Posted on Monday, November 29th, 2010.
By James T. Prusinowski
The following was published in the New Jersey Law Journal on November 29, 2010.
Businesses are constantly being presented with opportunities to negotiate contractual relationships with clients, vendors, service providers and employees. Whenever new contracts are established, the parties should determine how to resolve a dispute which may arise regarding the document.
There are several dispute resolution forums. The two most commonly utilized for contract disputes are the courts and arbitration. Arbitration itself is a creature of contract in that it will not be utilized unless the parties agree on it. The parties can agree at the time of contracting to submit an issue to arbitration and forego a judicial resolution. Further, they can limit the issues over which an arbitrator will have decision making authority and aspects of the decision making process. In contrast, when legal proceedings are filed, the parties are bound by the applicable court rules and processes.
In 1925, the Federal Courts were mandated to honor and enforce arbitration awards with the enactment of the Federal Arbitration Act (FAA). Pursuant to the FAA, the courts have a limited role in addressing arbitration awards, they are required to confirm an arbitration award unless there is evident partiality by the arbitrator; the award was procured by corruption, fraud or undue means; where the arbitrator engaged in misconduct; or where the arbitrator exceeded his/her scope of authority.
Only recently was it made clear that discrimination claims in employment under Title VII, ADEA, ADA and other statutes could be submitted to arbitration. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991); Circuit City Stores v. Adams, 21 S. Ct 1302 (2001). As such, today, an employer has great latitude in how to address claims by an employee. Further, an employee can be required to submit a claim to arbitration if there is an arbitration clause in an employment agreement or an employee handbook which the employee has properly acknowledged.
One benefit to arbitration is that the parties have great latitude in setting the parameters of the arbitration process; however, there are limits as to what is enforceable through the arbitration process. Especially since arbitration is being used more frequently in employment settings, understanding some of the limits is important to properly drafting and incorporating an enforceable arbitration clause in an employment agreement or handbook.
Generally speaking, in employment agreements, the arbitration provision as well as the process needs to be fair and reasonable for both parties. For instance, it should not appear that one side has a greater advantage based upon the process than the other, or that similar actions by different parties result in different outcomes. The courts look to the reasonableness of provision as well and seek to determine for instance whether a party is unreasonably prejudiced based upon certain actions or inactions.
In a recent Third Circuit decision, the court identified provisions that it deemed to be unfair and unreasonable. Nino v. Jewelry Exchange, 609 F.3d 191 (3d Cir. 2010). In determining substantive arbitrability, Nino addressed the fairness of the arbitrator selection process. Under the employment agreement, the employee was allowed to strike one potential name from the arbitrator panel while the employer could strike two. This provision was balanced too heavily in favor of the employer to be upheld. Considering this, the Court stated that the provision was “one-sided to the extreme,” and it gave “the employer an unreasonable advantage over the employee in the selection of an arbitrator.” As such, it was “utterly lacking in the rudiments of even-handedness.” The Nino court also looked at the provision’s reasonableness. The court noted that while the contract can shorten a statute of limitations, it cannot be shortened to an unreasonable amount. The court in Nino concluded that requiring a claim to be submitted within five days of the dispute arising was “clearly unreasonable and unduly favorable to the employer.” This was compounded by the provision stating that the timeframe for filing the claim could only be extended by mutual agreement. While in contrast if the employer failed to respond to a grievance or advance the grievance it merely affirmed the employer’s position and no prejudice resulted.
While the court in Nino did not specifically conclude that the provisions it struck were based on a lack of negotiations among the parties, it is likely that had the same provisions been in a fully negotiated agreement – – opposed to the take-it-or-leave-it basis upon which the agreement was presented to the employee – – the provisions may be been upheld.
Many benefits can come from arbitration as opposed to litigation conducted in superior or federal court. The process can be expedited, discovery is often limited, and the hearing can be less formal. The parties, however, should be careful of what they ask for. The arbitrator’s determination should be the final say in the matter, which may go as far as the arbitrator determining what he/she is allowed or authorized to decide, and this may not seem to be what the parties bargained for.
In a recent United States Supreme Court case, the Court decided that it is acceptable to have the arbitrator determine his own scope of authority. Rent-A-Center West v. Jackson, 130 S.Ct. 2772 (2010). The arbitration provision at issue delegated the authority to determine whether the contract was enforceable to the arbitrator. As the High Court explained, courts have a limited role in reviewing arbitration clauses to determine if an issue is to be submitted to arbitration; however, this does not provide the courts with the authority to address the merits of a claim. The merits must be addressed by the arbitrator. As in Rent-A-Center, if the parties provide the authority to determine an issue – even enforceability – with the arbitrator, then the courts most defer to the parties’ election. In other words, it is not the courts’ place to determine the wisdom of the delegation of authority to the arbitrator; rather, once it is determined that an arbitrator has authority to address the disputed issue then deferral to that forum is required.
By the same token, an arbitrator’s interpretation of a provision will likely be controlling as to the issue. For instance, in a recent New Jersey Supreme Court case, it was determined that it was within the arbitrator’s authority to supply definitions to contractual terms. Linden Bd of Educ v. Linden Educ. Assoc., 202 N.J. 268 (2010). In this case, the Court concluded that it was proper for the arbitrator to provide a definition as to what constituted “good cause” for disciplining an employee even though the parties had not defined the term in the agreement. Moreover, the courts were not to superimpose their determination of what such a term should mean. Thus, the parties must live with the decision of their contracted for process with little recourse. It can be inferred that in both Rent-A-Center and Linden Board of Education at least one of the parties believed that the arbitrator went beyond what the contract contemplated or the parties bargained for. This belief or understanding resulted in the ensuing litigation in addition to the arbitration proceeding.
When an issue is rather straight forward such as contract interpretation, utilization of an arbitrator may be economical; however, when discrimination claims arise, which can have many factual issues to present to an arbitrator then the hearing can take place over the course of days or weeks. As the Law Journal reported on September 1, 2010, arbitrations are becoming lengthier and more expensive Litigators Losing Love of Arbitration Argue for Trials. The parties are demanding discovery, depositions, case management and other tools that were once unusual in the arbitration context, but are now becoming more commonplace. The short informal hearing is being replaced in many respects by lengthy hearings. Even though arbitration decisions are supposed to be final with limited judicial review, many cases result in appeals being taken seeking to vacate an award and an appeal of the confirmation or vacation. All of this adds significantly to the cost and likely undermines the anticipated speedy process.
Employers are cautioned regarding utilization of arbitration clauses in their employment contacts and handbooks. While the statutes and case law support their use, the drafting of the provision needs to be fair and even-handed. When a dispute arises, utilization of the process is governed by the terms of the clause, so ensuring clarity as to what is arbitrable is paramount. Finally, if the employer decides to include discrimination claims as an arbitrable issue, then they need to be prepared for the potential of a lengthy and costly process.
James Prusinowski is a founding member of Knapp, Trimboli, and Prusinowski in Florham Park and represents employers in employment and commercial litigation.