A Pre-Dispute Arbitration Agreement Doesn't Limit Jurisdiction of the EEOC
by Richard S. Rosenberg and John J. Manier

The U.S. Supreme Court handed down its first major practical limitation on pre-dispute agreements to arbitrate job bias claims in EEOC v. Waffle House, Inc., 2002 DJDAR 485 (Jan. 15, 2002). The Court ruled that even though such agreements bind the employee to arbitrate such claims, they do not preclude the Equal Employment Opportunity Commission from going to court on the employee's behalf to obtain the full array of damages available under the federal job bias laws. This is a setback for employers wishing to divert such disputes to arbitration, and it raises serious concerns about the finality of privately-negotiated settlements.

Waffle House specifically arose under the Americans with Disabilities Act, 42 U.S.C. Û 12101 et seq. However, there is no reason why Waffle House won't also apply to cases under all federal job bias laws over which EEOC has jurisdiction, including Title VII of the Civil Rights Act of 1964, 42 U.S.C. Û 2000e et seq., and the Age Discrimination in Employment Act, 29 U.S.C. Û 621 et seq.

The EEOC sued Waffle House in a South Carolina federal district court on behalf of Eric Baker, an employee who was discharged soon after suffering a seizure on the job. The EEOC alleged that Waffle House terminated Baker because of his disability, and sought injunctive relief, backpay, reinstatement, and compensatory and punitive damages.

In his job application with Waffle House, Baker agreed to resolve "any dispute or claim" concerning his employment "by binding arbitration." However, Baker filed a charge with the EEOC instead of initiating arbitration. Waffle House petitioned the district court to compel arbitration under the Federal Arbitration Act, 9 U.S.C. Û 1 et seq., but the court denied the petition on the grounds that Baker had not actually agreed to arbitrate.

On appeal, the Fourth Circuit U.S. Court of Appeals ruled that Baker had indeed entered into an enforceable arbitration agreement, and that this contract precluded the EEOC from seeking any victim-specific relief on Baker's behalf, although the EEOC could still sue for injunctive relief. The Supreme Court granted the EEOC's petition for certiorari, and reversed the Fourth Circuit's decision to the extent it precluded the EEOC from seeking the full array of damages available under the law.

In his majority opinion, Justice John Paul Stevens emphasized the EEOC's authority under federal job bias laws to obtain injunctive and "make-whole" relief on behalf of discrimination victims. The 1991 Civil Rights Act expanded this authority to include suits for compensatory and punitive damages. Stevens noted that nothing in the federal job bias laws, or any of the Supreme Court's prior decisions, suggests that arbitration agreements between private parties have any impact on the EEOC's exercise of its statutory function to obtain remedies for employees.

Stevens added that the Federal Arbitration Act is silent on whether parallel enforcement actions by public agencies can proceed and that nothing in the Act purports to restrict nonparties to arbitration agreements, such as the EEOC, from simultaneously pursuing remedies in court.

Waffle House highlights an obvious tension between the strong federal policy favoring arbitration and the equally strong policy against job discrimination. The Fourth Circuit offered a common-sense solution to this conundrum by ruling that the "competing policies" under the Federal Arbitration Act and the job bias laws could only be resolved by precluding the EEOC from seeking victim-specific relief in court on behalf of an employee who agrees to arbitrate.

However, Justice Stevens rejected this approach in light of the EEOC's broad statutory powers. Stevens pointed out that once the EEOC decides to sue on behalf of an employee, it becomes "the master of its own case," and the individual is precluded from pursuing an independent cause of action, but instead can only intervene in the EEOC's suit. In effect, Stevens found that it is up to the EEOC to decide which job bias claims it wishes to pursue in court, and that private arbitration agreements have no bearing on the EEOC's exercise of its discretion.

Many practical issues were left unresolved by the High Court's decision. In particular, Stevens conceded that the employee's conduct "may have the effect of limiting the relief that the EEOC may obtain in court." If an employee fails to mitigate damages or accepts a monetary settlement, "any recovery by the EEOC would be limited accordingly."

Stevens also cited approvingly to a case which held that individuals who had litigated their own claims were barred by res judicata from obtaining relief in a subsequent EEOC lawsuit. EEOC v. U.S. Steel Corp., 921 F.2d 489 (3d Cir. 1990).

Yet, Stevens stated it remains "an open question whether a settlement or arbitration judgment would affect the validity of the EEOC's claim or the character of relief the EEOC may seek." Since these issues were not raised by the record in Waffle House, the Court declined to decide them.

However, these issues were extensively discussed in the dissenting opinion of Justice Clarence Thomas, which was joined by Chief Justice William H. Rehnquist and Justice Antonin Scalia. According to Thomas, "[a]ssuming that the Court means what it says, an arbitration judgment will not preclude the EEOC's claim for victim-specific relief from going forward, and courts will have to adjust damages awards to avoid double recovery."

Thomas stated that this will encourage employees to take "two bites at the apple" - in arbitration and in an EEOC lawsuit - and "benefit from the more favorable of the two rulings." In Thomas's view, this result will frustrate the strong federal policy favoring arbitration.

Thomas also opined that a settlement agreement between employee and employer likely would not preclude the EEOC from seeking relief in court action on behalf of the settling employee. This would leave parties uncertain about the finality of job bias settlements and discourage employers from settling these cases at all - a result which contradicts the policies favoring expeditious relief for discrimination victims through out-of-court settlements.

Unfortunately, the majority opinion does not rebut the "parade of horribles" laid out by the dissent, and leaves employers and employees alike in the dark on these important issues.

Waffle House challenges employers to draft arbitration and settlement agreements which avoid the worst-case scenarios outlined in Justice Thomas's dissent. One potential solution is to include a clause requiring the employee to tender back to the employer all monies received in any EEOC lawsuit. While not "fool-proof," such a clause may pass muster because it focuses on the employee's obligations, rather than questioning the EEOC's statutory prerogatives.

Employers should note, however, that an EEOC rule construing the Supreme Court's decision in Oubre v. Entergy Operations, 522 U.S. 422 (1998), prohibits tender-back agreements as a penalty for suing to contest the validity of a waiver of age bias claims under the Older Workers Benefit Protection Act, 29 U.S.C Û 626(f).

Waffle House sends a powerful message that private arbitration agreements will not preclude the EEOC from exercising its statutory mandate to root out perceived job bias. But in doing so, it disturbs the parties' ability to compromise disputes with finality. It also allows for multiple litigation of the same dispute, thus undermining the sound policy favoring arbitration.