An Arbitration Clause Could Short Circuit Your Legal Rights

Advice, Litigation
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Sara Kropf helps talk about OIG investagationsArbitration clauses have become increasingly common in all kinds of contracts, especially employment contracts. Whether that contract is with your employer, bank, your cell phone provider, or the car rental company you use, there’s a good chance it includes a mandatory arbitration clause. If such a clause is valid, it means that you can’t sue the other party (and it can’t sue you) in court. You have to go through an alternate dispute method known as arbitration.

Arbitration attempts to be a kind of private court. What are the differences between a trial and an arbitration?

  • The state and federal court systems are paid for by taxpayer dollars. Court officials and judges are public employees and should have no financial interest in who wins or loses. With arbitration, one or both parties pay for the costs.
  • Getting a decision through arbitration should be much faster than the court system and possibly less costly.
  • Filings and evidence in cases are normally available to the public as are trials. Arbitration hearings are normally held in private and the evidence may be kept confidential.
  • The state and federal court systems have their own rules of civil procedure and evidence. The rules and procedures for an arbitration will probably be spelled out by the American Arbitration Association.

k5In and of itself, arbitration isn’t good or bad. However, the devil is in the details when it comes to whether an arbitration will protect an employee’s interests.

  • As part of the contract, the employer may state it will pay for the arbitrator (normally, an attorney or retired judge who decides the case). That may sound like a good idea, but the arbitrator may be biased toward the employer because he or she would have a financial interest in the outcome. If the arbitrator wants to be chosen by the employer again for future cases to earn more money, deciding in the employer’s favor may make that more likely.
  • The rules of evidence in an arbitration may be more restricted than for a case filed in a court. It may be far more difficult to obtain evidence that could support your case.
  • Many arbitration clauses state that the losing party must pay for the winning party’s legal fees and costs. This is unusual in the court system and given the possible biases in an arbitration against an employee, it could weigh heavily against deciding to pursue your rights through arbitration.
  • It’s very difficult to appeal an arbitration case to the court system and will probably be final no matter how poorly supported, in law or fact, the arbitration decision is.
  • Many arbitration clauses are coupled with provisions that you can’t be part of a class action, in which many employees wronged by an employer could seek justice with a single lawsuit.

Just Because Language Is in a Contract Doesn’t Mean It’s Binding

k1Just because a contract you signed has a mandatory arbitration clause doesn’t mean it’s legally enforceable, so you may still be able to go to court. One example of a clause that was recently ruled unenforceable by a federal judge was in a contract signed on behalf of a purported employer, the Gold Club (a “gentleman’s club” in Philadelphia), and Jessica Herzfeld, an “exotic dancer” who is suing as part of a possible class action case because she claims she and others like her were Gold Club employees entitled to unpaid wages, overtime, and costs. The defendant claimed they are independent contractors who don’t qualify for such damages.

The court ruled that Herzfeld need not go to arbitration and that her case filed in the court can proceed. Judge Kearney wrote that the Federal Arbitration Act (FAA) governs questions of whether a case need go to arbitration, but the court needs to decide if state law concerning contracts indicates whether an arbitration agreement is valid under the FAA.

The Gold Club claimed the agreement barred any class action cases. The court disagreed because such language was not in the agreement and the judge was unwilling to imply such a material term without an indication the parties intended to be bound by such an obligation. The contract states only it applies to “both parties,” not to a class of purported employees.

Judge Kearney found the arbitration clause unconscionable (“seriously problematic”) and unenforceable. The court looks at whether a contract is unconscionable procedurally and substantively on a “sliding scale” so that if a contract is not so bad in one area but very bad in another, it can be unenforceable.

  • Procedural unconscionability covers the process by which the parties entered into the contract, and if there is no “meaningful choice on the part of one of the parties.” It was found it was a “take it or leave it” contract and Herzfeld couldn’t negotiate changes though there didn’t appear to economic compulsion in the case because she also worked at other clubs.
  • Substantively, the court found the contract unconscionable. Federal wage law allows a successful plaintiff to collect attorney’s fees from an employer. That wasn’t allowed in the contract. Judge Kearney also wrote that there was no valid waiver by Herzfeld to be part of a class action.

Summing It Up

Each situation is unique, and how contract language may apply to you varies on the facts and applicable laws. If you are told you need to sign a contract to obtain or keep a job, or if an issue has come up with your employer and you’ve already signed an agreement with the company, contact our office and have us review the contract.

  • We can tell you how it affects you and your employer, and
  • Whether it has an arbitration clause that appears to be enforceable.

We can suggest possible changes to a new agreement you haven’t already signed, if it’s not a “take it or leave it” contract. If you’ve already signed the contract, don’t give up hope. We can talk about your legal options to best protect your rights and interests and you can decide the best way to proceed.