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U.S. Supreme Court: Arbitration Is the New Employment Law

The employment law component of the docket during the most recent term of the U.S. Supreme Court was dominated by decisions on arbitration. Some of the cases have the potential to affect large numbers of employers and employees.

Allocation of Power

In the most significant of these decisions, the Court determined the allocation of decisionmaking powers under the Federal Arbitration Act (FAA), where an agreement to arbitrate includes an “agreement within the agreement,” delegating to the arbitrator the power to determine the enforceability of the arbitration agreement.

If a party specifically challenges the enforceability of that particular “delegation” agreement, the district court considers the challenge before ordering compliance with the agreement. However, if a party challenges the enforceability of the agreement as a whole, such as by a contention that it is unconscionable, as in the case before the Court, that challenge is for the arbitrator. In other words, in the latter situation, the courts must give effect to the agreement according to the terms agreed upon by the parties, by putting the matter before the arbitrator.

This is in keeping with the FAA’s general rule that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Court also relied on its previous recognition that parties can agree to arbitrate “gateway” questions of “arbitrability,” such as whether the parties have agreed to arbitrate in the first place, or whether their agreement covers a particular controversy.

Contract Formation

All was not lost for those predisposed to have courts, not arbitrators, decide as many employer-employee disputes as possible. In another case, an employer sued an international union and a local union, alleging that the local’s strike breached a no-strike clause in a collective bargaining agreement (CBA). The employer also alleged that the international union had engaged in tortious interference with a contract by promoting the strike and that both defendants were liable for claims under the federal Labor Management Relations Act.

Resolution of the claims against the unions was affected by a dispute over the ratification date of the CBA, which contained an arbitration clause. The Court ruled that the dispute was a matter to be resolved by the federal district court, rather than by an arbitrator. The argument over the formation or existence date fell outside the scope of the arbitration clause, which was limited to claims “arising under” the CBA. The Court applied the prevailing general rule that where the matter at issue concerns contract formation, such a dispute is generally for the courts to decide. In addition, a court may order arbitration of a particular dispute only where the court is satisfied, as it was not in the case before the Court, that the parties had agreed to arbitrate that dispute.

Class-Action Arbitration

In another case, the Court was concerned with when parties can be made to submit to arbitration for an entire class of claims, and its answer was, in short, not unless they clearly consent to it. There are fundamental differences between the more typical bilateral arbitration and class-action arbitration. In the latter case, an arbitrator chosen according to an agreed-upon procedure no longer resolves a single dispute between the parties to one agreement but, instead, resolves many disputes between hundreds or perhaps even thousands of parties.

The presumption of privacy and confidentiality that applies in many bilateral arbitrations does not apply in class arbitrations, thus potentially frustrating the parties’ assumptions when they first agreed to arbitrate. The arbitrator’s award no longer purports to bind just the parties to a single arbitration agreement but adjudicates the rights of absent parties as well.

The commercial stakes of class-action arbitration are comparable to those of class-action litigation, even though the scope of judicial review is much more limited. In a case involving antitrust allegations against shipping companies by some of their customers, these differences between bilateral arbitration and class-action arbitration were too great for arbitrators to presume that the parties’ mere silence on the issue of class-action arbitration constituted consent to resolve their disputes in class-action proceedings.

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