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The following discussion thread excerpt is from a recently completed law.com online seminar “Current Issues Facing California Employment Attorneys” moderated by Jeffrey Tanenbaum of Littler Mendelson For information on this program and other law.com seminar offerings, please visit http://www.law.com/seminars. MODERATOR JEFFREY TANENBAUM, LITTLER MENDELSON, SAN FRANCISCO In Circuit City Stores v. Adams, 1 CDOS 2250 (March 21, 2001), the U.S. Supreme Court held that the Federal Arbitration Act (FAA) is generally applicable to employment disputes. Adams had filed a state court discrimination action under the FEHA in which he also asserted various tort claims. Circuit City responded by filing its own suit in federal court under the FAA to enjoin the state action and to compel arbitration pursuant to a mandatory arbitration clause on an employment application signed by Adams. The District Court ordered arbitration. The Ninth U.S. Circuit Court of Appeals, departing from all other circuit courts that had ruled on this issue, reversed. The Supreme Court has now overturned the Ninth Circuit and sent a clear message of support for mandatory arbitration of employment disputes. Is there any reason not to expect a dramatic increase in the use of mandatory arbitration of employment disputes in California? What terms should be included in mandatory arbitration provisions? The Court did not address the issue of whether Title VII claims can be the subject of a pre-dispute mandatory arbitration clause. How do you think the Court will eventually rule on this issue? PANELIST JEFFREY BERMAN, SIDLEY & AUSTIN, LOS ANGELES Depending on what happens in Waffle Houseand Lagatree, Circuit Citylikely will spur an increase in the use of employment arbitration. Of course, Circuit Citywill have the impact of invalidating the anti-arbitration bills currently pending in the State Legislature, such as the one proposed by Shelia Kuehl. As to the elements of a valid arbitration agreement, Armanderizprovides a pretty good road map. Finally, there is an indication in Circuit Citythat Duffieldmay be in trouble. If so, it would be by a 5 to 4 vote. In any event, there likely will be federal legislation proposed on the issue of the arbitration of federal civil rights claims. JEFFREY TANENBAUM Jeff B., you mentioned federal legislation on the issue of arbitration of discrimination claims. Could you discuss this a bit further? Any predictions, thoughts about potential language (terms, limitations etc.)? PANELIST PAUL W. CANE, JR., PAUL, HASTINGS, JANOFSKY & WALKER, SAN FRANCISCO Plaintiffs to date have made three attacks on predispute arbitration programs: (1) the “contracts of employment” exclusion from coverage of the Federal Arbitration Act (a theory embraced by the Ninth Circuit in Craft v. Campbell Soup); (2) the Duffieldtheory, that Congress in the 1991 Civil Rights Act, impliedly and without saying so, intended to disapprove of pre-dispute arbitration agreements; and (3) procedural or substantive unconscionability, based on the facts of a particular case. The road ahead now is clear, or at least clearly marked. Circuit Citydid away with plaintiffs Theory No. 1. Theory No. 2 also soon will be resolved in employers’ favor, as Duffieldis a dead man walking. Every court except the Ninth Circuit has rejected it, and I believe the Supreme Court will unanimously overrule it if the Ninth Circuit doesn’t do so en banc. (I don’t agree with the earlier comment that the Duffieldissue will be at best 5-4. The four justices in the Circuit Citydissent may write separately to note their continuing disagreement on that issue, but even they will join the majority in holding that Duffieldis nonsense.) That leaves Theory No. 3 — unconscionability. Armendarizresolved most of these issues, laying out a clear path to safe implementation of pre-dispute arbitration. Will there be federal legislation to overrule Circuit City? Not until the Democrats control both houses of Congress and the presidency. ANONYMOUS ATTENDEE Since Armendariz, have employers been more frequently using these clauses? PAUL W. CANE, JR. Armendarizreceived less publicity, but it actually is more of a green light to arbitration than is Circuit City. Circuit Cityanswered the “can you” question; Armendarizanswered the “how to” question. In combination, the two decisions (as noted above) put to rest the main attacks on arbitration that plaintiffs’ lawyers had made, and as a result I believe more and more employers will consider the benefits of predispute arbitration agreements. PANELIST JEFFREY WOHL, ORRICK, HERRINGTON & SUTCLIFFE, SAN FRANCISCO I agree with Paul that Duffield‘s days seem numbered, though as of now it remains binding precedent in the Ninth Circuit; it certainly was not overruled by Circuit City. I think that most employers remain very interested in imposing pre-dispute arbitration agreements as a condition of employment, and I do not sense majority support to do away with it in Congress or the Legislature (regardless of which party controls). Some employers who have resisted arbitration fear that it will lower the threshold for claims being brought, i.e., encourage employees to arbitrate over mere “grievances” that are short of termination or other major adverse employment actions and that otherwise would never be litigated. My experience with employers who use pre-dispute arbitration agreements is that this concern has not materialized; has anyone had an opposite experience? Does anyone think that with Armendariznow decided, and the fee to commence arbitration reduced to a court filing fee for the employee, we’ll see an uptick in less-than-serious arbitration demands being brought by employees? PAUL W. CANE, JR. Not a single client that I’ve worked with has reported an uptick in claims once an arbitration program is in place. (Many have speculated that it would occur, but empirically it just hasn’t.) PANELIST STEVE ROTTMAN, ROTTMAN & ASSOCIATES, LOS ANGELES The removal of the cost barrier by Armendarizwill certainly result in more low-level disputes being arbitrated. As a plaintiff’s lawyer, I will arbitrate a low-damage case that I would not be willing to try. While arbitrators certainly will not render the type of awards I expect from a jury, they do, in my experience, issue generous fee awards to the prevailing party (assuming a statutory or contractual basis). What remains to be seen is how employers will react to the increased ability of plaintiffs to make it very expensive to resolve these disputes? PAUL W. CANE, JR. My experience is that employers will try more cases. That’s the beauty of arbitration. With transaction costs lowered, employers are not browbeaten into settlements by the daunting cost of taking a case to a court or jury trial. It now is more cost-effective to see the matter through to the end. JEFFREY TANENBAUM In answer to the question concerning whether we have seen an increase by employers utilizing arbitration clauses since Armendariz: Yes. However, I think Circuit City, which has been receiving more press will have an even greater impact. I agree with Paul that Duffieldis a dead man walking. As to the issue of federal legislation, I thought Jeff B. might have been suggesting the possibility of a bill to address Duffieldrather than Circuit City. Jeff W., my experience has been similar to that of Paul. I have not seen any uptick in claims under arbitration clauses. It just does not seem to work that way. I tend to believe that this is, in part, due to a beneficial side effect of arbitration. It is more predictable and thus encourages the parties to work out their differences without resort to arbitration. However, I also believe that the lack of an uptick is, in part, due to the reluctance of many plaintiffs’ lawyers to take on an arbitration. As arbitration becomes more common this is likely to change and thus I think we will see an uptick in claims down the road. We certainly have not seen a shortage of arbitrated claims in unionized workplaces where the use of arbitration is well entrenched and well understood. Finally, as to Steve’s comments, welcome to the wonderful world of arbitration — no matter how expensive it can get in any particular case, it will still be more cost effective than litigating that same case! GUEST PANELIST, CLIFF PALEFSKY, MCGUINN, HILLSMAN & PALEFSKY, SAN FRANCISCO I certainly don’t want to interrupt my management colleague’s collaboration on the eulogy for Duffieldbut it is still the law and the Supreme Court had its chance and denied cert. Not to mention that it was correctly decided and has the full support of every agency of the U. S. government involved in enforcing the civil rights and labor laws. I do agree that the Luce Forwardcase will be the most likely vehicle for the issue to get back to the Supreme Court, if they want it. There is going to have to be a legislative fix to these issues and legislation will be introduced next week, I believe, to amend the FAA to reverse Adams. I don’t harbor any illusions of its chances for the next two years, unless it is attached to some bill prohibiting abortion counseling in third world countries, but this worm is going to turn. Adamshas had the effect of unifying and activating the civil rights community and labor. Political plans are already in the works to make this a major national labor issue in upcoming elections. The Kuehl bill will certainly go forward. The FAA does not completely preempt the employment field as it does with commercial contracts. There is no preemption of workers in transportation, airlines, railroads, trucking, busses, maritime workers — all male dominated industries desperately in need of civil rights laws. So there would be no reason not to proceed with the bill. California has every interest in protecting the DFEH and the FEHA to the extent it can. Moreover, the Supreme Court has clearly stated that state law concepts of unconscionability are not preempted. The revised bill was drafted to stay within those lines and provides that any clause required as a condition of employment is “involuntary, beyond the reasonable expectations of the parties, unconscionable and against public policy.” The concept is simple … it is unconscionable to require an employee to waive access to the DFEH as a condition of employment, or to have to pay thousands of dollars to pursue a DFEH claim. The Supreme Court has repeatedly stated that arbitration under the FAA is a matter of “consent and not coercion” and the Kuehl bill says nothing more than that. It does not prohibit arbitration of DFEH claims nor does it prohibit pre-dispute agreements. And finally, Paul’s list of challenges is correct with two major omissions. The first is a constitutionally based challenge. The courts have consistently avoided acknowledging the constitution in their arbitration jurisprudence probably because they know they can’t reconcile the knowing and voluntary waiver standard with the now acknowledged involuntary reality of condition of employment. We will force them to address that issue. The other challenge will be fact based and predicated on statistics and the real world results and inadequacy of compulsory arbitration of these claims. The Gilmercourt invited that kind of record and challenge and it will happen. And even though it’s easy to lose perspective as we seesaw from judicial decision to judicial decision, standing back and looking at the big picture shows that the emperor has no clothes. The academic and intellectual consensus is that mandatory arbitration of discrimination claims is not right or fair. The arbitrators say it, the government agencies say it, the media says it, the academics say it and it is a mistake to think that such a corrupt process can be sustained in the long term. This, after all, is the major issue in the civil rights struggle. The courts have historically been impediments to enforcing the civil rights laws and the same is true now. We shall overcome. It’s just going to take a little longer. JEFFREY TANENBAUM Cliff, welcome to the seminar. If mandatory arbitration of discrimination claims is “not right or fair” and if it is a “corrupt process”, as you suggest, why has arbitration worked so well in the context of the unionized workplace for so many years? And, do you truly believe that the “courts have historically been impediments to enforcing the civil rights laws”? That seems a startling statement. How broadly do you mean the term “civil rights laws”? Are you distinguishing between civil rights and constitutional rights? In any event, I suspect Justices Warren, Brandeis and many others would beg to differ. A few important civil rights cases do come to mind, Brown, Mirandaand Roe v. Wadeto name but a few. CLIFF PALEFSKY Arbitration has worked so well in the labor context because of several distinct features, none of which are present in our prisoner of war model. For instance, the process, the procedures, and the selection of the arbitrators are the results of a voluntary and mutual agreement between parties of roughly equal bargaining power. The way it was intended to be. The arbitrators in that context are only resolving contract issues and not statutory discrimination cases. They are not expected to award punitive damages or accuse a company of discrimination knowing that such a ruling could end their career. The union has at least equal access to its members/witnesses so the need for traditional discovery is limited. Because parties have bargaining power they pay a fraction of what we pay for the same arbitrator’s time and the forum is provided for free to the employees with representation. They are both repeat users. The natural checks and balances on the process are in place. They are eliminated when one party can impose the process and rules on the other and when the arbitrator needs to please only one party to get repeat business. That is why the most articulate and compelling opponents of mandatory arbitration are the truly neutral arbitrators themselves — the courageous folks of the National Academy of Arbitrators. They are the ones who have dedicated their lives to giving labor arbitration and, in some respects, all arbitration its credibility. As they told the court in Duffield, “without voluntariness the process lacks legal or moral justification.” What is there left to say when the arbitrators themselves, contrary to their own economic interest, say the mandatory process is not fair and not appropriate for the resolution of statutory discrimination cases? They will say the same thing to the Supreme Court if the Duffieldissue ever gets there. Most everyone who studies and cherishes the institution agrees and will say the same thing. As to the courts, of course we need to exclude the Warren Court and that brief glorious period in our history when the Court truly respected and in some ways led the efforts to fight discrimination. But those days are long gone. I wish it wasn’t true, but the sad truth is that from Dred Scott, to the efforts to limit the Reconstruction Era civil rights laws to Plessy, the major advances in civil rights had to come from the legislature. All white men were created equal for far too long. Segregation was rationalized for 100 years after the passage of the 14th Amendment. Women still are not considered a suspect classification entitled to strict scrutiny. The 1991 Amendments were passed to overrule a series of hostile Supreme Court opinions. The Second Circuit did its own study of gender bias and concluded that there was significant hostility by many federal judges to civil rights cases. Sad but true. And look at our contemporary reality. The dismantling of the ADA, the gutting of affirmative remedial action, the rewriting of a statute and history in Circuit City. Compare Alexander v. Gardner Denverwhere the predominant public policy was a respect for the civil rights laws to Gilmerwhere it became docket clearing. I wish it wasn’t so … more than you’ll ever know. Maybe they will prove me wrong. Maybe they will one day write an arbitration decision that refers to or even acknowledges the existence of the Seventh Amendment, even in a footnote. Maybe some court outside the Ninth Circuit will discuss the public policy behind adding a jury trial right to the civil rights laws and how that policy is furthered by allowing the regulated party to require its waiver as a condition of getting a job in the first place. Or maybe, wishful thinking here, some court outside of the Ninth Circuit will even acknowledge the unanimous policy statement of the EEOC opposing mandatory arbitration because it makes it more difficult for them to enforce the civil rights laws. It is in some respects incredible that after all that we thought we had accomplished we are circling back to Dred Scottwhere employees like slaves are not entitled to constitutional rights and to Plessywhere the deprivation of constitutional rights is rationalized by the false doctrine that arbitration is a “separate but equal” forum. I guess that’s why they call it the civil rights “struggle.” PAUL W. CANE, JR. I’m always impressed with — even though I don’t really understand — the fervor with which my buddy Cliff approaches this issue. Most good arbitration agreements are simply forum shifting devices. The agreement does not destroy substantive rights, it simply changes the forum in which rights will be adjudicated. That forum — arbitration — is one protected by statute in every single one of the 50 states, and by the U.S. Congress. What’s so bad about forum shifting? No one thinks twice when employers demand, as a condition of hire, an at-will agreement, which really does alter the parties’ substantive rights. And no one thinks twice when employers say, as a condition of hire, that compensation will be $X a year, and that the amount is nonnegotiable. In these examples substantive rights are at stake, bargaining power arguably is unequal, and the employer proposes employment on a take-it-or-leave-it basis. But these practices are well-accepted facts of life, hardly meriting comment. Yet when an employer proposes forum shifting, even in an agreement that does not change the parties’ substantive rights in any manner, the employer is pilloried. The real problem here is that the legal system costs too much. Transaction costs are too high. Justice can’t be had because it costs too much to find out who’s right and who’s wrong. That is the impetus to arbitration. Instead of criticizing arbitration, we should be figuring out ways to make dispute resolution cheaper, whether that be in court or otherwise. ATTENDEE JIM JORDAN, EMPLOYMENT ATTORNEY, CORTE MADERA, CALIF. It has been 35 years since the federal Civil Rights Act became effective. I saw a listing recently of the most important developments in the history of our country, and was interested to see that the implementation of employment civil rights laws was in the top ten. That would not have happened if arbitration was the only recourse for employees. The downside of arbitration from the employee’s perspective is limited discovery, possible bias by arbitrators due to repeat business from employers, no appeal rights, and lack of precedent-setting decisions. The downside to employers is bearing the cost of the arbitrators, and facing an increase in the number of claims heard. Maybe we are at the beginning of a new era, when practicality supports the increased use of arbitration, provided that the systems are truly fair. Courts desire to reduce their burden of employment discrimination cases, some of which are brought by pro per plaintiffs. Arbitration would be better than no forum at all for the many discrimination complainants who can’t find attorneys to take their cases to court. The relaxed rules in arbitration proceedings could also assist employees. But the issue of arbitrators awarding attorney’s fees to the prevailing party will need scrutiny to ensure that it does not serve as a major disincentive to employees. What will probably result is a two-tier system, where about half of employers mandate the use of arbitration, and the other half do not, so that there will continue to be some development of the laws through judicial decisions. There may be other alternatives like the administrative employment courts that some countries have, or revising the roles of government agencies like the EEOC to provide objective hearing and decision processes. Mediation offers promise, but needs development to become more effective, instead of what is often a brief stop on the road to litigation. CLIFF PALEFSKY There is a significant difference between routine commercial terms and statutory rights. The primary difference is that the statutes were passed because employees were not able to protect themselves in certain contexts and marketplace Darwinism failed. The rights are not dependent on the consent of the employer unlike wages. And make no mistake, people do think twice when forced to sign at-will agreements. They just have no choice. As the opponents of the FAA properly noted and the Supreme Court refused to acknowledge, it makes “need, hunger and want, the basis of contracts which … a misused equity power will enforce.” It’s not accurate to call arbitration forum shifting. You lose the right to have the law enforced correctly. That’s the ultimate substantive right and especially critical when talking about the civil rights laws. One forum is free. The other costs some folks years of pay in after-tax dollars. You know that you can’t adequately prosecute a discrimination case and prove pretext without full discovery. Separate and unequal. You are right about the costs of arbitration. They are artificially high because of the lack of voluntariness and the restraint of trade aspect of pre-dispute agreements. Why does the same arbitrator charge unions $1000 per day and charge us $4000 per day? Because they can. Maybe now that employers need to pay the whole cost they will start negotiating some reasonable rates from the providers. When a theoretically not-for-profit like AAA charges $7000 just to file a claim, you know the system is out of whack. Beware of the arbitration industrial complex. Mediation, which is a voluntary process is enthusiastically endorsed by all segments of the bar, is hugely successful and settles cases with a fraction of the costs of arbitration. There is a lesson there. You would get many more people choosing to arbitrate rather than litigate if we removed the stench and perception of unfairness that is inherent in forcing it on someone. The reason for the passion here is that when you truly believe in civil rights and justice it’s so hard to have someone call you up and say “what’s this case worth … it’s going to arbitration.” It’s especially hard to watch the courts disregard their very reason for being, display hostility to the right to trial by jury and engage in multiple fictions and fantasies about the realities of arbitration to justify their judicially created public policy of docket clearing. There are very profound implications for our democracy when the courts betray their role as houses of justice. STEVE ROTTMAN If arbitration is really a separate but equal forum, as some of our colleagues claim, why is it that nearly all plaintiff lawyers oppose it and nearly all management lawyers endorse it? Litigation costs are the same for both sides, and more often than not the lawyers opposing this allegedly cheaper alternative are footing the bill themselves. Cliff is right. Mediation works because it is voluntary. Union arbitration works because it is involves parties of equal strength debating negotiated contractual terms. Compulsory arbitration based on an employee’s acknowledgement of a handbook is a sham. JEFFREY TANENBAUM Cliff and Steve, I think all of the management side panelists would agree that we have great faith you will ably protect your clients interests in arbitration, and you will do so at least as well as any union. It is therefore hard to see why arbitration is anymore inherently one-sided than a judicial forum in this regard. As to the issue of arbitrators being corrupt or unfair, I think most arbitrators would take offense at this notion. My experience is that most arbitrators are very good at remaining neutral, and as a whole are no better or worse than judges in this regard. Nor do I believe that any arbitrator who is particularly biased towards employers or employees will have a successful career for very long. We live in an information age and word will get out. Moreover as practitioners in this field, we all know who we think are good arbitrators (although we may disagree on some) and we all refuse to use the bad ones. This levels the playing field in both the union and non-union context. As to those employers or employees who choose not to use an attorney, they always take a greater risk, but even they can obtain advice as to which arbitrators to use. And as the use of arbitration grows, it will not be long before we see readily available scorecards on arbitrators available on-line and in written form. This already exists, of course, and it will be more broadly distributed. I would also submit that this weeding out by marketplace forces creates greater neutrality among arbitrators than among judges. If the courts interfere with the enforcement of civil rights, perhaps arbitrators will be better? As to the cost of arbitration, it is still less than litigation in court, and as it becomes even more popular, costs will drop. Again, an open marketplace is a great leveler. At the end of the day, isn’t the biggest difference between a judicial forum and arbitration just that attorneys make less money from an arbitration? And is that really a bad thing?

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