RE-EXAMINING COMPULSORY ARBITRATION CLAUSES IN CONTRACTS WITH INSURANCE PRODUCERS
Insurance producer contracts frequently have alternate dispute-resolution clauses requiring arbitration of certain disputes. These clauses should be re-examined in light of recent legal developments.
Former favored status of arbitration clauses
Arbitration clauses in contracts have been recognized and even encouraged under federal [1] and California state [2] arbitration acts. Until recently, it was commonly felt among employers that mandatory arbitration clauses in employment agreements were a wise precaution. Often such clauses included statutory causes of action, such as claims for violations of civil rights laws, as well as purely contractual disputes. Stock exchange-member companies and banks have made widespread use of such clauses, and they're frequently used in insurance producer contracts.
Recently, a number of developments have cast serious doubt on the efficacy of arbitration clauses in many areas, and point out the need for fairness and careful drafting if such clauses are to be used.
Attacks by the Courts on mandatory arbitration
In the past, the U.S. Supreme Court has held that Title VII statutory civil rights actions for such matters as race, sex, age, or disability discrimination were intended by Congress to be tried in the federal courts, and could not be the subject of a mandatory arbitration provision. [3] In 1991, however, it held that an arbitration clause in a collective bargaining contract covering age discrimination claims was enforceable. [4] This led some to believe that arbitration agreements could be used for certain kinds of statutory civil rights cases.
However, recent cases suggest that the federal courts will continue to strike down compulsory arbitration clauses for civil rights claims. Hearing a sex discrimination action in 1998, the 9th Circuit Court of Appeals struck down an arbitration clause in a securities broker's contract on the grounds that Congress did not intend to permit a waiver of the right to a trial in federal court in Title VII civil rights cases. The Court stated that there is no constitutional bar to advance agreements to arbitrate state tort and contract claims (other than for violation of state civil rights laws). [5]
Another 9th Circuit opinion refused to enforce an employer-employee arbitration agreement in an Americans with Disabilities Act (ADA) case, when the underlying collective bargaining contract did not provide for arbitration. [6] Currently, the majority view appears to be that arbitration of statutory civil rights cases cannot be compelled.
Federal courts have also been striking down civil rights arbitration clauses for lack of specificity. A federal court recently held that an employee who had agreed to arbitrate any employment-related disputes had not waived his right to sue for ADA violations, because the waiver was 'neither explicitly presented nor explicitly accepted.' [7] At least two decisions the previous year also found that a 'knowing' waiver of arbitration was not shown. [8]
The courts are also targeting efforts to limit damages and expenses through arbitration clauses. A contractual provision limiting damages to contract damages (thereby excluding punitive damages) was held by one California court to make the entire agreement unenforceable. Normally a court would limit the agreement, and enforce it with that limitation. [9] Another federal district court recently imposed the entire cost of a private judge on the employer. [10]
Even attempts to broaden the rights of the parties to an arbitration agreement might not work. One court refused to honor a provision permitting limited appeals of matters arbitrated, on the grounds that the arbitration statute did not allow it.
The U.S. Supreme Court is now considering whether arbitration clauses may apply to statutory civil rights actions. [11] Similarly, the California Supreme Court will decide whether arbitration clauses in Health insurance contracts can be circumvented by use of the California Consumers Legal Remedies Act. [12] These cases may shed light on the future viability of compulsory arbitration clauses for statutory civil rights cases.
Attacks on mandatory arbitration in the legislature
The plaintiffs' bar has been active in pushing legislation in California to limit the use of mandatory arbitration clauses entered into before the dispute arises. Although they were not successful in 1998, these efforts will no doubt continue.
Abandonment of compulsory arbitration by some employers
In the face of these attacks, some employers have begun to abandon compulsory arbitration clauses in their employment contracts. For example, Merrill Lynch announced in January 1998 that it would dismantle its employee arbitration program, and allow employees to take their claims to court.
In addition, large arbitration organizations such as the American Arbitration Association and Jams/Endispute are reviewing whether to accept mandatory arbitration cases when one party objects.
Strengthening the arbitration agreement
If employers intend to retain mandatory arbitration provisions in employment contracts, they should take steps to increase the likelihood that they will be upheld:
- Be fair and evenhanded. An unconscionable agreement will not be enforced.
- Consider nonbinding mediation as a first step. It often works.
- Be aware of the risk in limiting the kinds of damages that can be imposed. This could invalidate the entire arbitration agreement.
- The agreement should show on its face that the employee knew of the arbitration clause and agreed to it. Consider having both parties initial the arbitration clause. Some have advocated using a separate arbitration agreement instead of adding the arbitration provisions into a contract.
- If the agreement eliminates the right to go to court, a jury trial, or an appeal, emphasize this by use of upper-case letters or boldface type, so that the party would have difficulty arguing that he or she did not know of the provision.
- Specifically state that the arbitration provision applies to specific statutory remedies, if that is the case. For example, if it's intended to apply to federal and state age discrimination claims, it should specifically say so. Be aware that the 9th Circuit holds that no Title VII sex discrimination claims (and possibly no federal and state civil rights claims) can be the subject of an arbitration agreement entered into before the dispute arose.
- The agreement should probably have a severability clause, stating that even if part of the agreement is unenforceable, the balance will remain enforceable.
- If you ask existing employees to sign an arbitration agreement, pay them something or give them something of value in exchange.
An employer should weigh the advantages and disadvantages of an attorney's fees clause. Attorneys' fees can probably be collected against the employer if it loses, but what are the chances of collecting them from the employee? Are they really a deterrent to frivolous suits?
On balance, fair and properly drafted mediation and arbitration agreements in employment contracts are probably still useful. However, existing arbitration agreements need to be reviewed in light of recent developments.
Footnotes
1. Federal Arbitration Act, 9 U.S.C. 1 ff.
2. CCP 1280 ff.
3. Alexander v. Gardner-Denver Co., 415 36 (1974).
4. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.S. 20 (1991).
5. Tonyja Duffiend v. Robertson Stevens & Co., F4th, 98 CDOS 3492 (9th Cir. 1998).
6. Connie E. Doyle v. Raley's Inc., F4th, 98 CDOS 7321 (9th Cir. 1998).
7. William Kummetz v. Tech Mold, F4th, 98 CDOS 6399 (9th Cir. 1998).
8. Renteria v. Prudential Ins. Co. of America, 113 F.3d 1194 (9th Cir. 1997); Nelson v. Cyprus Bagdad Copper Corp., 119 F.3d 756 (9th Cir. 1997).
9. Stirlen v. Supercuts, Inc., 51 CalApp4th 1519 (1997).
10. Davis v. LPK Corp.,97-3998 (N.D. Calif., 1997).
11. Wright v. Universal Maritime Serv. Corp. (4th Cir 1997), cert. Granted 118 S.Ct. 1162 (1998).
12. Broughton v. Cigna Health Plans of California Co., 98 CDOS 7550 (1998).
13. Drapkin and Moscato, Employee Arbitration Agreements, Calif. Lawyer, Sept 1998.