Employers Should Reconsider Arbitration Agreements


by Roger Miller

Miller, Roger
rmiller@mcgrathnorth.com
(402) 341-3070

A recent decision of the United States Supreme Court should encourage employers to consider including arbitration provisions in employment agreements. So, too, should those businesses who might want to avoid class action litigation by customers. The Supreme Court decision is entitled AT&T Mobility v. Conception. The lawsuit concerned the sale of a cellular telephone in the State of California. AT&T advertised for a “free phone” with the purchase of service. The Conceptions purchased that service, then sued when AT&T charged sales tax on the “free” phone. AT&T’s contract provided for arbitration of disputes with the customer. The highlights of the arbitration provisions of the agreement were as follows:

  • The claim had to be brought as an individual and not as a member of a class.
  • AT&T paid all arbitration costs for “non-frivolous” claims.
  • The situs of the arbitration would be the county where the customer was billed.
  • For claims of less than $10,000, the customer could elect to present their case in person or via telephone.
  • The customer could elect to present their claim in small claims court in lieu of arbitration.
  • The arbitrator had the power to enter an injunction, and also award punitive damages.
  • AT&T could not collect attorney’s fees and if the customer received an award greater than AT&T’s last settlement offer, AT&T had to pay two times the attorney fees of the claimant and a minimum of $7,500 in damages.

A federal district court in California, in refusing to enforce the arbitration provisions of the contract, applied a rule decided in a case known as Discover Bank. Which held that California courts could refuse to enforce contracts they found to be unconscionable when made. Unconscionability required the application of two rules. The first, called a “procedural” rule, existed if the court found oppression or surprise based on unequal bargaining power (which virtually always would work against an employer or business as the more powerful of the two parties). The second rule was known as “substantive” and could be found to exist where the court felt the terms were overly harsh or one-sided. In applying the Discover Bank rule against AT&T in this case, the California courts, and the Ninth Circuit on appeal, found that the waiver of the right to file a class action deprived the consumer with a small monetary claim of effective relief, and might allow AT&T to “skate” on responsibility.

The Supreme Court held that the Discover Bank rule of the Ninth Circuit and the California courts was preempted by the Federal Arbitration Act, an Act which was passed in 1925. The Court held that the purpose of the FAA was to place arbitration agreements on an equal footing with other contracts. The Court then went on to find that arbitration agreements could indeed limit the issues to be arbitrated,could require the use of certain rules to be considered in arbitrations,and could limit with whom a party would arbitrate a particular dispute. Further, when state law prohibits the outright arbitration of a particular type of claim, that rule would have to be superseded by the FAA.

Arbitration has historically been a much more economical way of resolving disputes than court litigation. Typically, arbitration also results in a much quicker determination. Employers who wish to consider utilizing arbitration as a means for resolving employment-based disputes should, on the one hand, recognize that there are costs for non-frivolous arbitration claims, and agree to grant to an arbitrator the authority to provide a remedy which largely mirrors that available through making a similar type of claim in court. Even so, the potential costs savings, particularly if an employer is able to avoid class action litigation, could be very significant. If you would like more information, or if McGrath North can be of any assistance in helping you to prepare arbitration agreements for your employees or customers, please give us a call.

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