Articles Posted in Arbitration

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The Federal Arbitration Act was put in place in 1925. It provides a formal, private setting for businesses to hash out their disputes with each other without resorting to the courts. It’s more cost effective for the businesses and saves the courts time and money by preventing them from getting flooded with business disputes.

An arbitration agreement is a clause included in a contract that states that, in the event of a dispute, the two parties will settle their differences in arbitration, rather than in court. These types of agreements have been common in contracts between businesses ever since the FAA was enacted in 1925, but over the past decade or so, more and more companies have been stretching their interpretation of the 1925 federal law to mean a business can force arbitration with anyone they do business with. They have been including arbitration agreements in their contracts with consumers and employees alike, but many advocacy groups have been arguing that forcing individuals to settle their disputes with large companies in arbitration puts the individuals at a severe disadvantage.

To start with, arbitration does not allow for class actions, which means any employee with a small claim does not have the ability to combine their claims with other individuals with similar claims. Many people with small claims who signed arbitration agreements simply forgo pursuing the matter because their claim doesn’t justify the costs of bringing a suit. Continue reading

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As corporations and individuals have continued to argue over whether companies can force its customers and employees into arbitration, the courts have been flooded with allegations of breach of contract, often accompanied by one of the parties pointing to an arbitration agreement.

An arbitration agreement is a clause included in a contract that requires the parties involved to settle any disputes in arbitration, rather than in court. Arbitration was originally intended to allow businesses to handle their disputes with other businesses without crowding the courts. But in recent years, corporations have been including arbitration agreements in everything from loan contracts to employment contracts. Bringing another business into arbitration to settle your differences is one thing, but individuals usually suffer from a distinct disadvantage when they try to go up against large corporations because they don’t have access to the same resources.

To make matters worse, arbitrators are not always the impartial third parties that judges and juries tend to be. There are arbitration companies that have a reputation for being fair and unbiased, but not all of them. Because arbitration companies are in business to make a profit, a tendency to rule in favor of the party that continues to bring them business, even if it’s an unconscious bias, is a common occurrence. Continue reading

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One of the key reasons class action advocates are against arbitration agreements centers around the fact that arbitration is not equipped to handle class actions and collective actions, which immediately prohibits many plaintiffs from being able to file class claims.

Although arbitration is significantly less expensive than litigation (which is why so many corporations prefer to use it), it is still frequently more costly than claims most individuals can file for. Although a few hundred dollars may very well be a significant amount to that individual, it is rarely enough to justify the costs of arbitration, much less litigation.

Class actions and collective actions are therefore an important tool for plaintiffs with claims against large corporations. By cheating employees or consumers out of small amounts of money, companies can reap huge profits through unfair business practices. It also allows the companies to escape justice because their illegal practices never come to the attention of the courts, which means they can continue taking advantage of people.

Although arbitration was initially intended as a cost-effective way for businesses to handle disputes among themselves, more and more companies lately have been including arbitration agreements in everything from their employment contracts to their service contracts in order to escape the law. Continue reading

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Arbitration agreements are agreements contained in contracts that require the parties involved to settle disputes in arbitration, rather than in court. Although arbitration was initially intended as a cheaper, faster way for businesses to settle disputes between themselves, companies have increasingly expanded their interpretation of the law and included arbitration agreements in their employment contracts as well as their user agreements and contracts with their consumers.

District and federal courts across the country have disagreed when it comes to whether or not companies should be allowed to use and enforce these types of agreements in their contracts with individuals. But, at the very least, most arbitration agreements require all disputes between the parties to be resolved in arbitration, regardless of who files the complaint.

A California state appeals court recently ruled that a house painting company could not enforce an arbitration agreement that required its workers to settle all disputes in arbitration while allowing the employer to take the workers to court. Continue reading

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The National Labor Relations Board (NLRB) is the government agency responsible for investigating and remedying unfair labor practices. Lately, employees complaining of unlawful arbitration agreements have been filing complaints with the NLRB. The NLRB has consistently ruled in favor of the employees, but on appeal, federal courts have just as consistently overturned the NLRB’s ruling and allowed arbitration agreements to stand.

Corporations have increasingly been including arbitration agreements in their employee contracts in order to force any dispute with employees into arbitration. Many employees aren’t aware they’re signing away their right to take their employer to court in the event of a dispute, and even those who are aware of what’s at stake are afraid of losing their job if they don’t sign. Continue reading

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While employment agreements that include arbitration agreements (agreements which force any dispute between the employer and the employee into arbitration rather than the courts) have been on the rise lately, employers have not always found that they can enforce these agreements. Often, whether the court will find the arbitration provision to be enforceable depends on whether the provision has a “chilling effect” on employees exercising their rights under the applicable employment law.

Courts had to consider this requirement when ruling on a recent dispute between an employee and his employer. The employee, Jose Hernandez, filed a lawsuit against his employer, Colonial Grocers, Inc., for allegedly violating the Fair Labor Standards Act and Florida employment law. Colonial’s employment manual contained an arbitration provision and so Colonial filed a motion to force the case into arbitration in accordance with that provision. The trial court granted Colonials’ motion and Hernandez appealed the decision and the case went to the Second District Court of Appeals.

The arbitration provision in question not only stated that any dispute between the parties needed to be settled through arbitration, but it also made provisions for which party was to be responsible for the costs of the arbitration. According to the provision, “Although the parties shall initially bear the cost of arbitration equally, the prevailing party … shall be entitled to reimbursement for its share of costs and reasonable attorneys’ fees, as well as the interest at the statutory rate.”

In determining the enforceability of this arbitration provision, the appellate court pointed out the important difference between the costs of bringing a lawsuit to court as opposed to bringing an action under this arbitration provision. According to the Fair Labor Standards Act, a plaintiff who is successful in court is entitled to reimbursement of all of their attorneys’ fees and costs of bringing the suit. However, there is no case in which the Act would provide for the defendant’s eligibility for reimbursement of attorneys’ fees and legal costs. Hernandez therefore argued that the arbitration provision contradicted the statute under which he was filing his complaint.

Because plaintiffs risk getting stuck paying for both their own costs of arbitration as well as the costs of Colonial, a plaintiff faces a potentially much higher cost for bringing a complaint under arbitration than they ever would in the courts. These higher costs might deter employees from pursuing their rights under the Fair Labor Standards Act. Due to the existence of this possibility, the court ruled that the arbitration provision had a “chilling effect” on employees who might otherwise bring claims under the Fair Labor Standards Act. The court therefore ruled that the arbitration agreement was unenforceable and remanded the case back to the district courts for further proceedings.

In its ruling on the case, the appellate court quoted from previous rulings which found that “[a]n arbitration agreement containing provisions that defeat a federal statute’s remedial purposes is not enforceable.”

Although employers are always looking for ways around employment law, any methods which directly contradict the applicable law are less likely to be upheld in court.

A copy of the Appellate Court’s decision can be viewed here.

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Although the United States Supreme Court has consistently ruled to uphold arbitration agreements, many of the lower courts seem less willing to play along, although they usually make a point of stipulating why their rulings to do not contradict those of the Supreme Court. Overall, the lesson to employers (or anyone drawing up arbitration agreements) seems to be that you can have these agreements with terms that are favorable to the employer, as long as the terms are not too favorable.

This was evidenced by a recent lawsuit in California. In Chavarria v. Ralphs Grocery Co., an employee, Zenia Chavarria, filed a labor lawsuit against her employer, Ralphs Grocery. The lawsuit alleged violations of the California Labor Code and California Business and Professions Code. Chavarria asserted claims on behalf of herself and a proposed class of other employees of Ralphs Grocery. The company responded by trying to force Chavarria’s individual claims into arbitration, in accordance with the arbitration agreement which Chavarria had agreed to as a condition of employment.

The arbitration agreement contained a provision in which each party must pay its own attorney fees, subject to a later claim for reimbursement under applicable law. The agreement also states that the arbitrator’s fees must be appointed at the beginning of the arbitration and must be divided evenly between Ralphs and the employee.
The agreement further gave Ralphs permission to change the agreement without notifying the employee. According to the agreement, the employee’s continued employment was sufficient to constitute acceptance of any modification to the contract.

The arbitration agreement favored the employer so heavily that the lower court said that it “shocked the conscience”. In particular, the arbitrator selection process, as laid out in the agreement, was such that it would always produce an arbitrator chosen by Ralphs Grocery. The agreement even went so far as to specifically prohibit the use of an administrator from either the American Arbitration Association (AAA) or the Judicial Arbitration and Mediation Service (JAMS), both of which are known for providing fair and unbiased arbitrators.

The court held that the arbitration agreement was procedurally unconscionable because it was a condition of applying for employment and was presented on a “take it or leave it” basis. Additionally, the terms of the agreement were not presented to the employee until three weeks after she had agreed to be bound by it.

Ralphs argued that its arbitration agreement was in accordance with California state law and that the Federal Arbitration Act (FAA) preempts state laws. The FAA does provide that arbitration agreements must be enforced but it has an exception for “such grounds as exist at law or in equity for the revocation of any contract.”

The court maintained that the California state law supporting the unconscionability holding was not preempted by the FAA because it applies to contracts generally and therefore does not impact arbitration agreements more than any other agreements.
When the lower court ruled in Chavarria’s favor, Ralphs Grocery appealed. The case went to the Ninth Circuit Court of Appeals, which upheld the rulings of the lower court and remanded the case for further proceedings.

You can view a copy of the Ninth Circuit opinion here.

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