Forcing workers to privately resolve employment disputes behind closed doors through employer-imposed arbitration provisions is a fairly recent phenomenon, but one that carries enormous consequences. With forced arbitration, workers who have been discriminated against, shorted on wages, or sexually harassed have no meaningful way to enforce the laws Congress passed to protect them. Forced arbitration allows unscrupulous employers to break the law and violate workers’ rights with near-impunity.
The Federal Arbitration Act was passed in 1925 to expedite the resolution of contract disputes between companies of equal bargaining power who dealt with each other across state lines or at sea. It was never intended to govern employment contracts. At the suggestion of then-Secretary of Commerce Herbert Hoover, the drafters of the act even inserted clarifying language providing that “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Over time, companies repeatedly tried to force workers into arbitration, but the Court consistently recognized both the limited purpose of the FAA and the limited bargaining power individuals seeking employment held compared to those who would hire them, and held that forced arbitration clauses in employment contracts were unenforceable.
In 1991, everything changed for workers. The Court ruled that employees could be forced to arbitrate employment disputes rooted in federal statute. If a worker wanted to retain their right to go to court to enforce their statutory rights, they had to show that Congress intended to preserve access to a public judicial forum for the adjudication of those types of claims. In 2001, the Court opened the floodgates on forced arbitration in the workplace, ruling that the exclusionary clause which preserved workers’ access to a public court was actually intended to protect only transportation workers. Thereafter, all other types of employees could be bound by forced arbitration clauses—even if the text was presented on a take-it-or-leave-it basis in the fine print of a preprinted form, such as a job application. At the time of the Court’s ruling, only an estimated 4% of private-sector non-union employment contracts contained arbitration provisions. Today, more than half of all privately-employed unrepresented workers—totaling over 60 million employees—have no access to America’s public justice system when their rights are violated at work.
Within the last few years, the Court has gone even further in restricting employees’ access to the court, ruling that companies are free to use class, collective, and joint action bans to silo workers in individual arbitration. A 2017 report found that 80 Fortune 100 companies use arbitration clauses in their employment contracts, 39 of which also included class bans. Further investigation by The NELA Institute in 2018 revealed that at least 52 of those clauses were mandatory, 30 of which included a class ban. This timeline reveals how, one case at a time, the Court massively transformed from serving as a champion in the defense of powerless employees to standing as a bulwark between wronged employees and the ability to hold their more-powerful employers accountable for violating their rights and the law.
Relevant Facts: A man was hired to work for a New York employer. The employee later moved to Vermont but maintained his employment. When the company fired him, the employee brought a civil suit alleging wrongful discharge. Because the parties were now residing in different states and the value of the claim satisfied the statutory threshold, the claim was removed to federal court under diversity jurisdiction. The employer then sought to enforce an arbitration clause in the employment contract under the Federal Arbitration Act (FAA).
Question Before The Court: Whether a federal court must order arbitration of an employment contract under the FAA when the parties in the case have a diversity suit and state law would preclude arbitration.
The Opinion: The U.S. Supreme Court first examined the text of the FAA to determine whether the statute applied. The court observed that the part of Section 3 of the FAA that provides for a stay of the trial of an action until arbitration has occurred does not apply to all arbitration contracts. On the contrary, for Section 3 to apply, the contracts at issue must fall within the scope of Sections 1 and 2 of the FAA; that is, it only applies to contracts relating to maritime transactions or those involving interstate or foreign commerce. The Court determined the employment contract at issue here did not involve either of those classes of contract, and, thus, the FAA did not apply.
The Court then turned to the question of whether the Vermont state statute disfavoring arbitration applied, noting that, “The differences between arbitration and judicial determination of a controversy substantially affect the cause of action arising under state law, and make the Erie doctrine applicable. If, in this case, arbitration could not be compelled in the Vermont state courts, it should not be compelled in the Federal District Court.”
The Court disagreed with the appellate court’s conclusion that “arbitration is merely a form of trial, to be adopted in the action itself, in place of the trial at common law.” The majority explained, “We deal here with a right to recover that owes its existence to one of the States, not to the United States. The federal court enforces the state-created right by rules of procedure which it has acquired from the Federal Government and which therefore are not identical with those of the state courts. Yet, in spite of that difference in procedure, the federal court enforcing a state-created right in a diversity case is . . . in substance ‘only another court of the State.’ The federal court therefore may not ‘substantially affect the enforcement of the right as given by the State.’”
The Court continued, “If the federal court allows arbitration where the state court would disallow it, the outcome of litigation might depend on the courthouse where suit is brought. For the remedy by arbitration, whatever its merits or shortcomings, substantially affects the cause of action created by the State. The nature of the tribunal where suits are tried is an important part of the parcel of rights behind a cause of action. The change from a court of law to an arbitration panel may make a radical difference in ultimate result. Arbitration carries no right to trial by jury that is guaranteed both by the Seventh Amendment and by Ch. 1, Art. 12th, of the Vermont Constitution. Arbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial.”
“The nub of the policy that underlies Erie R. Co. v. Tompkins, 304 U.S. 64 (1938), is that for the same transaction the accident of a suit by a nonresident litigant in a federal court instead of in a State court a block away should not lead to a substantially different result. There would in our judgment be a resultant discrimination if the parties suing on a Vermont cause of action in the federal court were remitted to arbitration, while those suing in the Vermont court could not be.”
Prima Paint Corp. v. Flood Conklin Mfg. Co., 388 U.S. 395 (1967)
Relevant Facts: Two companies entered into a contract. One sued the other for breach of contract and fraudulent representation. In the lower courts, the defending company successfully sought to compel arbitration under a broad arbitration clause in the agreement.
Question Before The Court: Whether arbitration clauses are severable from the contracts that contain them.
The Opinion: The Court found that, because the Federal Arbitration Act (FAA) specifies the manner in which federal courts are to treat questions relating to arbitration clauses, in considering whether to compel arbitration under the FAA, “a federal court may not consider a claim of fraud in the inducement of the contract generally . . . but may consider only the issues relating to the making and performance of the agreement to arbitrate.”
The Court distinguished this case from the Bernhardt decision, providing that in Bernhardt the Court held that the stay provisions of Section 3 “apply only to two kinds of contracts specified in Sections 1 and 2 of the Act, namely those in admiralty or evidencing transactions in ‘commerce’.” Here, the matter involved a New Jersey paint business engaging in the manufacturing and sale of paint in Maryland, squarely within the scope of the FAA.
With that framework in mind, the Court held that, under the FAA, arbitration clauses are severable from the contracts that contain them. In the Court’s view, Section 4 of the FAA requires courts to order arbitration once it is satisfied that the “making of the agreement to arbitrate . . . is not at issue.” The Bernhardt Court focused on the jurisdictional ability of a federal court to enforce an arbitration clause a la the Erie doctrine, but the Court here traced the FAA to Congress’ exercise of its Commerce Clause power.
Since the challenge in this case was to the formation of the contract, at large, rather than specifically to the arbitration clause contained within, and because there was no evidence that the parties intended to prevent this type of claim from being arbitrable, the Court ruled that the FAA demanded the claim proceed in arbitration. After this ruling, courts were required to look at challenges to arbitration clauses separately from challenges to the contracts that contain them. If a person challenges a contract at large, unless a specific challenge to the arbitration clause itself is launched, the court will compel arbitration, regardless of the possible unenforceability of the larger contract.
In his dissent, Justice Hugo Black made a point of delving deep into the legislative history of the FAA, recalling that in 1923 hearings on the bill, “On several occasions [members of Congress] expressed opposition to a law which would enforce even a valid arbitration provision contained in a contract between parties of unequal bargaining power. Senator Walsh [of Montana] cited insurance, employment, construction, and shipping contracts as routinely containing arbitration clauses and being offered on a take-it-or-leave-it basis to captive customers or employees. He noted that such contracts ‘are really not voluntarily [sic] things at all’ because ‘there is nothing for the man to do except to sign it; and then he surrenders his right to have his case tried by the court . . ..’ [The Senator] was emphatically assured by the supporters of the bill that it was not their intention to cover such cases.”
Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Ware, 414 U.S. 117 (1973)
Relevant Facts: A broker for the firm, Merrill Lynch, Pierce, Fenner, & Smith, Inc. (“Merrill Lynch”) was hired to sell securities. To get the job, the broker signed a NYSE broker-dealer contract that contained an arbitration clause. Upon quitting the firm to work for a competitor, Merrill Lynch refused to pay the broker vested monies due under the profit-sharing plan included in his compensation package. The broker sued under relevant state labor law, which guaranteed workers’ access to a judicial forum. Merrill Lynch moved to stay the proceedings and compel arbitration under the FAA based on the NYSE application’s arbitration clause. In particular, Merrill Lynch argued that its fiduciary obligations to investors under the Securities Exchange Act justified the enforcement of the forced arbitration clause. The state court didn’t buy it, and held the arbitration provision was unenforceable as a matter of public policy.
Question Before The Court: Whether a state law precluding compulsory arbitration of an employment claim applied by a state court is preempted under federal law.
The Opinion: The Court held the arbitration clause could not be compelled because there was no evidence that the state’s policy interfered with any federal regulatory scheme. The Court reasoned, “It is unclear why muffling a grievance in the cloakroom of arbitration would prevent lessoning of confidence of the market,” as the defense had argued (emphasis added). The Court explained NYSE Commission’s self-regulatory authority, derived from the Securities Exchange Act (SEA) is designed to insure fair dealing and to protect investors from harmful or unfair trading practices, and “there is nothing in the SEA . . . that specifies arbitration as the favored means of resolving employer disputes.” The Court found that “the relationship between compulsory employer-employee arbitration and fair dealing and investor protection is extremely attenuated and peripheral, if it exists at all.”
The Court recognized the state legislature’s right “to protect the worker from the exploitative employer who would demand that a prospective employee sign away in advance his right to resort to the judicial system for redress of an employment grievance.” Unfortunately, this view is the polar opposite of where workers and states stand today.
Alexander v. Gardener-Denver, 415 U.S. 36 (1974)
Relevant Facts: An employee covered by a collective bargaining agreement alleged that he was fired because of racial discrimination. After filing a grievance under the terms of the collective bargaining agreement and losing in arbitration, he filed a complaint with the EEOC. The EEOC agreed with the arbitrator against the employee. The plaintiff persisted by filing a claim in federal district court under Title VII, a law specifically designed to root out discrimination in the workplace. Both the district court and appellate courts held the plaintiff had no right to sue under Title VII because he was bound by the arbitrator’s finding.
Question Before The Court: Whether an employee has the right to pursue statutory claims in federal court irrespective of a requirement to arbitrate, and whether arbitration is an appropriate forum for resolving statutory claims.
The Opinion: The Supreme Court found for the worker, holding that the federal policy favoring arbitration does not establish that an arbitrator’s resolution of a contractual claim is dispositive of a statutory claim under Title VII. Thus, an employee’s statutory right to a new trial under Title VII of the Civil Rights Act of 1964 is not foreclosed by prior submission of his claim to final arbitration under the non-discrimination clause of a collective bargaining agreement (CBA). Identifying that “federal courts have been assigned plenary powers to secure compliance with Title VII,” and contrasting those judicial powers with the powers of the EEOC, the Court noted, “There is no suggestion in the statutory scheme that a prior arbitral decision either forecloses an individual’s right to sue or divests federal courts of jurisdiction.”
The Court explained, “Title VII’s purpose and procedures strongly suggest[s] that an individual does not forfeit his private cause of action if he first pursues his grievance to final arbitration . . . In submitting his grievance to arbitration, an employee seeks to vindicate his contractual right under a CBA. By contrast, in filing a lawsuit under Title VII, an employee asserts independent statutory rights accorded by Congress. The distinctly separate nature of these contractual and statutory rights is not vitiated merely because both were violated as a result of the same factual occurrence. . .. [W]e think it clear there can be no prospective waiver of an employee’s rights under Title VII. . .. The private right of action remains an essential means of obtaining judicial enforcement of Title VII. In such cases, the private litigant not only redresses his own injury but also vindicates the important congressional policy against discriminatory employment practices.”
The Court’s opinion also spoke directly to whether a statutory claim is actually “arbitrable” in the sense that the arbitrator is capable of fairly rendering a decision based on the law, when it provided, “The factfinding process in arbitration usually is not equivalent to judicial factfinding. The record of arbitral proceedings is not as complete; the usual rules of evidence do not apply; and rights and procedures common to civil trial, such as discovery . . . and compulsory testimony under oath, are often severely limited or unavailable. . .. It is the informality of arbitral procedure that enables it to function as an efficient, inexpensive, and expeditious means for dispute resolution. This same characteristic, however, makes arbitration a less appropriate forum for final resolution of Title VII issues than the federal courts.” Moreover, the Court observed the limited “role of the arbitrator in the system of industrial self-government,” providing, “[T]he arbitrator has authority to resolve only questions of contractual rights, and this authority remains regardless of whether certain contractual rights are similar to, or duplicative of, the substantive rights secured by Title VII.”
Unfortunately, this holding was diluted by a massive shift in the Court’s FAA jurisprudence over the next decade. Using its own 1980’s rulings as a basis, the Court overturned this ruling completely in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991).
Barrentine v. Arkansas-Best Freight Systems, 450 U.S. 728 (1981)
Relevant Facts: A group of unionized truck drivers sued a trucking company for wage theft under the Fair Labor Standards Act (FLSA). The truckers filed a grievance in arbitration per their collective bargaining agreement, which was rejected without explanation. The truckers then filed a FLSA claim in federal district court, which the court dismissed. The Court of Appeals affirmed, concluding that the petitioners’ submission to arbitration barred them from asserting an FLSA claim in court.
Question Before The Court: Whether an employee may pursue both contractual and statutory rights claims through arbitral or judicial proceedings.
The Opinion: The Court held that FLSA claims are not barred by prior submission to contractual dispute resolution procedures like arbitration. Further, they held that the FLSA’s provision governing the right to go to court is not waivable, since substantive rights provided under FLSA are best protected in a judicial forum, not an arbitral forum. Noting that FLSA rights arise out of a statute to be considered separate from contractual rights, the Court provided, “Not all disputes between an employee and his employer are suited for binding resolution in accordance with the procedures established by [contract]. While courts should defer to an arbitral decision where the employee’s claim is based on rights arising out of [an arbitration] agreement, different considerations apply where the employee’s claim is based on rights arising out of a statute designed to provide minimum substantive guarantees to individual workers. . .. Even though a particular arbitrator may be competent to interpret and apply statutory law, he may not have the contractual authority to do so. . .. Because an arbitrator is required to effectuate the intent of the parties, rather to enforce the statute [here, FLSA], he may issue a ruling that is inimical to the public policies underlying the FLSA, thus depriving an employee of protected statutory rights.”
Moses H. Cone Memorial Hospital v. Mercury Constr. Co, 460 U.S. 1 (1983)
Relevant Facts: A hospital contracted with a building contractor and an architect to renovate its facilities. While the contract involving the building contractor included an arbitration clause, the contract with the architect did not. After a complicated dispute concerning the cost of the project arose, multiple legal actions were filed in both state and federal court, including motions to compel arbitration.
Question Before The Court: Whether state courts have the requisite jurisdiction to grant motions to compel arbitration under the Federal Arbitration Act (FAA); how far the nation’s federal policy favoring arbitration extends; and whether federal courts may defer to state courts when both are adjudicating parallel claims regarding the enforceability of an arbitration provision.
The Opinion: The Court focused on the FAA’s “statutory policy of rapid and unobstructed enforcement of arbitration agreements” and professed that Section 2 of the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act. . .. The [FAA] established that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself, or an allegation of waiver, delay, or a like defense to arbitrability.”
The Court was unmoved by the argument that, should the hospital be compelled to arbitrate its dispute with the building contractor, but not the architect against whom there was also pending litigation under the same facts, then it would have to resolve the two disputes in separate forums. To that point, the Court lamented that such misfortune “occurs because [the FAA] requires piecemeal resolution when necessary to give effect to an arbitration agreement. Under the [FAA], an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement.”
The Court expressed concern regarding the state’s ability to adequately protect the building contractor’s right to arbitration under the contract, observing “state courts, as much as federal courts, are obliged to grant stays of litigation under Section 3 of the [FAA]. It is less clear . . . whether the same is true of an order to compel arbitration under Section 4 of the Act.” The Court declined to go so far as establishing that state courts had the jurisdiction to do so. Still, the Court mused that, “if the state court stayed litigation pending arbitration but declined to compel the [objecting party] to arbitrate, [the party seeking to enforce the arbitration clause] would have no sure way to proceed with its claims except to return to federal court to obtain a Section 4 order.”
Over a series of footnotes, the Court explained, but did not resolve, an important issue arising from a conflict between federal subject matter jurisdiction and a state court’s ability to rule on FAA cases. The Court rightly observed that the FAA “is something of an anomaly in the field of federal court jurisdiction. It creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any independent federal question jurisdiction under §28 USC 1331 or otherwise. Section 4 provides for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction before the order can issue. Section 3 likewise limits the federal courts to the extent that a federal court cannot stay a suit pending before it unless there is such a suit in existence.”
At the time this case was decided, this discrepancy caused many courts to interpret the FAA to allow state courts to grant stays of proceedings under Section 3. Yet, a problem arose when a plaintiff would bring a wholly state level claim against another citizen of the same state before a state court. The FAA does not create any independent federal question jurisdiction under the Federal Rules of Civil Procedure, so when a state court granted a Motion to Stay, there was no way for a party seeking to compel arbitration to access the federal court to file the requisite Motion to Compel Arbitration. Although it failed to do so here, in the first case of its next term, Southland Corp. v. Keating, 465 U.S. 1 (1984), the Court directly addressed and resolved this issue when it held that state courts must enforce agreements subject to the FAA in the same manner as federal courts.
Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213 (1985)
Relevant Facts: A retired dentist invested his life savings in the stock market, only to lose the majority of his money. He subsequently sued the investment company in federal court, alleging violations of the Securities Exchange Act (SEA) and various state statutes. Although state law claims had never before been forced into arbitration, the company argued that since the federal claims were arbitrable under the terms of the contract, then the pendant state claims were too. However, the company also sought to stay arbitration pending the resolution of the non-arbitrable SEA allegations. The district court denied the motion, and the Court of Appeals affirmed.
Question Before The Court: Whether, when a complaint raises both federal and state claims, a federal district court may deny a motion to compel arbitration of the state law claims despite the parties’ agreement to arbitrate their disputes; and whether district courts should decide arbitrable pendant claims when a non-arbitrable federal claim is before them due to the possible collateral estoppel effect that may arise in a subsequent federal proceeding were an arbitration of the pendant claims to occur.
The Opinion: In deciding this case, the Court resolved a circuit split on the issue of how to apply the process of compelling arbitration described in Sections 3 and 4 of the Federal Arbitration Act (FAA). Prior to this case, when faced with the question, some circuits applied the doctrine of intertwining, which provided that where “arbitrable and non-arbitrable claims arise out of the same transaction, and are sufficiently intertwined factually and legally, the District [court] may deny arbitration.” Other circuits held that “the FAA divests the District courts of any discretion regarding arbitration in cases containing both arbitrable and non-arbitrable claims, and instead requires that the court compel arbitration of arbitrable claims when asked to do so.”
The Supreme Court in this case chose the latter interpretation when it held that “even where the result would be the possible inefficient maintenance of separate proceedings in different forums . . . [b]y its terms, the [FAA] leaves no place for the exercise of discretion by a District court, but instead mandates that District courts shall direct the parties to proceed to arbitrate on issues as to which an arbitration agreement has been signed.” The Court reiterated “the preeminent concern of Congress in passing the Act was to enforce private agreements unto which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate, even if the result is piecemeal litigation, at least absent a countervailing policy manifested in another federal statute. By compelling arbitration of state law claims, a district court successfully protects the contracts of the parties and their rights under the FAA.”
Despite ruling that courts must order arbitration of pendant state claims bound to non-arbitrable federal actions, Justice Thurgood Marshall, writing for the majority, made a point of observing that “arbitration cannot provide an adequate substitute for a judicial proceeding in protecting the federal statutory and constitutional rights that §1983 [of the Civil Rights Act] is designed to safeguard.” Justice Marshall rooted his finding on the belief that the FAA was a product of Congress’ Article III power to restrain the jurisdiction of the courts, and was not an exercise of its Commerce Clause power (a belief no longer held by the majority of the Court).
Federal district courts must now compel arbitration of state statutory claims if they are deemed to fall within the scope of a broadly-written arbitration clause, even if it is presented in a consumer contract of adhesion between an individual and a large corporation. By forcing arbitration “on issues as to which an arbitration agreement has been signed,” the Court opened the door for all types of statutory claims to be deemed de facto arbitrable – a move they fully committed to in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985), a case they heard oral arguments for just two weeks after issuing the opinion in this case.
Perry v. Thomas, 482 U.S. 483 (1987)
Relevant Facts: An employee who had worked for a securities broker in California sued for unpaid commissions in violation of state law. Based on an arbitration provision found in a Uniform Application for Securities Industry Registration form that all broker-employees are required to complete, the employer moved to compel arbitration. The state court refused to grant the motion, citing Merrill Lynch, Pierce, Fenner & Smith v. Ware, which held wage violations under that statute were non-arbitrable.
Question Before The Court: Whether a state labor statute that expressly guarantees employees a private right of action is preempted by the FAA, thereby forcing claims brought under that statute into arbitration.
The Opinion: In light of its more recent pro-arbitration decisions, the U.S. Supreme Court declined to apply the reasoning of the Ware Court. Instead, the Court focused on whether the state labor code section guaranteeing employees a private right of action for the collection of wages “without regard to the existence of any private agreement to arbitrate,” was preempted by the Federal Arbitration Act. Citing our nation’s “federal policy favoring arbitration agreements” and a handful of its most recent arbitration cases, the Court held that the state labor protections were in “unmistakable conflict” with the FAA, and so, “under the Supremacy Clause, the state statute must give way.”
The Court, in a footnote, spoke to the root of the issue, providing “In instances such as these, the text of Section 2 provides the touchstone for choosing between state law principles and the principles of federal common law envisioned by the passage of that statute: an agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, ‘save upon such grounds as exist at law or in equity for the revocation of any contract.’ Thus, state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally. A state law principle that takes its meaning precisely from the fact that a contract to arbitrate is at issue does not comport with this requirement of Section 2. A court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement in a manner different from that in which it otherwise construes non-arbitration agreements under state law. Nor may a court rely on the uniqueness of an agreement to arbitrate as a basis for a state law holding that enforcement would be unconscionable, for this would enable the court to effect what we hold the legislature today cannot.”
Justice Sandra Day O’Conner strongly disagreed with the majority in her dissent, providing, “Under the standards we most recently applied in Shearson/American Express Inc. v. McMahon, 482 U. S. 220 (1987), there can be little doubt that the California Legislature intended to preclude waiver of a judicial forum; it is clear, moreover, that this intent reflects an important state policy. . . to protect the worker from the exploitative employer who would demand that a prospective employee sign away in advance his right to resort to the judicial system for redress of an employment grievance. . . . In my view, therefore, even if the [FAA] applies to state court proceedings, California’s policy choice to preclude waivers of a judicial forum for wage claims is entitled to respect. Accordingly, I would affirm the judgment of the California Court of Appeal.”
Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)
Relevant Facts: A stockbroker brought suit in federal court alleging his employer had discriminated against him in violation of the Age Discrimination in Employment Act (ADEA). The NYSE representative application he was legally required to sign in order to work as a broker included an arbitration clause covering employment disputes. The employer moved to compel arbitration under the FAA, and was denied. The district court, relying on Alexander v. Gardner-Denver, concluded Congress intended to protect ADEA claimants from waiver of the judicial forum. The Court of Appeals reversed.
Question Before The Court: Whether forced arbitration clauses in employment contracts that prevent workers from bringing statutory claims against an employer in a judicial forum are enforceable.
The Opinion: It is worth noting that, as in Perry, despite the fact that the employee here did not have a direct arbitration agreement with the employer, the Court imputed the forced arbitration clause in the broker’s registration application in order to apply the FAA. The Court specifically acknowledged that the contract with the employee was with the stock exchange, not with the employer. Still, the Court allowed the employer to enforce the clause despite the fact it was not a party to the contract.
The Court placed the burden on the worker alleging discrimination to show that Congress intended to protect his right to go to court against his more-powerful employer. The employee raised many arguments against the appropriateness of arbitration procedures in ADEA cases. The plaintiff argued that compulsory arbitration is improper because it deprives claimants of the judicial forum provided for by the ADEA, and that the ADEA is not just about individual claims, but also furthers important social policies. The Court was unconvinced, providing, “Congress did not explicitly preclude arbitration or other non-judicial resolution of claims. . .. We do not perceive any inherent inconsistency between [the ADEA’s important social] policies, however, and enforcing agreements to arbitrate age discrimination claims. . .. So long as the prospective litigant effectively may vindicate their statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.”
In response to the plaintiff’s expressed concerns that the arbitrator could be biased in favor of the employer the Court explained, “We don’t presume parties and the arbitral body will be unable to retain competent and impartial arbitrators.” Dismissing the broader implications of its ruling, the Court concluded that the arbitration clause in this particular case sufficiently protected the employee against bias as it provided the employee with one preemptory challenge and specified that the NYSE arbitration rules would be utilized. The worker also argued that since discovery is more limited in arbitration than federal court, it may be too difficult to prove an ADEA claim in arbitration. The Court observed that age discrimination claims likely require no more discovery than RICO or anti-trust claims, which the Court had recently held to be arbitrable despite their complexity. The plaintiff highlighted that the lack of written opinions and public scrutiny of arbitrators’ decisions would stifle important developments in ADEA case law, to which the Court implied that other ADEA cases will come along and those future cases will be public and contribute to that body of law.
Lastly, the worker objected to the enforceability of this forced arbitration clause on the grounds that the contract was a product of unequal bargaining power between an employee and employer. The Court was unmoved, providing that “mere inequity in bargaining power . . . is not sufficient reason to hold arbitration agreements are never enforceable in the employment context.”
Ignoring the fact that it was the Court, through its own opinions within that preceding decade, that had expanded the jurisdictional reach of the FAA to state courts, the majority contended that “concurrent state and federal jurisdiction . . . indicates Congress’ desire to ‘allow claimants a broader right to select the forum for resolving disputes.” The Court ruled that employees could be compelled to arbitrate ADEA claims, asserting, “It is by now clear that statutory claims may be the subject of an arbitration agreement, enforceable pursuant to the FAA. . .. Although all statutory claims may not be appropriate for arbitration, having made the bargain to arbitrate, the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue.”
Justice Thurgood Marshall expressed severe dismay about the impact the majority’s ruling would have in the workplace, noting, inter alia, “The Court’s holding today clearly eviscerates the important role played by an independent judiciary in eradicating employment discrimination.” Indeed, with this ruling the Court turned its back on the larger social purpose of the ADEA and other anti-discrimination laws elucidated by Congress, in favor of creating a nearly impossible standard for parties who do not wish to see statutory rights forced into arbitration. Now, not only must the person fighting to access a judicial forum show that a competing federal statute’s purpose would be frustrated by having that type of claim forced into arbitration, they must also show that Congress at the time the statute was passed intended to exclude arbitration as a possible forum for dispute resolution—a nearly impossible task given most workplace protections, including the Civil Rights Act of 1964, the Fair Labor Standards Act, and the Americans with Disabilities Act, were passed prior to the Court’s massive 1980’s expansion of the FAA. Failing such a showing, courts must assume that Congress considered arbitration to be an acceptable forum for adjudicating statutory claims.
Allied-Bruce Terminix Cos., Inc. et al v. Dobson, 513 U.S. 265 (1995)
Relevant Facts: A homeowner contracted with an exterminator to inspect and protect his home from termites. The contract included both a lifetime guarantee and an arbitration clause. The homeowner decided to sell his house. The exterminator was called to the home to inspect and guarantee that the home was pest-free, which they did. The homeowner sold the house to a buyer. Shortly thereafter, the buyer discovered termites everywhere. The buyer sued the homeowner and extermination company. The company moved to compel the buyer’s suit into arbitration based on the forced arbitration clause in the contract with homeowner. The company’s motion to compel arbitration was denied at both the district court and appellate court levels.
Question Before The Court: Whether the Federal Arbitration Act (FAA) applies to wholly intrastate consumer contracts.
The Opinion: The petitioner directly called on the Court to overturn its 1984 opinion in Southland Corp. v. Keating, 465 U.S. 1 (1984), where the Court had ruled that the FAA preempts certain state laws and ruled that state courts must order arbitration under the FAA unless an exception applies. Instead, the Court here doubled down on, and went further, than the Southland Court in holding that states are not free to apply anti-arbitration law or policy.
The majority reasoned that Section 2 of the FAA is rooted in Congress’ Commerce Clause power, and should be applied using the modern understanding of the limits of the commerce clause, and not as the legislature understood the power to exist at the time the FAA was passed in 1925. The Court then expressly prohibited states from limiting the enforcement of arbitration clauses, declaring, “States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or inequity for the revocation of any contract.’ What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful, for that kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contrary to the Act’s language and Congress’ intent.”
With this case, the Court fully committed to enforcing forced arbitration clauses in adhesive consumer contracts. Relying on its modern commerce clause analysis, the Court held that if the transaction involved interstate commerce in fact, then the FAA will apply to the contract. Even though the contract here was for extermination services on a stationary home, as the company used materials obtained through interstate commerce to conduct those services, the tangential relationship to interstate commerce was enough in the Court’s view to render the contract subject to the FAA.
In his dissent Justice Clarence Thomas rebuked the majority’s opinion, arguing, among other things, that the FAA does not apply to states at all, that the FAA itself in no way supports this outcome, and that the Court was now just making up new FAA rules as they go along, independent of congressional intent or legislative text. These arguments clearly failed to persuade, as the Court relied on its majority opinion here to support its 2001 holding in Circuit City v. Adams, which vastly expanded the reach of the FAA to cover nearly all contracts of employment.
Circuit City Stores, Inc. v. Adams, 523 U.S. 105 (2001)
Relevant Facts: A man filled out a job application to work at a big-box electronics retailer, and was hired. The fine print at the bottom of the company’s job application contained a forced arbitration clause. Two years later, the worker pursued an employment discrimination claim under state law. Citing the FAA, the company invoked the forced arbitration clause to move the claim out of court.
Question Before The Court: Whether the reach of the FAA extends beyond commercial contracts to include most contracts of employment.
The Opinion: The FAA’s Section 1 “exclusionary clause” exempts “contracts of employment of seamen, railroad employees, or any class of workers engaged in foreign or interstate commerce” from the Act’s coverage. Applying a general rule of statutory construction, the Court held that, rather than exclude employment contracts from the FAA, “the better interpretation is to construe the statute . . . to confine the exemption to transportation workers.” To hold that the clause exempted all workers from the FAA, in the Court’s opinion, would be to render the specific reference to seamen and railroad workers superfluous. As a result, according to the Court, most non-transportation employment contracts containing an arbitration clause are subject to the FAA.
The Court rejected the argument that applying the FAA to most employment contracts would infringe on the traditional role played by states in regulating the employment relationship, including the passage of “state employment laws which restrict or limit the ability of employees and employers to enter into arbitration agreements.” Instead, the Court re-iterated its position in Southland that “Congress intended the FAA to apply in state courts and to preempt state antiarbitration laws to the contrary. . . The Court should not chip away at Southland by indirection, especially by adoption of the variable interpretation theory advanced by the respondents in the instant case [which argued for interpreting the statute in light of the extent of the legislature’s commerce clause power at the time of the law’s passage].”
With this case, the Court opened the floodgates on forced arbitration clauses in employment contracts. Although in its petition for certiorari the employer argued that the job application did not actually constitute an employment contract, the Court declined to rule on that point. The opinion in this case, then, is implicitly premised on the fact that the arbitration clause in the job application constituted a valid and enforceable contract.
After this ruling, with extremely limited exception, employers became free to require pre-dispute arbitration agreements – forced arbitration clauses – as a condition of employment, and they have done so with rapidity. Through job applications, employee handbooks, and other adhesive employment documents, over 60 million workers are now bound by forced arbitration clauses, and, because of this case, states can do little to protect them.
Equal Employment Opportunity Commission v. Waffle House, Inc., 534 U.S. 279 (2002)
Relevant Facts: After completing a form job application, a man was hired to work the grill at his local Waffle House. Weeks into his new job, the man suffered a seizure at work, and was fired shortly thereafter. The man filed a charge of discrimination with the Equal Employment Opportunity Commission (EEOC) alleging the discharge violated the Americans with Disabilities Act (ADA). The EEOC filed an enforcement action in federal district court seeking injunctive relief, damages to make the employee whole, and punitive damages. Waffle House sought to compel arbitration based on a forced arbitration provision in the job application. The district court denied the motion, finding that, despite the presence of the provision in the application, there was no agreement to arbitrate in the actual employment contract. The appeals court reversed in part, finding a valid arbitration agreement did exist that precluded victim-specific relief, but since the EEOC was not a party to that agreement it was not precluded from bringing the enforcement action.
Question Before The Court: Whether an arbitration clause between an employer and employee bars the EEOC from pursuing victim-specific relief in an enforcement action.
The Opinion: In addressing the question presented, the Court reviewed the legislative history of Title VII, noting that when Congress originally passed the statute it limited the EEOC’s power to that of an investigative body. However, in 1972, Congress specifically amended the Act to authorize the EEOC to bring its own enforcement actions, and authorized courts to order victim-specific relief, such as back pay, and to enjoin employers from engaging in unlawful employment practices. While the amendments specified the judicial districts where such actions could be brought, they made no mention of arbitration proceedings. In 1991, the legislature again amended Title VII to allow for the award of punitive damages. Based in these facts, the Court concluded that “these statutes unambiguously authorize the EEOC to obtain the relief that it seeks in its complaint if it can prove its case against respondent.”
The Court held that, although the employee could be compelled to arbitrate claims he brought on his own behalf, there is no mechanism to preclude the EEOC’s power to investigate the employees’ charges of discrimination, or to obtain the remedies it sought. By law, the “EEOC holds its own independent statutory responsibility to investigate and conciliate claims.” In a prior case, General Telephone Co. of Northwest v. EEOC, 446 U.S. 318 (1980), the Court provided that “the EEOC is not merely a proxy for the victims of discrimination and that its enforcement suits should not be considered representative actions.” The Court pointed out that under Title VII, once a charge is filed, the EEOC has exclusive jurisdiction over the claim for 180 days: “The statute clearly makes the EEOC the master of its own case and confers on the agency the authority to evaluate the strength of the public interest at stake.”
Although this nation does have a “liberal federal policy favoring arbitration,” the Court explained, “nothing in the [FAA] authorizes a court to compel arbitration of any issues, or by any parties, that are not already covered in the agreement. The FAA does not mention enforcement by public agencies; it ensures the enforceability of private agreements to arbitrate, but otherwise does not purport to place any restriction on a nonparty’s choice of judicial forum.” Certainly, the Court asserted, “a court [is not permitted] to announce a categorical rule precluding an expressly authorized form of relief as inappropriate in all cases in which the employee has signed an arbitration agreement.”
Finding that “the compromise solution reached by the Court of Appeals turns what is effectively a forum selection clause into [an impermissible] waiver of a nonparty’s statutory remedies,” the Court reversed, emphasizing that “a contract cannot bind a nonparty. Accordingly, the pro-arbitration goals of the FAA do not require the agency to relinquish its statutory authority if it has not agreed to do so.” When a party is not bound by the agreement, a court must proceed without regard to the federal policy favoring arbitration.
Rent-A-Center, West, Inc., v. Jackson, 561 U.S. 63 (2010)
Relevant Facts: After a retail salesman filed an employment discrimination claim against his former employer, the company moved to compel arbitration under a forced arbitration clause upon which the worker’s employment had been conditioned. The employee specifically challenged the forced arbitration clause on the grounds of unconscionability, but the forced arbitration clause contained a delegation provision which provided that questions of the clause’s enforceability would be decided by an arbitrator. The district court granted the motion to compel and, based on the delegation provision, ordered the unconscionability question into arbitration. The appeals court reversed in part, holding that when a challenger asserts that he cannot meaningfully assent to the agreement, the threshold question of unconscionability is for the court to decide.
Question Before The Court: Whether an arbitrator or a judge shall determine the enforceability of a forced arbitration clause when the agreement includes a delegation provision.
The Opinion: The Court cited its severability rule from Prima Paint in holding that “the delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement. We have recognized that parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy. . .. [Delegation provisions are] simply an additional, antecedent arbitration agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does any other. . . Application of the severability rule does not depend on the substance of the remainder of the contract. Section 2 operates on the specific ‘written provision’ to ‘settle by arbitration a controversy’ that the party seeks to enforce. Accordingly, unless [a party] challenged the delegation provision specifically, we must treat it as valid . . . and must enforce it, . . . leaving any challenge to the validity of the Agreement as a whole to the Arbitrator.”
The primary effect of this case was summarized in Justice John Paul Stevens’ dissent: “A claim that an entire arbitration agreement is invalid will not go to the court unless a party challenges the particular sentences that delegate such claims to the arbitrator, on some contract ground that is unique and particular to the sentences.” In so deciding, the Court gave effect to contracts when the validity of those very contracts is in question. Justice Stevens addressed this problem, saying, inter alia, “I do not think an agreement to arbitrate can ever manifest a clear and unmistakable intent to arbitrate its own validity.”
Arguably, one could go much further in questioning why the FAA is being applied to the delegation provision at all. The FAA only applies to “written provision[s] . . . evidencing a transaction involving commerce.” While an arbitration clause may be a part of, but severed from, an underlying contract in interstate commerce—which is the means by which the FAA applies to them—the same cannot be said for a delegation provision. The contract that contains a delegation provision is the arbitration contract. In Mitsubishi Motors the Court went to great lengths to characterize arbitration contracts as “mere forum-selection clauses.” Even under the broadest interpretation of the Commerce Clause, forum-selection clauses have never been interpreted as contracts in interstate commerce. Because the underlying contract that delegation provisions are severed from are arbitration agreements, which, again, are not contracts in interstate commerce in and of themselves, it’s questionable that the FAA should apply to matters of their enforceability.
Epic Systems, Corp. v. Lewis, 138 S. Ct. 1612 (2018)
Relevant Facts: Three separate cases with similar facts were combined, all involving claims by workers for unpaid wages by more-powerful employers. In each instance, a group of employees’ efforts to band together to enforce their right to unpaid wages was met by their employer’s invocation of the class ban contained in their company forced arbitration provision to block the workers’ ability to proceed in a class legal action. The employees objected, arguing that the National Labor Relations Act (NLRA) protects their right to act collectively for their “mutual aid or protection.” The class ban in the company forced arbitration clause, the employees argued, violated that NLRA guarantee, so was unlawful and unenforceable.
Question Before The Court: Whether arbitration agreements with individual employees that bar them from pursuing work-related claims on a joint basis in any forum are illegal because they limit the employees’ right under the NLRA and NLGA to engage in “concerted activities” in pursuit of their “mutual aid or protection,” and are therefore illegal and unenforceable under the Federal Arbitration Act’s (FAA) “savings clause.”
The Opinion: The U.S. Supreme Court held that the FAA requires collective action bans in employment contracts to be enforced. In so finding, the Court determined that the NLRA did not apply in the case before it because, in its view, the NLRA was designed to serve as a mechanism for workers to organize a union in their workplace, but that workers’ right to act collectively for “mutual benefit or protection” does not extend to collective legal action. The Court reasoned that, since the NLRA didn’t protect a right to collective legal action, class bans in forced arbitration clauses limiting workers’ ability to band together against a more-powerful employer are not illegal, and, by extension, the FAA’s “savings clause” did not apply. It further asserted that even were the illegality defense available, it still could not be applied because doing so would impermissibly “disfavor arbitration”—an act the Court ruled in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) would violate the FAA. The Court then reiterated its position in Concepcion that courts cannot render arbitration contracts unenforceable for public policy reasons.
In reaching its holding, the majority expressed open disdain toward the employees’ effort to retain their right to band together. It portrayed the illegality defense asserted by the workers as an attempt to “attack the individualized nature of the arbitration proceedings,” and claimed that the employees’ demand to enforce their rights collectively was really intended to “interfere with one of arbitration’s fundamental attributes.” In making this point, the Court ignored the fact that the attributes it was holding up as sacrosanct had only been used to characterize arbitration proceedings for less than a decade and were wholly a product of the Court’s own recent decisions—observations that Justice Ruth Bader Ginsberg pointed out in her scathing dissent.
The full repercussions of this opinion have yet to be felt. Time will tell what this case will mean for workers who seek avail themselves of the “mutual aid or protection clause” of the NLRA in the future; and the winnowing of the FAA “savings clause” in this opinion creates doubt as to how an employee may use the provision to defend against forced arbitration moving forward.
New Prime Inc. v. Oliveira, 586 U.S._(2019)(slip opinion)
Relevant Facts: A truck driver sued for wage and hour violations. The employer invoked an arbitration clause containing a delegation provision in the employment contract. The driver argued that truck drivers fall within the transportation worker exemption in Section 1 of the Federal Arbitration Act (FAA). The employer argued the driver was an independent contractor, so the exemption didn’t apply.
Question Before The Court: Whether a dispute over applicability of the FAA’s Section 1 “contract of employment” exemption is an arbitrability issue that must be resolved in arbitration pursuant to a valid delegation clause; and whether that exemption is applicable to independent contractor agreements.
The Opinion: The Court held that a court, not an arbitrator, should determine whether the Section 1 exemption applies, even in cases where an otherwise-valid delegation provision is present. The Court observed that “under the severability principle, [courts] treat a challenge to the validity of an arbitration agreement (or a delegation clause) separately from a challenge to the validity of the entire contract in which it appears,” but “a court may only use Sections 3 and 4 [of the FAA] to enforce a delegation clause if the clause appears in a ‘written provision in . . . a contract evidencing a transaction involving commerce” consistent with Section 2. And only if the contract in which the clause appears doesn’t trigger Section 1’s ‘contract of employment’ exception.”
This ruling appears to be the first constraint the Court has placed on delegation provisions in arbitration clauses since it first embraced them. In doing so, the Court suggested that where the FAA Section 1 “contract of employment” exception is at issue, a court should first review the contract as a whole to determine whether the exception applies. If the court determines it does apply, then the other sections of the FAA cannot be used to compel arbitration. If the court determines the exception does not apply, then the severability doctrine established in Prima Paint, and later applied to delegation provisions in Rent-A-Center, should be applied, and the court must order arbitration as required under the terms of the arbitration clause.
Relying on legislative text and history, the Court also found that the phrase “contract of employment” in Section 1 refers to all contracts to perform work, and is not limited to parties engaged in a formal employer-employee relationship. Under this ruling, the exception applies to independent contractors, and not just to workers classified as employees.
With this clarification, one wonders if there is room to expand the type of a work considered to be “engaged in . . . interstate commerce” to include common 21st Century interstate business transactions conducted primarily through the internet. For example, businesses like Amazon and its affiliates are certainly involved in interstate commerce. Under this decision and the Court’s holding in Terminix, it is possible that the workers who support those transactions may fall under the Section 1 exception. If this question were to arise in a future claim, under this decision, the answer would be for a court to decide.
Lamps Plus, Inc. v. Varela, No. 17-988, (U.S. Apr. 24, 2019)
Relevant Facts: An employee of Lamps Plus fell prey to a phishing scheme and accidentally released the tax information of thousands of the company’s workers. After Frank Varela discovered a fraudulent tax return had been filed in his name, he filed a putative class action lawsuit in federal court against Lamps Plus on behalf of the employees whose information was compromised. Lamps Plus responded by filing a motion to compel individual arbitration. The District Court granted the order to compel arbitration, but denied the company’s effort to break the class. Under the state law doctrine contra proferentem, ambiguous language in a contract should be interpreted in a favor of the non-drafting party. Because the language in the arbitration clause drafted by Lamps Plus was ambiguous, the court allowed class arbitration proceedings to move forward. The appellate court affirmed.
Question Before The Court: Whether the Federal Arbitration Act bars courts from applying a neutral principle of state contract interpretation to an ambiguous contract term when doing so would result in the authorization of class arbitration proceedings.
The Opinion: Under California law, the doctrine of contra proferentem provides that ambiguous contract terms should be interpreted against the drafter. Because the arbitration provision at issue here was ambiguous, the Ninth Circuit interpreted it in a way most favorable to the employee required to accept it, which meant permitting class arbitration to move forward.
Relying on precedent from only the last decade, the U.S. Supreme Court reversed, holding that an arbitration contract must expressly authorize class arbitration in order for parties to access the arbitral forum collectively. In the Court’s view, the “traditional individualized arbitration contemplated by the FAA”—and the benefits the Court has assigned to it—are undermined by class arbitration. For that reason, the Court held that “ambiguity does provide a sufficient basis to conclude that parties to an arbitration provision agreed to ‘sacrifice the principal advantage of arbitration.’
Additionally, the Court addressed the appellate court’s use of contra proferentem, and ruled that the FAA’s predilection for individual arbitration prevents courts from applying a state’s general contract principles to ambiguous contract terms if doing so would result in the authorization of class arbitration. The Court explained, “The FAA provides the default rule for resolving certain ambiguities in arbitration agreements. . .. Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentem cannot substitute for the requisite ‘contractual basis for concluding that the parties agreed to class arbitration.”
All four justices in the minority authored separate dissents. Justice Breyer focused on jurisdictional issues. Justice Sotomayor argued against the preemptive effects of the majority’s holding. Justice Kagan excoriated the majority’s blatant anti-class action judicial activism that laid at the heart of their decision to render the state’s “plain-vanilla rule of contract interpretation” preempted when applied to arbitration contracts.
Justice Ginsburg lambasted the majority’s woeful straying from the legislative purpose of the FAA at the expense of employees and consumers. “Piling Pelion on Ossa,” she wrote, “the Court has hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum. . .. Employees and consumers forced to arbitrate solo face severe impediments to the ‘vindication of their rights’. . .. [M]andatory individual arbitration continues to thwart ‘effective access to justice’ for those encountering diverse violations of their legal rights. The Court . . . has facilitated companies’ efforts to deny employees and consumers the ‘important right’ to sue in court, and to do so collectively, by inserting solo-arbitration-only clauses that parties lacking bargaining clout cannot remove.”