Concerned with growing jury verdicts, unwanted publicity, and the high costs often associated with litigating claims made against them by their current and former employees, many employers are turning to mandatory arbitration programs as a means of resolving employment disputes. Indeed, recent U.S. Supreme Court cases have encouraged this trend by confirming the general enforceability of arbitration agreements even in the context of statutory discrimination claims such as those brought under Title VII and the Age Discrimination in Employment Act.
But these recent Supreme Court decisions have also left many questions unanswered. For example, the Court has made clear that courts need not enforce arbitration agreements if they are "unconscionable" under state law. Just what makes an agreement "unconscionable," though, remains somewhat nebulous, leading employers, employees, and their respective counsel to question the enforceability of many different types of arbitration provisions.
On January 30, 2003, the United States Court of Appeals for the Sixth Circuit, which covers Ohio, Kentucky, Michigan, and Tennessee, handed down its much-anticipated en banc decision in Morrison v. Circuit City Stores, Inc.(1) The case – which actually consists of two consolidated cases, Morrison v. Circuit City Stores, Inc. and Shankle v. Pep Boys – Manny, Moe & Jack, Inc. – begins to answer many of the questions left open by recent Supreme Court opinions, and it provides much-needed guidance to employers who have or are considering mandatory arbitration programs.
The facts of the two cases giving rise to the Sixth Circuit's opinion are fairly straightforward. Morrison involved an African-American manager who signed a job application that required her to submit claims arising out of her employment to binding arbitration. When Circuit City terminated her employment two years later, she sued, claiming she was terminated because of her race and sex. Circuit City sought to compel arbitration, but Ms. Morrison claimed her arbitration agreement was unconscionable because, among other things, it limited discovery and shortened the period she might otherwise have for bringing her claims to just one year. Ms. Morrison also argued that the agreement was unenforceable because it had no "mutuality of obligation" – that is, while she was obligated to arbitrate her claims, Circuit City was free to alter or terminate the agreement on December 31 of any given year upon giving 30 days' advance notice. Finally, Ms. Morrison claimed the agreement was not enforceable because it required her to split the costs and fees of arbitration and because it limited the remedies that might otherwise be available to her under federal discrimination statutes if she were to bring her claims in court. Senior Judge Spiegel of the United States District Court for the Southern District of Ohio rejected these challenges and compelled arbitration, and Ms. Morrison appealed.
Shankle raised some of the same issues. In that case, Mr. Shankle executed a "Mutual Agreement to Arbitrate Claims" as a condition of his employment with Pep Boys. When Mr. Shankle quit his job with Pep Boys, he consulted a law firm in an effort to obtain severance pay. Pep Boys told him he would have to arbitrate his claims against the company, and he consequently initiated an arbitration claim. A month later, though, Mr. Shankle obtained new counsel, attempted to withdraw from arbitration, and filed a discrimination suit in court. Like Ms. Morrison, Mr. Shankle argued that the fee-splitting provision of his arbitration agreement rendered it unenforceable. Additionally, he claimed that the failure of the American Arbitration Association ("AAA") to follow certain procedures set forth in the arbitration agreement (such as the procedure for selecting a neutral arbitrator and the application of certain discovery and evidentiary rules) further undermined its enforceability. Judge Nixon of the United States District Court for the Middle District of Tennessee agreed with many of Mr. Shankle's arguments and stayed the arbitration, and Pep Boys appealed.
The Sixth Circuit consolidated the Morrison and Shankle cases and heard both appeals en banc. The majority opinion, joined by all but two judges, analyzes both the Circuit City and the Pep Boys arbitration programs and finds, for the most part, that both programs are enforceable. First, the court rejected Ms. Morrison's unconscionability challenge, holding that even though Circuit City drafted the agreement and it was not open to negotiation, Ms. Morrison's experience and college education precluded an unconscionability finding. And, although the court expressed "serious doubts about the fairness and reasonableness" of certain Circuit City arbitration program features, it refused to hold that the arbitration agreement was unenforceable because it limited discovery, shortened the period for filing claims, or even because Circuit City reserved the right to amend or terminate the program upon 30 days' advance notice. In fact, the court expressly found that the agreement's statute of limitations provision and its discovery provision – which limited the number of written discovery requests and depositions but allowed the arbitrator to order more discovery upon a showing of "substantial need" – were enforceable.
Nonetheless, in what is perhaps the most significant and controversial portion of the court's majority opinion, the court struck down the fee-splitting provisions contained in both the Circuit City and Pep Boys agreements. On this point, the court held that "potential litigants must be given an opportunity, prior to arbitration on the merits, to demonstrate that the potential costs of arbitration are great enough to deter them and similarly situated individuals from seeking to vindicate their federal statutory rights." It is not enough, the court reasoned, to examine the possible "chilling effect" of fee-splitting provisions on the individual plaintiff bringing suit, but rather, courts should look to the possible chilling effect on all similarly situated potential litigants. Otherwise, if an arbitration agreement's cost-splitting provision deters employees from bringing statutory claims, one of the goals behind federal discrimination statutes – to deter discriminatory behavior – would suffer.
In conducting this review, the Sixth Circuit instructs that courts should discount the chance that plaintiffs may not be required to pay costs or arbitral fees if they prevail on their claims. While many arbitration agreements provide for recovery of costs and fees by prevailing parties, the court held that many plaintiffs might nonetheless be deterred from bringing their claims by having to pay substantial arbitration costs up front.
Two of the court's judges dissented from this portion of the court's opinion, observing that the majority's decision creates "a complex new field of litigation in order to determine the enforceability of a cost-splitting provision in an agreement to arbitrate." The majority's "complicated pre-arbitration quasi-class action litigation scheme," the dissent observes, "raises questions for which it provides no answers." For example, if one litigant successfully shows that a fee-splitting provision is unenforceable, must other potential litigants repeat this showing in future cases involving the same arbitration program, or are they relieved of this burden? As the dissent observes, the majority's opinion provides no answer to this and several other important practical questions that are likely to arise in future cases involving fee-splitting provisions.
As a practical matter, the court's analysis effectively renders most cost-splitting provisions challengeable – and thus arguably undesirable. Except for arbitration agreements with highly paid employees or senior executives, most employees will be able to mount a plausible attack on such provisions before being compelled to arbitrate their claims, and this litigation (and the delay it brings in resolving an employee's claims) undermines many of the advantages arbitration brings. Accordingly, except for arbitration agreements with highly paid employees, employers in the states that make up the Sixth Circuit may be well advised to avoid fee-splitting provisions in their arbitration programs and instead limit employee costs to reasonable filing fees and other minor arbitration costs.
Fee-splitting provisions are not the only type of arbitration clause with which the Sixth Circuit took issue. The court's opinion also provides guidance to employers on another arbitration no-no: limiting the remedies available to employees. The court squarely rejected Circuit City's effort to limit the amount of punitive and other damages available to employees who prevail on their statutory claims through its arbitration agreement, finding – consistent with other courts of appeals that have considered the issue – that such limitations on remedies are unenforceable.
The good news is that, but for the offending provisions discussed above, the Sixth Circuit's opinion confirms the enforceability of mandatory arbitration programs. In fact, because both the Circuit City and the Pep Boys arbitration programs had provisions in them that allowed courts to "sever" unenforceable provisions, the Sixth Circuit was able to uphold the general enforceability of both arbitration agreements notwithstanding their fee-splitting and remedy limitation provisions. Even the failure of the AAA to follow prescribed procedures did not prevent the Sixth Circuit from upholding the general enforceability of Mr. Shankle's arbitration agreement with Pep Boys, for that problem could be cured either by a court order directing the AAA to follow the proper procedures or by a post-arbitration challenge to any award issued by the AAA seeking to set the award aside because of the AAA's failure to follow proper procedures.
All in all, the decision presents a win-win for employers and employees: Employers with carefully drafted arbitration agreements can obtain the reduced costs, speedier resolutions, and greater predictability that arbitration sometimes offers over litigation, but they will have a challenge if they seek to shift arbitrators' fees and costs to employees who may have difficulty affording them, or if they seek to limit the damages that employees with valid claims can recover. The key, though, is ensuring that the agreements are carefully drafted. The Sixth Circuit's opinion highlights only a few of the many legal pitfalls to which arbitration agreements often fall victim. Accordingly, employers who have or who are considering arbitration agreements should consult with counsel – both about the Sixth Circuit's recent decision and about other recent state and federal legal developments – to ensure that their programs are as up to date as possible.
(1) Case Nos. 99-4099/5897, __ F.3d __ (Jan. 30, 2003).
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
