From the Los Angeles Daily Journal

"Alternative Views --
Pre-Dispute Agreements To Arbitrate Employment Claims"
by Richard S. Rosenberg and Jeffrey P. Fuchsman

With employment cases now resembling high stakes personal injury litigation, alternative dispute resolution has become common in the employment setting. Many employers require job applicants and employees to commit to binding arbitration as a condition of employment. The plaintiff's bar has attacked these so-called "pre-dispute mandatory arbitration agreements" both in court and before the State Legislature with varying degrees of success. Courts generally have been willing to enforce agreements to arbitrate employment claims. Although a few recent federal cases have limited mandatory pre-dispute arbitration agreements of certain federal discrimination claims, California state courts routinely compel arbitration of state law employment claims. Meanwhile, legislation outlawing such agreements is sitting on Governor Wilson's desk.

Both California and federal law strongly favor arbitration. Moncharsh v. Heily & Blase, 3 Cal. 4th 1 (1992). Courts will "`indulge every intendment to give effect to such proceedings'" (Doers v. Golden Gate Bridge, Highway & Transp. Dist., 23 Cal. 3d 180 (1979)), and all doubts concerning arbitrability must be resolved in favor of arbitration (United Transportation Union v. Southern Cal. Rapid Transit Dist., 7 Cal. App. 4th 804 (1992)). Courts around the country have upheld pre-dispute agreements to arbitrate statutory employment discrimination claims.

The seminal case in the area is the U.S. Supreme Court's decision in Gilmer v. Interstate/Johnson Lane, 500 U.S. 20 (1991). In Gilmer, the plaintiff signed a New York Stock Exchange ("NYSE") U-4 agreement which required the plaintiff to "arbitrate any dispute, claim or controversy' arising between him and defendant 'that is required to be arbitrated under the rules, constitutions and by-laws' . . . [of NYSE]." The Supreme Court held that the plaintiff's civil action against his employer under the federal Age Discrimination in Employment Act was subject to the mandatory arbitration provisions in the U-4 agreement.

The California courts have applied Gilmer to state employment discrimination claims under the Fair Employment and Housing Act ("FEHA"). For example, in Spellman v. Securities, Annuities & Ins. Services, Inc., 8 Cal. App. 4th 452 (1992), the plaintiff was required to arbitrate his state discrimination claims in accordance with the U-4 agreement he signed. The Court stated that "Gilmer . . . stand[s] for the proposition that important social policies and public rights embodied in statutes prohibiting discrimination in employment can be appropriately resolved by arbitration." Numerous other cases have reached the same result. The courts also routinely require arbitration of a broad range of common law claims. E.g., Vianna v. Doctor's Management Co., 27 Cal. App. 4th 1186 (1994) (tort claims for wrongful termination, defamation and negligent infliction of emotional distress).

Although the California cases generally uphold the enforceability of arbitration agreements, one-sided agreements likely will not be enforced. In Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519 (1997), the Court refused to enforce an agreement to arbitrate on the grounds that the agreement was unconscionable. The Court focused on provisions in the agreement which limited the employee's available remedies, but not the employer's, and which made arbitration mandatory for the employee, but not the employer. The obstacles to enforcement in Stirlen can be avoided by drafting the arbitration agreement to apply equally to employers and employees, and do not limit remedies. It would also be prudent to provide for some discovery and exchange of information prior to the arbitration hearing to avoid potential unconscionability problems.

The Ninth Circuit has taken a different course, at least insofar as the agreement pertains to federal statutory discrimination claims. For example, in Prudential Ins. Co. of Am. v. Lai, 42 F.3d 1299 (9th Cir. 1994), the Ninth Circuit refused to apply Gilmer to a sex harassment and discrimination claim under Title VII even though the arbitration agreement in Lai (as in Gilmer and Spellman) was the U-4 form used in the securities industry. Since the agreement did not expressly include statutory discrimination claims, the Court held that the plaintiff did not knowingly waive her statutory right to proceed in court. The "knowing waiver" requirement was based on the Court's interpretation of the 1991 amendments to Title VII, which were not at issue in Gilmer.

The California Court of Appeal, and numerous other federal courts have criticized the rationale of Lai and have refused to follow it. E.g., Brookwood v. Bank of America, 45 Cal. App. 4th 1667 (1996). In light of this criticism, and since Lai was expressly based on an interpretation of the legislative history of the 1991 amendments to Title VII, cases in state court which do not raise a Title VII claim should not be affected. Since Lai was based on the absence of any specific language in the arbitration agreement covering discrimination or other employment claims, careful drafting ought to satisfy Lai's "knowing waiver" requirement and thus overcome any obstacle to enforcement.

In Duffield v. Robertson Stephens & Company, 144 F. 3d 1182 (9th Cir. 1998), the Ninth Circuit refused to enforce an agreement to arbitrate federal Title VII claims. The Duffield court held that the Title VII "knowing waiver" requirement altogether prohibits pre-dispute agreements to arbitrate Title VII cases. Since the Court expressly relied on legislative history to Title VII, Duffield, like Lai, should apply only to Title VII cases and not state law claims. In light of this dichotomy, lawyers bringing employment cases will have to choose their claims carefully if an arbitration agreement is involved. Like Lai, Duffield will not likely to be embraced by state court judges, and has already has been criticized by other federal courts. Seus v. John Nuveen & Co., 1998 U.S. App. LEXIS 11907 (3rd Cir. 1998).

A petition for certiori to review Duffield is currently pending before the U.S. Supreme Court. Given the Supreme Court's announcements in Gilmer favoring arbitration, the split between the Ninth and Third Circuits may provide the Supreme Court with the opportunity to review this area of law in the Fall. However, since Duffield, the NYSE has rescinded its mandatory arbitration rules, thus making it less likely that the high Court will see a need to review Duffield.

More recently, the Ninth Circuit has again addressed mandatory arbitration of federal employment discrimination claims in Kummetz v. Tech Mold, Inc., 98 Daily Journal D.A.R. 8873 (9th Cir. 1998), a handicap discrimination case under The Americans with Disabilities Act. The Court appeared to back away from its extreme pronouncement in Duffield that all pre-dispute mandatory arbitration agreements are impermissible. Utilizing the "knowing waiver" analysis in Lai, the Court held that an employee handbook acknowledgement form which did not expressly require the plaintiff to arbitrate ADA claims did not go far enough in advising the employee, and hence was not a "knowing waiver" of the plaintiff's right to pursue such claims in court. Given this analysis, a written agreement which expressly states that it covers arbitration of statutory discrimination claims should be sufficient.

Practitioners should be aware of legislation currently on Governor Wilson's desk (AB 574) which would make it unlawful for an employer in California to require employees to enter into a pre-dispute mandatory arbitration agreement as a condition of employment. Governor Wilson has until September 30, 1998 to veto the bill. Given the Governor's pro-business stance in the past, many people are predicting that AB 574 will be vetoed. Even if the bill is passed, there are serious issues about whether the law would be preempted by the Federal Arbitration Act ("FAA") and, therefore, not applicable to the vast majority of employment relationships. Macaulay v. Norlander, 12 Cal. App. 4th 1 (1992) (FAA preempts California law which purports to limit the enforceability of arbitration agreements subject to the FAA).