Avoiding Arbitration Agreements for Employment Lawsuits; FAQs by My Employment Lawyer

The problem with arbitration “agreements” is that most employees are in a poor position to bargain for a good agreement. For starters, few employees understand what arbitration means or what rights they are giving up. Moreover, arbitration agreements might require:

the employee to pay some or all of the costs of the arbitrator;
the losing party to pay the winning party’s attorneys’ fees;
the employee to give up certain rights, such as the amount of discovery or the extent of a remedy available in arbitration.

Finally, employers usually present arbitration agreements on a “take it or leave it" basis, forcing a choice between no job or a job subject to arbitration of disputes arising out of it. When presented with this choice, many employees simply sign the agreement, often without reading it closely.

How can I get out of an arbitration agreement?

It is difficult, but not impossible, to avoid some arbitration agreements.

Arbitration agreements are contracts. The first defense to any contract is that the parties never formed one in the first place. A valid contract formation requires an offer, acceptance and consideration (something of value) in exchange for the acceptance. Therefore, if you can prove that you did not accept the arbitration agreement or that you never received anything in exchange for it, you may be able to prove that you never had a binding agreement to arbitrate your claims.

Are there other ways to get out of arbitration?

The federal arbitration act (FAA) 9 U.S.C. § 1, et seq. and Ohio’s arbitration act ORC § 2711.01 et seq., both direct a court to stop the trial of a matter that is the subject of a written arbitration agreement. This means that the arbitration agreement:

must be in writing;
must say that it covers the parties and the dispute at issue; and
can be challenged by normal contract defenses, such as unconscionability.
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When is a contract unconscionable, meaning that a court will not enforce it?

Unconscionability refers to things about the arbitration agreement that make it so unfair that a court must, in good conscious, refuse to enforce it. The agreement must be procedurally unconscionable, which refers to factors bearing on the relative bargaining position of the contracting parties, and substantively unconscionable, meaning that the terms themselves are so unfair that the court cannot enforce them.

What is procedural unconscionability?

Factors that bear on the relative bargaining position of the parties include their age, education, intelligence, business acumen and experience, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, and whether the written terms could be changed. A “take it or leave it” boilerplate agreement forced on an unsophisticated and uneducated employee may be procedurally unconscionable. Before the employee can escape its terms, however, she must also show that it is substantively unconscionable as well.

When is an arbitration agreement substantively unconscionable?

An arbitration agreement, like any other agreement, may be substantively unconscionable if the court concludes it cannot in good conscionce enforce those terms. Examples of unconscionable terms include those that:

lack of mutuality,
lack of a knowing and voluntary agreement,
cost so much that it deters the employee from pursuing his rights,
provide for an arbitrator who is not neutral, or
place limits on the remedies or rights of the employee.
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What are some examples of unconscionable arbitration agreements?

First, remember that arbitration agreements must be both procedurally and substantively unconscionable. Therefore, you must prove in each case that you actually had no opportunity to bargain over it and were forced to accept the agreement on a “take it or leave it” basis. In those situations, however, examples of unconscionable terms include the following:

Lack mutuality:

the employee must arbitrate every dispute, but the employer is not similarly bound or can change the terms of the arbitration agreement.

the arbitration agreement is in an employee handbook that contains a disclaimer saying it is “not a contract” and allows the employer to change its terms.

The agreement gave the employer complete freedom to select the location of the arbitration and to change the arbitration terms without notice to or consent from the employee. In contrast, however, where an agreement let the employer change the terms of the agreement once each year after 30 day’s notice, a lack of mutuality defense failed.

Are not knowing and voluntary:

arbitration “agreement” was buried in an employee handbook,

the employee lacked the experience, background and education to understand the agreement;

the employee did not have sufficient time to consider whether to sign the agreement or consult with a lawyer; or

the agreement was unclear.

Courts should look at all of the circumstances when considering a challenge that the agreement was not knowing and voluntary. As a general rule, however, challenges based on lack of a knowing and voluntary agreement are difficult to win.

Cost Deterrence:

Test: will the cost deter a substantial number of employees similarly situated to the claimant from seeking to vindicate their statutory claims?

Considered on a case by case basis, since costs are less likely to deter claimants of substantial means.

The employee must prove that the costs of arbitration deter a substantial number of similarly situated employees from vindicating their rights. However, the cost must be considered from the vantage point of the potential litigant who “must continue to pay for housing, utilities, transportation, food, and the other necessities of life in contemporary society despite losing her primary, and most likely only, source of income.”

The forum is not neutral. This may be the case, for example, where the employer has exclusive control over the pool from which the arbitrator was selected.

Limitations on Remedies:

Test: whether the limitation on remedies at issue undermines the rights protected by the statute. For example, an arbitration agreement that did not provide for award of attorney fees to a successful Title VII claimant was unenforceable because "the right to attorney's fees . . . is central to the ability of persons to seek redress from violations of Title VII"); Perez v. Globe Airport Sec. Servs., Inc., 253 F.3d 1280, 1286 (11th Cir. 2001) ("Federal statutory claims are arbitrable only when arbitration can serve the same remedial and deterrent functions as litigation, and an agreement that limits the remedies available cannot adequately serve those functions.") (citing Paladino v. Avnet Computer Techs., Inc., 134 F.3d 1054, 1061-62 (11th Cir. 1998).

The arbitration agreement does not allow the arbitrator to make “persons whole for injuries suffered through past discrimination.”

However, limits on the number of interrogatories and depositions and a one year limitations period for filing a claim did not render an agreement unenforceable, at least in the specific case where the employee failed to show that such restrictions would deter a substantial number of employees from vindicating their rights.

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If the terms of the arbitration agreement are unconscionable, will I be able to avoid arbitration?

Not necessarily. Courts are allowed to cut out or modify the arbitration provisions that are unconscionable and allow the arbitration to go forward with those terms removed or modified. For example, if the court finds that the costs of the arbitration will deter employees of modest means from pursuing their claims, the employer can require the arbitration to go forward only if the employer pays for all of those costs.

My claim is against my boss and not the company. Does an arbitration agreement with the company cover my boss too?

Generally speaking, if a person did not agree to arbitrate a claim, the court will not compel that person to arbitrate. Jankovsky v. Grana-Morris, 2001 Ohio App. LEXIS 3938, 2001 WL 1018337 (Ohio Ct. App., 2001) (“Arbitration is strictly a matter of contract; if the parties have not agreed to arbitrate, the courts have no authority to mandate that they do so”).

This rule has several exceptions, however. They include:

incorporation by reference;

assumption;

agency;

veil-piercing/alter ego; and

estoppel.

In plain English, these exceptions could arise where owners and supervisors who did not sign the agreement can be covered as agents of their company.

The company asked the Court to send the case to arbitration six months after I filed suit. Is there a limit on when the company can ask for arbitration?

Yes. Arbitration is a waivable right. This means that both parties can waive their right to arbitrate. An employee can waive his right to arbitrate merely by filing suit in court. If the employer does not ask the court to stop the suit and send the case to arbitration, the employer may waive its right to arbitrate too. Factors that determine whether a party waived its right to arbitrate include:

whether the parties delayed in asking the court to stop the lawsuit and order arbitration;
the extent of the participation in the litigation of the party asking to stop the lawsuit before that party asked the court to stop the lawsuit;
whether the party asking to stop the lawsuit first invoked the jurisdiction of the court by filing a counterclaim or third-party complaint without asking for a stay of the proceedings; and
whether the party opposing arbitration was hurt by the requesting party's inconsistent acts.

The burden is heavy on the party seeking to prove waiver of arbitration. There is a strong presumption against the waiver of such rights, which “is not to be lightly inferred.” In your case, however, if the employer has been in the lawsuit and is now trying to avoid an expected, unfavorable outcome, the court may find that the employer waived its right to arbitration.

Back to Part I: Overview of Employment Law Arbitrations or

Continue to Part III: Practice and Procedure for the Arbitration of Employment Disputes

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Part II: Avoiding Mandatory Employment Arbitration by Neil Klingshirn

Avoiding Employment Arbitrations

Part II: Avoiding Mandatory Employment Arbitration
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Neil Klingshirn