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Legality of Pre-Dispute Mandatory Arbitration Agreements

JURIST Guest Columnist Rebecca Bielski, St. John's University School of Law Class of 2013, is the author of the sixth article in a 15-part series from the staffers of the Journal of Civil Rights and Economic Development. She offers insight on the legal ramifications of employees signing pre-dispute mandatory arbitration agreements...

You have been unemployed for 18 months. You finally get an employment offer and, although it is not your dream job, it will put the food on the table. You accept the offer without hesitation. "One more thing," Mr. Employer adds, "just sign this agreement which waives your right to bring any potential claims before a court, and instead, requires that those claims be submitted to an arbitrator." Do you sign?

Probably. Or even definitely, given the current state of the economy. But what most employees do not understand when they sign these pre-dispute mandatory arbitration agreements (PMAA's) is that they are giving up significant due process rights. Employees are waiving their right to a judicial forum, foregoing the impartiality of a judge appointed under Article III of the US Constitution and giving up their right to a jury who is chosen in a fair, objective and non-discriminatory manner. Furthermore, they waive the right to appeal an adverse verdict. Unlike litigation where a party may appeal a final judgment, a court can only vacate an arbitral award under the most extreme of circumstances. Nevertheless, employees never think twice when they sign these agreements. Why? Employees often sign PMAA's because they are rarely given an informed choice on the matter.

The only explicit limitation the US Supreme Court has placed on PMAA's is that they must be signed voluntarily and knowingly. This requirement was most recently established in the case Rent-A-Center, West v. Jackson. However, the Court has not further defined the standard of "voluntarily and knowingly" and, thus, has left little instruction for employers on how to draft these contracts or for judicial enforcement. The victim is the employee who is left with little protection and who, out of necessity, will likely sign any employment offer without thinking twice. The US Congress needs to implement protections so that employees can be adequately protected and have some idea of the legal rights that they are signing away.

PMAA's are rarely signed in knowing and voluntary fashion established by the Supreme Court. PMAA's are not signed voluntarily because people view their jobs as their most valuable possession. Economic realities result in the fact that few employees are in a position to refuse a job merely as a result of an arbitration requirement. Moreover, PMAA's have now become standard boilerplate provisions in most employment agreements, which effectively eliminates any negotiating or bargaining power for the employee.

Notwithstanding the fact that hardly anyone reads such boilerplate provisions, it is unlikely that an average employee knows what he is signing away for several other reasons. Most applicants do not understand the remedial and procedural ramifications of consenting to arbitration. They assume they are afforded the same rights in arbitration as they are in jury trials, when in reality they often lose the ability to seek higher awards, punitive damages, more extensive discovery and the right to appeal. When employees do realize these differences, it is often too late. Another hindrance to understanding a PMAA is that people tend to be overwhelmingly optimistic about their lives and underestimate risk. This phenomenon applies everywhere from accident avoidance to home hazards and to addiction problems. In the PMAA context, few applicants think prospectively about potential conflict before they are employed and few consider the possibility of a lawsuit ensuing.

There are several benefits of arbitration, and it is an extremely important form of dispute resolution in America's pro-lawsuit environment. In contrast to litigation, arbitration results in speedier resolutions, lower costs, no exclusionary rules of evidence, no public record or hearing and adjudicators with specific subject matter expertise — the system is less adversarial and more informal. Congress recognized these benefits when it passed the Federal Arbitration Act (FAA) in 1925 to respond to longstanding judicial hostility towards arbitration agreements.

The Supreme Court continues to enforce and encourage PMAA's pursuant to the aged FAA. This support is seemingly at odds with more recent congressional legislation prohibiting PMAA's in certain contexts, including whistleblower and sexual harassment disputes. The National Labor Relations Board is also weary of PMAA's, recently ruling that employers cannot require employees to waive class or collective actions addressing their wages, hours or other working conditions and instead individually arbitrate all employment-related disputes. Where on Earth does Congress now stand?

The US Senate is considering enacting the Arbitration Fairness Act (AFA), which would prohibit PMAA's in the employment context altogether. However, the AFA is a drastic step that represents a complete reversal from the formerly favorable congressional view of arbitration. It eliminates the advantages of arbitration and would result in a substantial increase in litigation nationwide as employment lawsuits continue to account for one of the largest percentages of total civil litigation.

Although the AFA is unnecessarily overbroad, legislation that effectively protects employees while remaining consistent with legislative and judicial support for arbitration is still essential. New legislation should explicitly list requirements that employers must meet in implementing arbitration agreements in recognition that a heightened standard of consent is necessary when signing a PMAA.

I propose that new legislation should have three main requirements:

  1. The waiver should be drafted to be understood by the average individual. This requirement will ensure that employers draft clear and easy-to-understand agreements.
  2. The waiver should explain the differences between arbitration and litigation so that the average individual can understand the legal rights they are waiving. This requirement will enable the individual to understand the legal ramifications of what he or she is signing and prevent future surprise.
  3. The individual should be advised in writing to consult with an attorney prior to executing the agreements. This requirement will prompt the individual to take a step back and realize that what they are signing might be significant, whether or not he or she chooses to consult a lawyer.
The best way to ensure that employees understand what they are giving up is by mandating an explicit list of factors that would foster the knowing and voluntary signing of PMAA's. The alternative, banning PMAA's altogether, could prove disastrous as employment litigation steadily expands.

Rebecca Bielski is a Research Editor for the Journal of Civil Rights and Economic Development. Her experience includes internships with the Honorable John Leventhal of the New York State Supreme Court, Queens District Attorney's Office and Bloomberg, LP.

Suggested citation: Rebecca Bielski, Legality of Pre-Dispute Mandatory Arbitration Agreements, JURIST - Dateline, Oct. 8, 2012, http://jurist.org/dateline/2012/10/rebecca-bielski-mandatory-arbitration.php.

This article was prepared for publication by Michael Micsky, an associate editor for JURIST's student commentary service. Please direct any questions or comments to him at studentcommentary@jurist.org

Opinions expressed in JURIST Commentary are the sole responsibility of the author and do not necessarily reflect the views of JURIST's editors, staff, donors or the University of Pittsburgh.

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