Two Bites at the Apple for Employees: Mandatory Arbitration Agreements

On January 15, 2002, the Supreme Court struck a blow to the strong federal policy favoring arbitration. It held that mandatory arbitration agreements do not foreclose or trump the Equal Employment Opportunity Commission‘s absolute right to seek victim specific relief (back pay, reinstatement, and punitive damages) on behalf of an employee in federal court.

Approximately ten percent of all employees sign mandatory arbitration agreements, which require them to bring all on-the-job disputes to binding arbitration and give up their right to sue in court. These types of agreements are increasingly more popular, and every day it seems a major employer announces that it is requiring employees to sign such agreements. Mandatory arbitration gives many benefits to employers including a reduction of overall litigation costs and settlement amounts. Employers also increasingly look to arbitration as a way of ensuring finality. However, the Supreme Court firmly rejected the notion that arbitration will solve all employment ills.

Waffle House required all of its applicants, as a condition to their employment, to agree to mandatory arbitration. Acceptance of the mandatory arbitration was indicated in the employment application itself. Eric Baker signed such an application and sixteen days into his employment as a grill operator in North Carolina suffered a seizure at work. Waffle House terminated him shortly thereafter.

Mr. Baker ignored the arbitration agreement and filed charges with the EEOC. After an investigation and an unsuccessful attempt to conciliate, the EEOC filed an action in federal court in its name (not Baker’s), alleging violations of the Americans with Disabilities Act (“ADA”) and the Civil Rights Act of 1991. Waffle House countered by filing a petition under the Federal Arbitration Act requesting a stay of the EEOC action and an order to compel arbitration.

The lower Court ruled that the actual employment contract did not include an arbitration provision. On interlocutory appeal to the 4th Circuit Court of Appeals, the Court of Appeals over- ruled the District Court, and held that a valid arbitration agreement existed between Baker and Waffle House. It also ruled that the EEOC has independent statutory authority to bring suit under Title VII and the ADA given the dual enforcement scheme under Title VII. Moreover, since the employee had signed the arbitration agreement and not the EEOC, the EEOC was not precluded from bringing suit in its own name. However, the Court of Appeals limited the EEOC’s relief to an injunction, not victim specific relief on behalf of the employee who had actually signed the arbitration agreement.

The Supreme Court soundly rejected the Court of Appeals limitation on the type of relief the EEOC could seek. Rather, it held that the Federal Arbitration Act did not trump public agencies from enforcing the public interest when they were statutorily charged with doing so. The Court observed that the EEOC was statutorily charged with protecting the public interest through the power to be master of the case. For example, the EEOC has exclusive jurisdiction of a complainant’s case for 180 days. Additionally, the complainant cannot sue without a right to sue letter, nor can she pursue an independent action in federal court if the EEOC takes the case. The Court held that in order to protect the public interest, the EEOC needed the unfettered right to seek victim specific relief because such relief (such as a high punitive damage award) had a far greater impact on the behavior of other employers than threats of injunctive relief.

This opinion, however, continues to leave employers in the cold because it did not address the issue of what would happen if the employee had already arbitrated or settled his/her claims. The Court left it as an “open question” although it did give a nod to employers by commenting that if Baker had accepted a monetary settlement, any recovery by the EEOC would be limited accordingly. Thus, courts can and should preclude double recovery by an individual. This suggests that if an arbitrator renders a judgment on the employee’s claim, there is a strong argument that the EEOC cannot litigate the same claim.

On the bright side, the EEOC only files suit in a small fraction of the charges filed by employees. On average, the EEOC files suit in 1% of all charges filed therewith. In 2000, approximately 80,000 charges were filed with the EEOC. However, the downside is that mandatory arbitration agreements will not ensure finality. Employers will therefore have to continue to take EEOC charges seriously, carefully preparing their responses so that the EEOC sees no reason to spend its valuable and limited resources pursuing their case on behalf of the public.

This case should also serve as a reminder that arbitration is not a panacea. It is a tool, along with all of the other defensive measures available to the employer, to prevent discrimination charges and to control the costs of those charges when forced to defend. Arbitration has many benefits; it can reduce overall litigation costs, including fees and settlements. This is still significant because each litigated case taken to court with an employee generally costs an employer from $50,000 to $75,000. Arbitration costs far less and the judgment cannot be appealed. The bottom line is that mandatory arbitration clauses will continue to be a valuable option for most employers, despite the Supreme Court’s recent holding.