can’t, you have to arbitrate instead of suing.”
“Who says so?”
“The employment application you signed says so.”

It can be expected that this dialogue will be heard with increasing frequency in the business community because of a decision by the U.S. Supreme Court on March 21, 2001. Basically, the Supreme Court held that an employee of Circuit City could not institute a lawsuit in a state or federal court against his employer for alleged discrimination, because the employee had agreed to arbitrate such actions rather than bring a lawsuit.

When the employee sought a job from Circuit City he filled out an application form, which contained an agreement that if he had any claim, dispute or controversy with Circuit City, arbitration was the “exclusive” remedy and was binding on him and his employer. In short, he could not bring an action in court. Among other things, the employee had argued that he was unaware that the clause was in the application form. The Supreme Court said that did not matter and the clause was still binding.

The arbitration clause in the application stated it applied to any action related to age discrimination, racial or gender discrimination and actions under the Americans with Disabilities Act. This was in addition to any actions under contract or tort law. The U.S. Supreme Court said that under a 1925 statute called the Federal Arbitration Act, agreements such as the one the employee had signed agreeing to arbitrate any employment related dispute were binding and precluded a court action.

This decision is expected to prompt a movement toward such clauses in employment contracts and greatly expand the use of arbitration processes in general. Prior to the Supreme Court’s ruling, about 10% of all employment contracts contained an arbitration clause. When there is a contract with a union, there is ordinarily an arbitration provision on some possible employment issues in the contract between the employer and the union.

What is Arbitration?

Arbitration does not mean that the employer can avoid the law. Even with such a clause the employer is still obligated to obey the various employment laws, including the ones pertaining to discrimination. There are many forms of arbitration procedures. They are all designed to resolve a dispute much more quickly than going through the courts and at considerably less expense. In general, the process works by the aggrieved party filing a complaint with the employer. A neutral party is then appointed to hear the arguments of both sides. The costs of the arbitration will usually be split between the parties. It will almost always amount to less than the cost of a lawsuit.

There are many arbitration services, and usually one is hired to conduct the arbitration. The service will present each side with a list of possible arbitrators; many are retired judges or senior lawyers. They may not have any conflicts with either party, such as stock ownership or past representation. Each side may select someone as an arbitrator and bargain back and forth on the selection of the final arbitrator.

After the arbitrator is selected, he or she will ask each side to submit a statement of its contentions and views of the law. Any relevant documents such as contracts, employment manuals and applications will also be submitted. Next, the arbitrator may conduct a hearing. The hearing may be in person or over the telephone. Here, without the full trappings of courtroom procedure or the technical rules of evidence, each side states its position and witnesses can be heard. Rarely, even in complicated cases, do such hearings take more than a day or two. Usually, within 30 days after the hearing, the arbitrator makes a decision as to which side is right and assesses damages, if any. A complainant in an arbitration proceeding may recover considerable sums. For instance, if the arbitration finds that an employee was discriminated against in violation of the law, the employee could recover significant damages.

Appeals rarely result in an arbitrator’s decision being overturned. Only in situations where there is a clear misinterpretation of the law or bias on the part of the arbitrator will a decision be reversed.

Arbitration has a number of advantages over court suits. The arbitration process is much faster—often arbitration may be concluded within six months of the time the complaint was made. Arbitrations are also conducted in private; there are no public court documents, transcripts of depositions or trials taking place in the open. As a result, both sides can keep all information confidential from others. Obviously, the cost of litigation is less and attorney’s fees are far below what they would be in courtroom litigation.

Arbitration on the Rise

While it is expected that this recent Supreme Court decision will mean a growth in the arbitration of employment disputes, it can also be expected to prompt a growth in the arbitration of a variety of commercial disputes. Because the Supreme Court has now upheld the supremacy of the Federal Arbitration Act, businesses will be on sounder legal footing as they insert arbitration clauses into contracts for the sale of goods or provision of services. In the global economy, there is even international arbitration with the national laws of a number of countries sanctioning arbitration as a means of settling disputes.

It can be expected that the trend toward arbitration will be seen in the ceramics industry. Certain companies now have arbitration clauses in some of their sales contracts. Recently, the Society of Glass and Decorators, in cooperation with the American Arbitration Association, instituted a voluntary program for members to be able to use arbitration processes for a wide range of disputes. As frustrations continue to grow over the delay, complexity and expense of traditional litigation, arbitration can be expected to become more popular.

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