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First Circuit In Rivera v. Clark Melvin Securities Corp., [FOOTNOTE 1]a non-employment securities fraud case, the defendants moved to dismiss or, in the alternative, for a stay compelling arbitration alleging that a margin agreement contained a pre-dispute arbitration provision. The plaintiffs asserted that they had signed neither a margin agreement nor any arbitration clause and that, in any event, there could be no arbitration if the arbitration clause had been induced by fraud. Agreeing that a party cannot be compelled to arbitrate the “threshold issue” of the existence of an arbitration agreement, the U.S. District Court for Puerto Rico ordered an evidentiary hearing to determine whether an agreement requiring arbitration existed. Such a determination is for the court and not an arbitrator to decide. Second Circuit In Chelsea Square Textiles Inc. v. Bombay Dyeing and Manufacturing Company, Ltd., [FOOTNOTE 2]the Second Circuit vacated a stay of arbitration and ordered the parties to arbitration. Although the district court determined that the parties had not agreed to arbitrate disputes arising between them, calling the alleged arbitration clause illegible and unintelligible, the Second Circuit held that whether parties have contractually bound themselves to arbitrate is a legal conclusion subject to de novoreview. Nor was the appellate court required to give deference to the lower court’s interpretation of state law. However, the appellate court stated that findings of fact upon which the lower court’s conclusion is based may not be overturned unless clearly erroneous. Further, the Second Circuit reasoned that while Section 2 of the FAA preempts state law that treats arbitration agreements differently from any other contracts, Section 2 also “preserves general principles of state contract law as rules of decision on whether the parties have entered into an agreement to arbitrate.” The Second Circuit denied a motion to dismiss for lack of appellate jurisdiction and affirmed a lower court’s order dismissing an employer’s motion to stay arbitration and granting the employee’s motion to compel arbitration in CPR (USA) Inc. v. Philip R. Spray. [FOOTNOTE 3]In this case one issue was whether expiration of a contractual period of employment terminated the right to arbitrate any employment disputes. The trial judge noted that the agreement did not include a termination date or indicate that the right to arbitration was bounded by the period of employment. This issue was not resolved by the court; instead, the court held the threshold question was whether the specific controversy was covered by the arbitration clause. In 1998, the FAA was amended, suggested the court, to promote appeals from orders barring arbitration and limit appeals from orders directing arbitration. The Second Circuit reasoned that “if a suit in which the question of arbitrability arises is ‘independent’ — that is, if the plaintiff seeks an order compelling or prohibiting arbitration or a declaration that a dispute is arbitrable or not arbitrable, and no party seeks any other relief — then a final judgment compelling arbitration ends the litigation.” The order is appealable at once. On the other hand, the court continued, “if an application to compel arbitration is ‘embedded’ in a broader action — an action in which one party or the other seeks some relief other than an order requiring or prohibiting arbitration (typically some relief concerning the merits of the allegedly arbitrable dispute)” — the order denying arbitration is immediately appealable, but an order directing arbitration is not immediately appealable. In Sunoco Overseas, Inc. v. Texaco International Trader Inc., [FOOTNOTE 4]the U.S. District Court for the Southern District of New York denied a motion to vacate an arbitration award that alleged the arbitrator was partial and manifestly disregarded the law. A high standard is required to vacate an arbitration award. The court observed that the standard is “more than error or misunderstanding with respect to the law . . . .” The court further suggested that the meaning of “disregard implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it.” The mere fact that the sole arbitrator’s former law firm represents a company that participated in a joint venture with one of the parties was not enough to vacate the award. “When arbitrators explain their conclusions . . . in terms that offer even a barely colorable justification for the outcome reached, confirmation of the award cannot be prevented by litigants who merely argue, however persuasively, for a different result,” the court concluded. In Vissa. v. Pagano, [FOOTNOTE 5]a Connecticut court held where the defendant did not sign the alleged arbitration agreement and did not thereafter participate in arbitration, the claim of the plaintiff against the defendant for breach of the arbitration agreement failed as a matter of law. Third Circuit A motion to vacate or modify an arbitration award based on the argument that the arbitrator exceeded his authority was granted in Roadway Package System Inc. v. Scott Kayser. [FOOTNOTE 6]The U.S. District Court for the Eastern District of Pennsylvania stated that an arbitrator has the authority to decide only those issues that actually are submitted to him and exceeds his authority when he rules on questions or matters not before him. Where the arbitrator was requested to determine only whether an employee’s termination was proper, it was beyond the arbitrator’s jurisdiction to find that the employer’s procedure for notifying the employee of his performance deficiencies was unfair. In a non-employment case, Selective Insurance Group, Inc. v. Berkeley Martin, [FOOTNOTE 7]the U.S. District Court for the Eastern District of Pennsylvania vacated an arbitration award and, in its decision, reviewed the basis upon which a common law arbitration decision can be vacated. Under the Pennsylvania Arbitration Act, matters sent to arbitration are either “statutory arbitration” or “common law arbitration” depending on whether the parties’ agreement to arbitrate originated in the court system. Under Pennsylvania law, either a statutory or common law arbitration decision can be vacated if there is a clear showing that a hearing was denied, or that “fraud, misconduct, corruption or other irregularity caused the rendition of an unjust, inequitable or unconscionable award.” The court held that in arbitration, an “irregularity” refers to the process employed in reaching the result of arbitration, not to the result itself. An “irregularity” as grounds to vacate an arbitrator’s award is an arbitration award that imports “bad faith, ignorance of the law, or indifference to the justice of the result.” In Selective, the arbitrators refused to apply a Pennsylvania Supreme Court decision governing the issue decided during their arbitration proceedings. This disregard for governing law, held the court, was a plain “irregularity” and, as such, it was sufficient grounds to vacate the arbitration award. Fourth Circuit In EEOC v. Waffle House, Inc., [FOOTNOTE 8]the Fourth Circuit ruled that it would be against the public interest to compel the EEOC, because of an employment arbitration agreement, to arbitrate a claim for injunctive relief that sought to prevent the employer from discharging individuals and engaging in unlawful employment practices. However, the court held that the EEOC may not seek to enforce rights of an individual seeking back pay, reinstatement, compensatory and punitive damages. A charging party’s actions that impede his own right to sue also can limit the nature and scope of the EEOC’s suit brought in its own name to the extent that it acts on behalf of a charging party, the court found. In Circuit City Stores Inc. v. EEOC, [FOOTNOTE 9]Circuit City Stores sought declaratory relief in response to a perceived attempt by the EEOC to reinterpret the U.S. Supreme Court’s holding in Gilmer v. Interstate/Johnson Lane Corp. [FOOTNOTE 10]The U.S. District Court for the Eastern District of Virginia found it had no subject matter jurisdiction. Nonetheless, the case is noteworthy because it describes the substantial work done by the EEOC to prepare a challenge to the Associate Issue Resolution Program (AIRP) of Circuit City. EEOC’s Office of General Counsel conducted a comprehensive review of arbitration programs adopted by companies throughout the country to identify appropriate venues for instituting lawsuits aimed at clarifying and reforming the law subsequent to Gilmer. Circuit City was one of its targeted companies. The EEOC’s preparation included identifying federal districts where judges were perceived as most favorable to the EEOC’s view against mandatory arbitration agreements, identifying potential plaintiffs, and conducting ongoing discussions with private attorneys who might be willing to file private suits. Notwithstanding the fact that the EEOC had filed a Commissioner’s charge and obtained authorization to litigate, when Circuit City filed this action the EEOC decided not to file suit and closed its case file. The district court commented on the “unreasonable and capricious conduct of the EEOC and the serious adverse consequences of that conduct to the plaintiff.” Fifth Circuit Applying Texas and federal law principles favoring arbitration, Texas courts routinely enforce arbitration clauses in employment agreements and focus largely on the employee’s factual allegations to determine whether the allegations trigger coverage under the arbitration clause. Texas courts, however, will refuse to expand a narrowly drafted arbitration clause to cover any employment-related dispute. In IKON Office Solutions, Inc. v. Eifert, [FOOTNOTE 11]for example, the Houston Court of Appeals, Fourteenth District, refused to compel arbitration because the arbitration clause did not cover a dispute arising out of an employee’s sale of his company. The plaintiff, Steven Eifert, entered into an acquisition agreement with IKON in which he agreed to sell his shares of Global Services, Inc., to IKON. In exchange, IKON promised to employ Eifert and give him various marketing rights. After a disagreement with IKON, Eifert resigned and sued IKON for breach of contract, fraud, tortious interference, and conspiracy. IKON moved to compel arbitration, relying on an arbitration clause in a separate employment agreement, which required the parties to arbitrate disputes for wrongful termination or a termination that violated the employee’s “rights or privileges, express or implied, whether founded in fact or in law.” To avoid the arbitration clause, Eifert initially maintained that he asserted only claims arising out of the acquisition agreement and the alleged fraudulent sale of Global Services, Inc. The appeals court, however, rejected Eifert’s attempt to bifurcate the acquisition and employment agreements, concluding that the parties had signed the agreements contemporaneously and the employment agreement was incorporated by reference into the acquisition agreement. In view of these facts, the appeals court determined that the parties intended to include the arbitration clause as part of both agreements. Nevertheless, the appeals court reasoned that Eifert’s dispute fell outside the narrow confines of the “employment termination” arbitration clause — the clause only required arbitration when the employee asserted a wrongful termination claim or a violation of his employment rights or privileges. According to the court, Eifert’s claim hinged exclusively on factual allegations about the fraudulent sale of his company. Thus, Eifert did not have to arbitrate his claim because the parties had not drafted the clause to cover “all disputes.” Despite the Federal Arbitration Act and Texas’ counterpart statute favoring arbitration, a Texas federal district court recently struck down an arbitration clause that violated public policy embodied in the Texas Workers’ Compensation Act (TWCA). In Strawn v. AFC Enterprises, Inc., [FOOTNOTE 12]the district court held that an employer who does not subscribe to the TWCA and offers “meager” benefits under a non-subscriber benefits plan, cannot unilaterally impose an arbitral forum on its injured employees because of TWCA public policy considerations. Under Texas law, an employer may elect not to provide workers’ compensation coverage, but in doing so, the employer waives all common law defenses to employee injury claims. Barbara Strawn injured herself while working at a Church’s Chicken restaurant. The owner of the Church’s Chicken, AFC Enterprises, Inc. (AFC), did not subscribe to the TWCA but, instead, opted to provide insurance coverage through its own benefit plan, which offered significantly lower benefits than the TWCA. Moreover, AFC required its employees to enter into binding arbitration under this plan, which deprived the employees of a TWCA judicial forum and a jury trial. Strawn argued that the minimal benefits offered under the AFC plan, when coupled with AFC’s arbitration agreement, violated public policy. The district court agreed, finding that legal constraints external to the parties’ agreement foreclosed the arbitration of those claims. Focusing on the balance mandated by the TWCA, which provides sufficient no-fault benefits to employees who choose to waive their common law and statutory remedies, the court held that the AFC benefit plan violated public policy because it provided neither of these options. The court also concluded that fundamental differences between the arbitral forum and judicial forum compelled the conclusion that the arbitration clause, in the context of the “miserly” benefits plan, violated Texas public policy. According to the court, the Texas Legislature intended to provide employees with a choice between these two forums under the TWCA. AFC’s plan was void because it provided few benefits and: (i) it barred employees from their right to a jury trial; (ii) evidence rules are more relaxed in arbitration; and (iii) the grounds for judicial review of an arbitration decision are extremely limited. Recognizing that the Fifth Circuit repeatedly has upheld mandatory pre-dispute arbitration of civil rights claims, employment discrimination plaintiffs often turn to “economic duress” arguments to attack an arbitration clause. These arguments are rarely successful. For instance, in Johnson v. Labor Ready, Inc., [FOOTNOTE 13]a Louisiana district court granted an employer’s motion to compel arbitration, despite the former employee’s claim of “economic duress.” To circumvent an arbitration provision and bring a sexual harassment lawsuit, Johnson challenged the circumstances surrounding the signing of her employment agreement, which contained a mandatory arbitration provision. She claimed that she was forced to sign the agreement because she needed the job for her basic needs. To buttress her allegation, Johnson relied on Louisiana cases allowing an employee plaintiff to avoid arbitration clauses based on alleged economic duress. The district court, however, ruled that federal substantive law applied to the case and not Louisiana law. Because Johnson directed her duress argument at the entire agreement, and not to the arbitration provision, the court refused to apply state law. Louisiana law, the court reasoned, would have applied only if Johnson had limited her duress argument to an attack on the arbitration clause itself. Thus, under federal substantive law, Johnson was required to arbitrate her discrimination claim. Sixth Circuit In Lillian Pebbles Morrison v. Circuit City Stores, Inc., [FOOTNOTE 14]the U.S. District Court for the Southern District of Ohio granted the defendant’s motion to compel arbitration. In this case, the plaintiff, a store manager, had signed an employment application in which she agreed, as a condition of being considered for employment, to be bound by the Circuit City Dispute Resolution Agreement. The Sixth Circuit recognizes that both statutory and common law claims may be subject to an arbitration agreement enforceable under the FAA. Further, Ohio law does not preclude the arbitration of plaintiff’s Title VII and Ohio discrimination law claims. The district court rejected the plaintiff’s arguments that the mandatory arbitration agreement created a contract of adhesion, lacked mutuality of obligation, lacked consideration, resulted in an unenforceable waiver of future rights, and violated public policy. In Duryee, et al. v. Rogers, [FOOTNOTE 15]an Ohio state appellate court remanded the case to the lower court to decide whether there was assent to the contract requiring arbitration. The question of whether a particular corporate employee who signed a document requiring arbitration lacked authority is a matter to be determined by the court and not an arbitrator. The court stated that “a party who contests the making of a contract containing an arbitration provision cannot be compelled to arbitrate the threshold issue of the existence of an agreement to arbitrate. Only a court can make that decision.” Additionally, the court held that the fact that a claim may sound in tort does not necessarily exclude such claim from an arbitration clause. “[W]hether a claim falls within the scope of an arbitration agreement turns on the factual allegations in the complaint rather than the legal causes of action asserted.” Seventh Circuit Holding that an employee and employer’s mutual promises to follow handbook procedures constituted sufficient consideration to support an arbitration clause, the U.S. District Court for the Northern District of Illinois granted an employer’s motion to compel arbitration of a former employee’s age discrimination claim. [FOOTNOTE 16]Johnson sued his employer under the Age Discrimination in Employment Act after Traveler’s terminated his employment. Johnson alleged that no consideration supported the arbitration provision in the employee handbook that he signed six years after he began his employment. The district court ruled that sufficient consideration existed because both parties agreed to resolve their disagreement according to the handbook procedures. The court also held that the arbitration provision applied to all employment disputes, including Johnson’s termination claim, and that the handbook’s disclaimer (that it did not create contractual rights) only meant that it did not affect Johnson’s employment at-will status. In the union setting, an Indiana federal district court in Collins v. Michelin [FOOTNOTE 17]applied the U.S. Supreme Court’s Wright v. Universal Maritime Service Corp. [FOOTNOTE 18]decision, holding that a union-negotiated waiver of an employee’s statutory right to a judicial forum under the Americans with Disabilities Act (ADA) must be explicit. Michelin employees, represented by the United Steelworkers Union, filed complaints alleging disability discrimination under the ADA. The collective bargaining agreement (CBA) mandated arbitration, but failed to comply with the Supreme Court’s holding in Wrightthat a purported waiver of a statutory discrimination claim be clear and explicit. Examining the CBA terms, the district court concluded that the CBA did not clarify that arbitration was mandatory for ADA claims. Accordingly, the court held that Michelin could not compel the employees to arbitrate their ADA complaints. The Collinscourt construed the CBA terms against the employer in the union context, but courts in the Seventh Circuit continue to give employers wide latitude in drafting the terms of an arbitration clause. In Quist v. Empire Funding Corp., [FOOTNOTE 19]for example, Quist challenged Empire’s forum selection clause requirement that any arbitration be conducted in Texas. Quist claimed that the requirement was unduly burdensome and not the result of appropriate “arms-length negotiations between sophisticated parties.” The district court disagreed and ruled that, even if the agreement was the result of a marked disparity in bargaining power, the disparity was insufficient to invalidate the agreement. The court noted that the clause would be invalid if the employer had committed fraud, misconduct, or some other wrongdoing, but Quist offered no evidence to support such a finding. Eighth Circuit Continuing the judicial trend favoring arbitration of employment claims, a Missouri appellate court reversed a lower court’s denial of an employer’s motion to dismiss and to compel arbitration, despite a former employee’s contention that an arbitration clause in his employment contract was unenforceable. In Mueller v. Hopkins & Howard, P.C., [FOOTNOTE 20]Douglas Mueller attempted to dodge a mandatory arbitration clause after he resigned his financial position and filed suit against Hopkins & Howard for, among other things, breach of contract, conversion and breach of fiduciary duty. Mueller maintained that the arbitration provision was unenforceable because: (i) the Federal Arbitration Act (FAA) did not apply; (ii) the employer waived its right to arbitrate; (iii) no legal support existed for the employer’s motion to dismiss; and (iv) the provision did not cover most of his claims. The trial court denied Hopkins & Howard’s motion to dismiss Mueller’s complaint and compel arbitration. The Missouri Court of Appeals reversed the trial court’s decision and held that the FAA applied to the arbitration provision because Mueller’s employment contract involved interstate commerce. The appeals court also concluded that a motion to dismiss is a proper motion in which to request the trial court to compel arbitration. Further, the court ruled that Hopkins & Howard had not waived its right to arbitrate, finding that Mueller was not substantially prejudiced by his employer’s delay in seeking arbitration. The court noted that Hopkins & Howard sought arbitration in less than a year from the time Mueller filed his lawsuit and had not filed a substantial number of motions to which Mueller had to respond. Finally, the court ruled that the arbitration clause covered Mueller’s claims against his employer because his petition referenced specific provisions of the employment agreement. Ninth Circuit According to a California appeals court, an employee’s discharge for failure to sign pre-dispute arbitration agreements requiring that the parties resolve work-related disputes through binding arbitration did not violate public policy. In Lagatree v. Luce, Forward, Hamilton & Scripps, [FOOTNOTE 21]Donald Lagatree maintained that he was wrongfully terminated because he would not sign arbitration agreements with two law firms. The law firms hired Lagatree as a legal secretary. The first firm presented him with an employee agreement to arbitrate employment disputes, but he refused to sign it. The first firm terminated his employment and Lagatree applied at the second firm. When he refused to sign an arbitration agreement with the second firm, that firm terminated his employment as well. Lagatree filed suit against both firms for wrongful termination. To support his public policy violation argument, Lagatree asserted that the law firms terminated his employment because he refused to waive his constitutional rights to a jury trial and a judicial forum. The court of appeals disagreed, holding that the agreement was not unenforceable simply because it existed on a take-it-or-leave-it basis. Lagatree’s rights to a jury trial and a judicial forum could generally be waived, the appeals court concluded, holding that the arbitration agreement did not violate public policy. Applying California law, the court reasoned that a contract violates public policy when it offers no benefit to the public; however, dispute resolution through arbitration constituted a sufficient public benefit for the court to uphold the firms’ policies requiring employee arbitration agreements. Lagatree also asserted that the provisions were void against public policy based on the costs to pursue a claim. Lagatree reasoned that the agreements’use of the American Arbitration Association’s (AAA) rules and regulations imposed burdensome costs and fees. The court rejected this argument because the AAA allows for reduced fees under a showing of extreme hardship. Finally, Lagatree challenged the provision’s requirement that the losing party in the arbitration pay all the arbitration costs. The court noted that current law disfavored such a cost-shifting provision, but refused to hold the agreements void because California had no well-established policy against imposing arbitration fees on the losing party when the parties signed the agreements in 1997. Eleventh Circuit In a retail installment contract case, Green Tree Financial Corporation of Alabama v. Vintson, [FOOTNOTE 22]the Alabama Supreme Court compelled arbitration in spite of plaintiffs’ arguments that the arbitration agreement was an unconscionable contract of adhesion, lacked mutuality of remedy, and denied them meaningful choice. Where the language of an arbitration agreement applies to claims “arising out of or relating to”the contract, noted the court, that clause has a broader application than one that refers only to claims “arising from”the agreement. Accordingly, the clause was broad enough to encompass intentional tort as well as contractual claims. This article is excerpted with permission from CCH’s Journal of Alternate Dispute Resolution, Spring 2000 Edition. Mr. Goldstein is Vice President and General Counsel of Signature Flight Support Corporation, as well as an Adjunct Professor at Rollins College. He is a frequent lecturer and writer on ADR and conflict resolution. Mr. Goldstein analyzed decisions from the First, Second, Third, Fourth, Sixth and Eleventh federal circuits. Mr. Schaner is the managing partner of Haynes and Boone LLP’s Houston employment law section and represents employers in all aspects of employment, labor, and employee benefits litigation. He is certified by the Texas Board of Legal specialization as a labor and employment law specialist, and for this column he analyzed decisions from the Fifth, Seventh, Eighth and Ninth federal circuits. ::::FOOTNOTES:::: FN159 F. Supp. 2d 297 (DC Puerto Rico 1999). FN2189 F.3d 289 (2d Cir. 1999). FN3187 F.3d 245, 138 CCH Labor Cases �10,501 (2d Cir. 1999). FN41999 U.S. Dist. LEXIS 15692 (S.D.N.Y. 1999). FN51999 Sup. Ct. Conn. LEXIS 2637 (Dist. Stamford-Norwalk 1999). FN61999 U.S. Dist. LEXIS 15768 (E.D. Pa. 1999). FN71999 U.S. Dist. LEXIS 14500 (E.D. Pa. 1999). FN81999 U.S. Dist. LEXIS 24911 (4th Cir. 1999). The Court cited other cases in accord: EEOC v. Goodyear Aerospace, 813 F.2d 1539, 1543 (9th Cir. 1987), and EEOC v. U.S. Steel Corp., 921 F.2d 489, 496 (3rd Cir. 1990), EEOC v. Harris Chernin, 10 F.3d 1286, (7th Cir. 1993). FN91999 U.S. Dist. LEXIS 15876 (E.D. Va. 1999). FN10500 U.S. 20, 114 L. Ed. 2d 26, 111 S. Ct. 1647 (1991). FN11Nos. 14-98-013337-CV, 14-98-01424-CV, 1999 Tex. App. LEXIS 6982 (Tex. App.–Houston [14th Dist.] Sept. 16, 1999). FN12No. Civ. A. G-99241, 1999 WL 1009706 (S.D. Tex. Nov. 4, 1999), FN13No. CIV-A-99-9129, 1999 U.S. Dist. LEXIS 15555 (E.D. La. Oct. 5, 1999). FN141999 U.S. Dist. LEXIS 15410 (S.D. Ohio 1999). FN151999 LEXIS 4406 (Ct. App. Ohio 10th Dist. 1999). FN16 Johnson v. Traveler’s Property Casualty, 56 F. Supp. 2d 1025 (N.D. Ill. 1999). FN17 Collins v. Michelin N. Am., Inc., No. 1:99-CV-235, 1999 WL 825543 (N.D. Ind. Oct. 14, 1999). FN18119 S. Ct. 391 (1998). FN19No. 98-C-8402, 1999 U.S. Dist. LEXIS 16723 (N.D. Ill. Oct. 22, 1999). FN20No. ED 75447, 1999 WL 969496 (Mo. App. E.D. Oct. 26, 1999). FN2188 Cal. Rptr. 2d 664 (Cal. App. Ct. 1999). FN221999 Ala. LEXIS 274 (Ala. S. Ct. 1999). � 2000, CCH INCORPORATED. All Rights Reserved.

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