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While much divides them on the merits of arbitration, friends and foes of this fast-growing method of resolving disputes agree that recent U.S. Supreme Court rulings have created “arbitration heaven” for businesses trying to stay out of court. Even though the justices have split, 5-4, in some of the tougher arbitration challenges, “they are building fairly high protective walls for arbitration and have reinvigorated the old Federal Arbitration Act,” says management counsel Lawrence Lorber of the Washington, D.C., office of New York’s Proskauer Rose. Those high walls obviously affect big-time corporate commercial litigation, he adds, and with the justices’ most recent rulings, also protect arbitration in peripheral areas involving employees and consumers. The guiding principle of the recent rulings — three in the current term alone — is “clear the dockets; keep the cases out of court,” says arbitration scholar David E. Feller of the University of California at Berkeley School of Law. And in the face of that driving force, he contends, even the Rehnquist Court’s signature concern for states’ rights must give way — as it did in the justices’ latest arbitration ruling — in order to reach a pro-arbitration result. Feller and Lorber each filed amicus briefs — the former on behalf of the National Academy of Arbitrators, and the latter for the U.S. Chamber of Commerce — in Circuit City Stores Inc. v. Adams, No. 99-1379, the last of the trio of arbitration challenges this term, which was decided March 21. Circuit City was sued in state court in 1997 by a gay former employee who said he had resigned because of harassment at work. The company asked a federal court to enforce an agreement to arbitrate employment claims that Saint Clair Adams had signed as a condition of his employment. Circuit City contended that the 1925 Federal Arbitration Act (FAA), which makes commercial arbitration agreements enforceable in federal court, covered the employment agreement. The 9th U.S. Circuit Court of Appeals — unlike all other circuits to consider the issue — held that the FAA does not apply to labor or employment contracts. At issue in the U.S. Supreme Court was the meaning of a provision excluding from the act’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Reversing the 9th Circuit, the 5-4 high court, led by Justice Anthony M. Kennedy, held that the exclusion was narrowly limited to transportation workers. A broad exception, he said, would involve complex determinations of which workers were covered, would spawn litigation — undermining the act — and would “call into doubt the efficacy of alternative dispute resolution procedures adopted by many of the nation’s employers.” In a sharply worded dissent, Justice John Paul Stevens said the majority ignored the FAA’s history, which, he said, clearly showed that coverage of employment contracts was never intended. IMPACT ON STATE COURTS Although the decision actually changed the law in only one circuit, it was “reasonably important” to employers who continued to face the possibility of trying to enforce arbitration agreements in state courts, says Neal Mollen of Washington, D.C.’s Paul, Hastings, Janofsky & Walker. In state courts, he explains, employers would have to grapple with the vagaries of state law, and in some states, the differences with respect to enforcing agreements are “quite significant.” Not only “quite significant,” but more protective of consumers and employees, adds Feller. But the “best news” for employers in the decision was “dicta suggesting that at least five justices believe that arbitration is a salutary means of dealing with employment disputes and their rejection of the notion that it is peculiarly unfair in the employment context,” says Mollen. The “best news” is bad news for employees, says employment litigator H. Barry Cappello of Cappello & McCann in Santa Barbara, Calif. “The Supreme Court basically endorsed arbitration as a good method of speedily dealing with these kinds of issues. It is exactly the opposite. Arbitration in employment is extraordinarily expensive, more so than going to court, and onerous.” Employers generally pick the arbitrators, he adds, who know where their business is coming from; results are often very unfavorable to employees because of the “institutional bias” of the arbitrators, and employees can’t fund the cost. “The Supreme Court is not and has not been in the real world,” says Cappello. “They are judges who have been in the nether world of appellate courts.” Besides Circuit City, the justices this term issued two other pro-arbitration rulings: � Last December, the court, in the same 5-4 split as in Circuit City, held that an agreement to arbitrate in a consumer sales contract is not unenforceable because the agreement is silent on the costs of arbitration. Greentree Financial Corp. v. Randolph, No. 99-1235. � Last November, the justices rejected an employer’s argument that a federal court should refuse to enforce an arbitrator’s order reinstating an employee who used marijuana because of a strong public policy against drug use by workers in safety-sensitive jobs. Eastern Associated Coal Corp. v. United Mine Workers of America, No. 99-1038. Greentree and Circuit City will make it increasingly tempting for companies to use those binding arbitration clauses, and more difficult for consumers and employees to find arguments that courts will accept to void those clauses, says arbitration scholar Jean Sternlight of the University of Missouri-Columbia School of Law. “That said, there are still many ways to challenge them,” she adds. “The Supreme Court leaves open the possibility of challenging clauses under federal statutes if you can show the clause is so egregious it denies you a forum to air your claims. And a number of courts have accepted a variety of contract arguments — unconscionability and lack of an agreement.” But so far, she contends, courts are striking only the most egregious clauses, allowing less egregious ones to stand and do harm. The Supreme Court is likely to return to arbitration, say Professor Sternlight and others, as certain issues wend their way through the court pipeline. Two key questions involve whether arbitration clauses can bar class actions and whether clauses must meet the demands of the Seventh Amendment when jury trial rights are waived. There also are a number of cases dealing with the details of the arbitration program, says Mollen, such as whether an individual must pay a fee to lodge a complaint, or pay some portion of the arbitrator’s fee, and how much discovery is required in order for the process to be fair. “The plaintiffs’ bar continues to be relatively dissatisfied with the direction the law has taken here, but there are any number of decisions in the lower courts where particular programs have been struck down,” Mollen adds. “Courts have done a reasonably good job of policing arbitration programs.”

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