To Arbitrate or Not to Arbitrate Discrimination Claims: That Is Now the Question for Michigan Employers


by Daniel B. Tukel

In a dramatic about-face, a special panel of the Michigan Court of Appeals has recently held that pre-dispute agreements requiring mandatory arbitration of statutory discrimination claims are enforceable, provided that certain requirements are met. The case is Rembert v Ryan’s Family Steak Houses.1 An earlier panel of the Court of Appeals had held that such agreements are void and unenforceable as a matter of public policy.2

The Rembert decision was issued by a special conflict panel convened pursuant to MCR 7.215(H) to resolve the conflict between Rushton and the original Rembert I decision.3 It was the special conflict panel that, in a 4-3 decision, held that an agreement requiring mandatory arbitration of statutory employment discrimination claims—under the Elliott-Larsen Civil Rights Act4 and the Persons With Disabilities Civil Rights Act, formerly known as the Handicappers Civil Rights Act5—is "valid and enforceable" as long as "no rights or remedies accorded by the statute are waived" and as long as "the procedure is fair."6

Rembert means that an employer can legally require "arbitration of claims as a condition of employment," provided that the agreement does not waive or diminish any substantive rights or remedies and contains "procedural safeguards" ensuring "fair procedures."7 While Rembert involved state law statutory claims, its reasoning applies equally to federal discrimination claims.8

Rembert also involved a nonunion employee. Whether mandatory arbitration of statutory discrimination claims is permissible when employees are covered by a collective bargaining agreement remains unclear. The Rembert court did not decide that issue and specifically indicated that its decision "did not turn" on how that question was ultimately decided.9 The court did cast some doubt about the enforceability of provisions requiring mandatory arbitration of discrimination claims, citing Alexander v Gardner-Denver Co and Betty v Brooks & Perkins.10

In Wright v Universal Maritime Service Corp,11 the U.S. Supreme Court avoided the issue by holding that the collective bargaining agreement in question did not contain "a clear and unmistakable waiver" of the right to a judicial forum.12 However, the Court’s decision in Wright suggests that had there been a sufficiently "clear and unmistakable waiver," it might well have been held enforceable. In Arslanian v Oakwood Hospital,13 the Michigan Court of Appeals concluded that mandatory arbitration of civil rights claims was "inappropriate" when a collective bargaining agreement is in place. However, the Arslanian court pointed out that in that case, as in Wright, the collective bargaining agreement did not contain a "clear and unmistakable waiver" of the right to pursue a discrimination claim in court. Thus, there is not yet a decision by the United States Supreme Court, nor by the Michigan appellate courts, considering this issue in the context of a collective bargaining agreement containing a clear and unmistakable waiver of the right to pursue a statutory discrimination claim in court. While there is a split of authority, at least some courts that have recently considered this issue have held such agreements to be enforceable.14

The Rembert court held that a number of conditions must be met for an arbitration agreement to be valid. First, as a threshold issue, "there must be a valid, binding contract covering the civil rights claim." If the arbitration agreement does not constitute a binding and enforceable contract, it will not be enforceable regardless of the procedures contained in the agreement. Additionally, the statute itself must not prohibit such agreements. If the arbitration agreement itself creates a valid contract and is not prohibited by statute, it must still meet two requirements to be enforceable:

•it cannot waive "the substantive rights and remedies of the statute," including the right to damages

•the arbitration procedures must be "fair so that the employee may effectively vindicate his statutory rights"15

Each of these elements has a number of sub-requirements. To avoid waiving "substantive rights" and "remedies," the agreement must allow the same components of damages that the applicable statute permits.16 Additionally, the agreement cannot limit the employee’s right to seek administrative relief through the MDCR or EEOC.

In order to satisfy the "fairness" elements, the court set forth a number of requirements that any arbitration agreement must contain to be enforceable:17

1."Clear notice" to the employee that she/he is waiving the right to file a lawsuit and is "opting instead to arbitrate" the claims

2.The right of the employee to be represented by a lawyer

3.A "neutral" arbitrator

4."Reasonable" pre-hearing "discovery," which may include depositions

5.A "fair arbitral hearing," which may include the issuance of subpoenas by the arbitrator and the right to "summon witnesses"

6.A written arbitral award that contains "findings of fact and conclusions of law"

WILL THE FLOODGATES OPEN?

Under the current state of the law, as set forth in Rembert, employers now have a choice about whether to require mandatory arbitration of employment claims, including statutory discrimination claims. Separate from the question of the legal enforceability of mandatory arbitration agreements, the question of whether an employer should require arbitration remains open.

Some have predicted that Rembert will trigger a wave of employers instituting arbitration policies in much the same way that Toussaint18 triggered wholesale adoption of written "at will" acknowledgments. However, whether or not mandatory arbitration provisions would be a boon to employers is not a clear-cut matter. There remain advantages and disadvantages with arbitration as an alternative to litigation. Given that Rembert leaves a number of significant issues open, and therefore subject to judicial challenge, there are further questions about whether such agreements would offer employers significant short-term advantages. This uncertainty makes it less likely that employers will immediately adopt, en mass, arbitration provisions.

ARBITRATION PROS

The primary perceived advantage of arbitration is that it is generally thought to be a faster, less formal, and less costly process than litigation. However, given the Rembert procedural requirements—some reasonable discovery, right to counsel, calling of witnesses—an arbitration in the post-Rembert workplace will be more quasi-judicial in nature. While arbitration may well remain at least somewhat faster and less expensive than litigation, the more closely an arbitration resembles civil litigation, the less likely it is to save substantial time or expense.

Another potential advantage of arbitration is that an arbitrator, who generally has experience in workplace disputes, will decide the issue rather than a jury that might be more influenced by sympathies than by legal arguments or evidence. In addition, arbitration offers a private setting, which may reduce concerns about pursuing, or defending against, sensitive claims such as those involving sexual harassment.

From an employer’s standpoint, an adverse arbitration decision does not involve a public judgment, which might more easily lend itself to being used against the employer in future claims by other employees. However, an employer runs a risk in establishing an arbitration policy that does not provide that an appropriate court will enter judgment in accordance with the terms of the arbitration award. In Hetrick v Friedman,19 the Court of Appeals indicated that the "unilateral revocation rule" remains in effect for common-law arbitrations. A common-law arbitration is one in which the arbitration agreement does not provide that judgment shall be entered in accordance with the arbitrator’s decision. In such a situation, either party can unilaterally revoke the arbitration agreement at any time before the announcement of an award. The Hetrick court specifically indicated that in deciding that case it was not necessary to consider the continuing vitality of the unilateral revocation rule and further indicated that it would only follow such a rule because it was obligated under MCR 2.715(H)(1). Nonetheless, the unilateral revocation rule remains the current state of the law.

An employer seeking to avoid union organization could establish a just-cause termination standard and a mandatory arbitration provision. While establishment of a just cause standard limits the employer’s flexibility in termination decisions, voluntarily agreeing to such a standard with an arbitration provision could be a powerful counter to an argument by union organizers that employees need the protection of a collective bargaining agreement to prevent arbitrary discipline by an employer.

ARBITRATION CONS

There are several disadvantages from an employer’s perspective to arbitration as an alternative to litigation. First, while claims may be decided more quickly, there is no ability to appeal an adverse decision. While a court can review for material legal error, it cannot simply substitute its judgment for that of the arbitrator. In addition, while the chances for a significant award of "front pay" (future economic damages) are reduced, the likelihood of the employee being reinstated is significantly greater than in litigation. Moreover, because arbitration may be perceived as faster and less costly, more employees might be inclined to file claims than would be the case with litigation.

Arbitration may not permit a mechanism for the employer to seek summary disposition of the claim by motion, another fact that could encourage more employees to file claims. The Rembert court cited with approval a decision stating that one of the reasons a particular arbitration agreement was enforceable was because, as a "counterweight" to reduced discovery, it provided that the arbitrator was not bound by the rules of evidence.20 If the rules of evidence do not apply, a party may not be able to exclude particular irrelevant or unduly prejudicial evidence that would not, in litigation, be admissible.

The Rembert court also cited with approval a decision indicating that arbitration offers employees a "guarantee that there will be a hearing on the merits of their claims," suggesting that an arbitration provision permitting summary disposition motions may not be enforceable.21 A rule prohibiting employers from seeking summary disposition could also encourage the filing of more claims.

Another potentially significant disadvantage to arbitration, at least in the short run, is that Rembert leaves a number of issues unresolved. An employer hoping to avoid litigation by instituting an arbitration provision may, therefore, still find itself in court, defending the contractual enforceability or the fairness of the procedure itself. The court thought it would "not be prudent" to attempt to exhaustively catalog all the circumstances in which an arbitration provision would or would not be contractually enforceable or would or would not meet the "fairness" requirements.

With certain issues left open, it can be anticipated that there will be challenges to specific arbitration provisions, which may include

1)Challenges as to whether the discovery afforded was "fair." [While Rembert only specifically endorsed depositions and the ability to subpoena witnesses, it cited with favor a procedure including document production, information requests, depositions, and subpoenas]

2)Challenges as to whether the arbitrator was "neutral." [While not endorsing any specific method of selection, the court cited with approval a procedure permitting access to information regarding the arbitrator’s background, some pre-emptory challenges, and unlimited challenges for cause]

3)Challenges as to whether the findings of fact and conclusions of law were adequate. [A written decision with findings and conclusions is required, and it must be sufficient for a reviewing court to determine whether there was error sufficiently material to require that the arbitrator’s award be vacated].

Other open issues include whether an arbitration provision that permitted motions for summary disposition or permitted a prevailing employer to collect attorney fees would pass Rembert muster.

Under Rembert, even if a particular arbitration agreement is deemed enforceable, the arbitration award itself can be vacated by a reviewing court if the arbitrator committed "legal error that is so material or so substantial as to have governed the award, and but for which the award would have been substantially otherwise."22 Not only did the decision indicate that a court can review an arbitration award of a statutory employment discrimination claim to "ensure that statutory rights are not waived and procedures are fair," it also indicated that the judicial review will be "less deferential to the arbitrator’s judgment than in the collective bargaining context." A "less deferential" standard of review may invite more judicial challenges, decreasing the utility and finality of arbitration.

Because an employee cannot be required to waive the right to file an administrative charge, employers with arbitration policies may see an increase in the number of EEOC charges filed by employees. In addition to such charges, the EEOC can file a claim in federal court in its own name. Therefore, an employer with an arbitration policy may find itself defending both an arbitration filed by an employee and a federal court action filed by the EEOC. The possibility of an increase in EEOC filings and the potential of defending an arbitration and a parallel civil action by the EEOC may further discourage wholesale adoption of arbitration policies by employers.

ESTABLISHING AN ARBITRATION POLICY

If an employer has made the decision to establish an arbitration policy or wishes to review the enforceability of an existing policy, Rembert offers some guidance.23 First, the policy itself must be set up as an enforceable contract. When Rembert was initially released, the common wisdom would have suggested that an employer have a separate agreement covering the arbitration policy itself, which would be distinct from any employment handbook. In order to avoid the problems of Heurtebise,24 the policy should not contain any language that permits unilateral modification or otherwise indicates it is not a binding contract.

However, following Rembert, the Michigan Court of Appeals provided some additional guidance on the issue of how an employer can establish a binding arbitration policy. In Guelff v Mercy Health Services,25 the court affirmed the granting of summary disposition to the defendant on age discrimination and retaliation claims based on a determination that the claims were subject to arbitration. The arbitration policy in that case was contained in a human resources manual. The plaintiff claimed that she had no knowledge of the manual—had never seen or received a copy—and had never assented to be bound by it. In addition, the manual in that case did state that the employer could amend the policies. Nonetheless, the court found the situation distinguishable from Heurtebise and upheld the enforceability of the arbitration policy. Thus, while it may still be better practice, employers are not required to promulgate arbitration policies in separate documents. Such policies can be enforceable if contained in employee handbooks, provided they meet the requirements of Guelff and Heurtebise.

In addition to being contractually enforceable, the policy must contain sufficient procedural safeguards to comply with the Rembert "fairness" requirements. While these requirements are not exhaustively detailed in Rembert, they are at least generally outlined. Until there is further clarification, it is safe to say that the more closely the policy mirrors the discovery and disqualification procedures of a civil action, the more likely it is to survive judicial review.

WHAT THE FUTURE MAY HOLD

We have not heard the last of the issue of the enforceability of mandatory arbitration of statutory discrimination claims. The Rembert case itself is now over,26 however, this issue can be expected to reach the Michigan Supreme Court. How the Court will assess the issue is unclear. What is clear is that several outspoken opponents of mandatory arbitration provisions are no longer on the Court.

In Heurtebise, supra, the majority of the Court declined to reach that issue. However, three Justices—Levin, Mallet, and Cavanagh—indicated that they would hold that such arbitration provisions are invalid as a matter of public policy. Of those three, only Justice Cavanagh remains on the Court. Justice Levin was replaced with Justice Taylor, who indicated in his dissent in Rushton that arbitration agreements can be enforceable. Justice Corrigan, another post-Heurtebise addition to the Court, agreed in Rembert I with Taylor’s Rushton dissent that such provisions do not violate public policy. Justice Young, who replaced Justice Mallett, while not yet expressing a position, is known as a judicial conservative. Justice Markman, another recent addition to the Court, has also not yet expressed a position on this issue and is considered a conservative. In short, should the Michigan Supreme Court address this issue, the odds in favor of upholding the enforceability of mandatory arbitration of discrimination claims appear greater than may previously have been the case.

Footnotes

1 235 Mich App 118 (1999).

2 Rushton v Meijers, 225 Mich App 156 (1997).

3 Rembert v Ryan’s Family Steakhouse, Inc, 226 Mich App 821 (1997), vacated pursuant to MCR 7.215(H), 226 Mich App 821-822 (1997).

4 MCLA 37.2101 et seq.; MSA 3.548 (101) et seq.

5 MCLA 37.1101 et seq.; MSA 3.550(101) et seq.

6 235 Mich App at 123.

7 235 Mich App at 124.

8 This is true at least regarding discrimination claims under federal law brought in state courts. As noted in Rembert, a majority of federal courts also enforce, at least in certain circumstances, such arbitration provisions.

9 235 Mich App at 151-152, n 24.

10 415 US 36 (1974); and 446 Mich 270 (1994), respectively.

11 525 US 70 (1998).

12 525 US at 82.

13 240 Mich App 540 (2000).

14 See, e.g., Clarke v UFI, Inc, 2000 US Dist Lexis 6900 (ED NY, 2000).

15 235 Mich App at 156-157.

16 For state law discrimination claims, this would include economic damages for wage and benefits loss, noneconomic damages for emotional injuries, and attorney fees. In a claim under the Federal Civil Rights statutes, it would presumably also include punitive damages in an amount not less than the statutory "caps."

17 235 Mich App at 161-162.

18 Toussaint v Blue Cross, 408 Mich 579 (1980).

19 237 Mich App 264 (1999).

20 235 Mich App at 147, citing Gilmer v Interstate/Johnson Lane Corp, 500 US 20, 31 (1991).

21 235 Mich App at 155, citing Cole v Burns International Security Services, 105 F3d 1465 (DC Cir 1997).

22 235 Mich App at 164, citing DAIIE v Gavin, 416 Mich 407, 443 (1982).

23 An employer that has established an arbitration policy and is sued cannot assent to and actively participate in the litigation process, or it may be deemed to have waived the right to seek to compel arbitration. See, e.g., St. Mary’s Medical Center v Disco Aluminum Products, 969 F2d 585, 587 (CA 7, 1992); Saga Communications of New England v Voornas (S Ct Maine, 8/10/00).

24 Heurtebise v Reliable Business Computers, 452 Mich 405 (1996).

25 Guelff v Mercy Health Services, ___ Mich App ___, (No. 200040, 5/25/99 Unpublished).

26 The plaintiff’s motion for reconsideration was denied by the Court of Appeals, and the Michigan Supreme Court has now denied the plaintiff’s application for leave to appeal.



Daniel B. Tukel
Daniel B. Tukel is a shareholder in the Detroit-based firm of Butzel Long. He concentrates his practice in advising and representing employers in labor and employment issues and litigation. This article is an updated and expanded version of an article that originally appeared in the Summer 1999 Labor and Employment Lawnotes, Volume 9, No. 2.


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