Many employers choose to require employees to arbitrate all claims arising out of employment, including discrimination claims. Employers believe that arbitration will be a cheaper and more cost-effective method rather than going to trial. Although arbitration is not necessarily a panacea, as it is sometimes as expensive and time-consuming as litigation through the courts, the thought is that it can limit the possibilities of “runaway juries.” Generally, the hope is that an experienced arbitrator is better able to put aside passion and apply reason to the award of damages and not award outrageous sums without any factual support simply because he or she believes the plaintiff was wronged. Thus, ever since the seminal Supreme Court case Gilmer v. Interstate/Johnson Lane, which held that employment discrimination claims could be subject to mandatory arbitration clauses, employers have presented employees with agreements that require employees to arbitrate any such claims.
A recent federal court of appeals case reminds employers to keep in mind that old adage, “pigs get fat, but hogs get slaughtered.” In Nino v. the Jewelry Exchange, the Third Circuit, which hears appeals from district courts in Pennsylvania, New Jersey, Delaware, and the Virgin Islands, decided that the Jewelry Exchange was simply too greedy when drafting its arbitration clause. Although the Third Circuit noted that it is generally the policy of the courts to uphold arbitration clauses and, where possible, to simply edit out any clause that cannot be legally enforceable, the Third Circuit invalidated the entire arbitration clause in this case. The Third Circuit did so after finding that the arbitration clause so strongly favored the employer in a number of respects that the whole agreement was unconscionable.
So, where did the Jewelry Exchange go wrong?
• Take it or leave it: the Jewelry Exchange not only gave the agreement to Mr. Nino without any chance to have it reviewed by counsel of his choosing, they refused to even discuss negotiation of any of its terms. Employers should give employees ample time to review the agreement and at least enter into discussions regarding the terms.
• Ridiculously Short Time to Demand Arbitration: the Jewelry Exchange required any demand for arbitration be filed within five days. Although courts will permit an arbitration clause to limit a statutory limitations period, employers need to be reasonable when limiting the time to demand an arbitration. For example, courts have held that a 30-day period was also not sufficient.
• Forcing the Employee to Bear His/Her Costs at Arbitration: the agreement specified that each party would bear his/her/its own costs at arbitration, which goes directly against the principles of fee-shifting statutes such as Title VII.
Arbitration clauses can be very beneficial to employers. However, care should be taken to insure enforceability to either avoid costly litigation over whether the terms can be enforceable or to avoid having a court invalidate the whole agreement. When in doubt, consult with your labor and employment counsel for help in drafting enforceable agreements.