Arbitration Update: Favorable Developments For Employers

Tuesday, November 2, 2010 - 01:00

Recent decisions rendered by the United States Supreme Court, the United States Court of Appeals for the Second Circuit and the New York State Court of Appeals generally bode well for employers with respect to the enforcement of their arbitration agreements with employees.

In Stolt-Nielsen v. Animalfeeds Int'l Corp. , 130 S. Ct. 1758 (2010), the Supreme Court ruled that an arbitration panel exceeded its powers under the Federal Arbitration Act (the "FAA") by imposing class arbitration on class antitrust claims. The Court held that the parties could not be compelled to submit claims to class arbitration when the arbitration clauses in their agreements were silent on the question of class arbitration. In so holding, the Court found the arbitration panel's imposition of its policy choice in favor of class action arbitration to be at odds with the fundamental FAA principle that arbitration is a matter of consent and the differences between simple bilateral and complex class action arbitrations to be too great for a presumption that the parties implicitly authorized class action arbitration solely from the fact of an agreement to arbitrate.

In Ragone v. Atlantic Video at the Manhattan Ctr. , 595 F.3d 115 (2d Cir. 2010), the Second Circuit ruled that an arbitration agreement, as modified by the defendants' waivers of certain provisions, was enforceable. The arbitration agreement at issue contained several questionable provisions, including (i) a limitations provision mandating the employee had to make a demand for arbitration within 90 days after her claim arose, (ii) a fee-shifting provision that required that attorneys' fees must be awarded to the prevailing party, and (iii) a clause that forbade any appeal of the arbitrator's decision. The defendants agreed to waive the statutes of limitations and fee-shifting provisions and represented to the district court that clause (iii) would not prevent the employee from moving to vacate the arbitration award in court pursuant to the FAA. The Second Circuit found that New York law would permit the enforcement of the arbitration agreements as modified by the defendants' waivers. The court further held that in light of the defendants' actions, the employee "ha[d] not been chilled in asserting her Title VII rights." The court cautioned, however, that it was "not at all clear that [it] would [have] reach[ed] the same result had the defendants attempted to enforce the arbitration agreement in its entirety" and emphasized that it was affirming the district court's holding that the arbitration agreement was enforceable as modified by the defendants' waivers "with something less than robust enthusiasm."

In Brady v. Williams Capital Group, L.P. , 14 N.Y.3d 459, 902 N.Y.S.2d 1 (2010), an employer's employee manual required the submission of any disputes to arbitration before the American Arbitration Association ("AAA") and further provided that the employer and each employee agreed to equally share the fees and costs of the arbitrator. Following the employee's submission of discrimination claims to the AAA, the AAA sent an invoice to the employer for the entire advance payment for the arbitrator's compensation, consistent with its rule requiring the employer to pay all arbitration expenses and the arbitrator's compensation in connection with an arbitration arising from an "employer-promulgated plan" such as one in an employee manual. Relying on the arbitration agreement, the employer refused to pay the entire sum and demanded that the employee pay half in accordance with their agreement. Thereafter, the AAA canceled the arbitration. The employee - unemployed for 18 months at the time - then commenced an Article 78 proceeding against the employer to pay the arbitrator's fee or to enter a default judgment against the employer.

The New York State Court of Appeals ruled that the terms of the parties' arbitration agreement - requiring the splitting of the arbitrator's compensation - controlled, rather than the AAA's "employer pays" rule, basing this ruling on the principles that "arbitration is a creature of contract" and the judiciary's role is "to interfere as little as possible with the freedom of consenting parties in structuring their arbitration relationship." Addressing the enforceability of the arbitration agreement's fee and cost-sharing provision, the Court of Appeals rejected the Appellate Division's holding that the "equal share" provision was unenforceable as against public policy on the facts before it and determined that the proper analysis was to "resolve the question whether [the employee] was financially able to share the arbitration costs." The court held that "the issue of a litigant's financial ability is to be resolved [by the trial court] on a case-by-case basis and that the inquiry should at minimum consider the following questions: (1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum." The court expressly noted that it was not deciding what the remedy should be if the "equal share" provision contained in the arbitration agreement was found unenforceable by the trial court, leaving to the trial court the decision "whether to sever the clause and enforce the rest of the Arbitration Agreement, oroffer [the employee] a choice between accepting the 'equal share' provision or bringing a lawsuit in court."

Ramifications For Employers

These decisions generally bode well for employers:

Extended to employment-related disputes, the Stolt-Nielsen decision should preclude an employee's ability to bring wage and hour or discrimination claims as class action arbitrations in the absence of a provision in the parties' arbitration agreement expressly authorizing class arbitrations.

The Ragone court expressly recognized that New York courts have accepted offers to waive the enforcement of certain provisions of arbitration agreements and evaluated those agreements as modified by the waivers. Thus, it is critical for New York employers to insert New York choice of law provisions in their arbitration agreements. Because of the strong cautionary language in the Ragone court's opinion, employees should nevertheless avoid over-reaching and not seek to push their ability to waive provisions after-the-fact too far and strive instead to insert fair provisions in their agreements (so the next court does not rule that the employer has abused its privilege).

Courts must resolve conflicts between arbitration agreements and the arbitral forum's arbitration rules in favor of the agreements. Accordingly, employers should educate themselves regarding the arbitration rules of the arbitral forum they select for their agreements and adjust their agreements accordingly.

The burden of demonstrating that an arbitration agreement's provision for the equal sharing of arbitration fees and costs is unenforceable remains on the employee. Faced with the possibility that an individual claimant may meet this burden, an employer may need to choose between paying the arbitration costs and expenses itself or forgoing arbitration of that dispute - or leave it to the court to make such choice for it. In addition, employers should consider including in their arbitration agreements a provision requiring that any issue regarding the split of costs be resolved by the arbitrator.

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