Recently in Arbitration Category

The Fourth Circuit issued a bold new arbitration decision last week, sending a putative class of shuttle drivers to arbitration while expanding its application of SCOTUS' Concepcion decision beyond cases involving federal preemption of state arbitration law.  Muriithi v. Shuttle Express, Inc., __ F.3d __, 2013 WL 1287859 (4^thCir. 2013).

Muriithi was a driver for an airport shuttle service who signed a franchise agreement containing an arbitration clause.  The franchise agreement required arbitration of "any controversy arising out of this Agreement," required that arbitration proceed "on an individual basis only," and required each party to bear half the "fees and costs of the arbitrator." 

Muriithi later brought employment claims as a representative of a putative class of drivers, arguing they should have been treated as employees entitled to minimum wage and overtime pay instead of labeled as franchisees.

Shuttle Express moved to compel arbitration.  The district court denied the motion, finding the arbitration clause was unconscionable, because plaintiffs could not effectively vindicate their statutory rights due to the class action waiver and fee-splitting provision (and a one year statute of limitation).

The Fourth Circuit reversed the district court, and ordered it to compel arbitration of the drivers' claims.  The Fourth Circuit could have accomplished that in a fairly simple fashion - by finding that Muriithi did not meet his burden to prove the costs of arbitration would be prohibitive (under the same line of decisions at issue in the AmEx case currently pending before SCOTUS) because he did not present evidence about relevant arbitration fees or the value of his employment claims.  [It could not have hurt that Shuttle Express volunteered during oral argument to pay all arbitration costs if the court compelled arbitration.]

Instead, the Fourth Circuit did that, and then also went out of its way to discuss arguments about whether Concepcion had any application to the case.  The driver argued it did not, because he was not arguing for the application of any state common law that precludes class action waivers in arbitration. 

The court disagreed, finding Concepcion applies to any unconscionability argument directed to waivers of class arbitration.  "[T]he Supreme Court's holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances."

That is a bold statement from the Fourth Circuit, not only because the question presented and ultimate holding inConcepcion were both specific to federal preemption, but also because it adopts the position of the Petitioner in the AmExcase, before SCOTUS has even issued a ruling.

In Awuah, et al. v. Coverall North America, Inc., No. 12-1301 (1st Cir. Dec. 27, 2012), the First Circuit reversed a district court's ruling and ordered arbitration of workplace disputes for certain franchisees even though they had not signed, received, or reviewed an arbitration agreement. The First Circuit found that the district court had erroneously adopted a special heightened notice requirement for arbitration clauses that does not exist and, even if Massachusetts law had imposed such a notice requirement, the FAA would preempt it. Id. at 4. The decision is important for employers in the context of workplace arbitration agreements.

The Facts Of The Case

Coverall North America, Inc. ("Coverall") contracts to provide commercial janitorial cleaning services to building owners or operators, and its "franchisees" do the cleaning. In their complaint, the franchisees asserted a variety of state law claims against Coverall including breach of contract, misrepresentation, deceptive and unfair business practices, misclassification as independent contractors, and failure to pay the wages due to them. Many (but not all) of the franchisees signed Franchise Agreements with Coverall providing that, with certain exceptions not implicated here, "all controversies, disputes or claims between Coverall . . . and Franchisee . . . shall be submitted promptly for arbitration." Id. The district court readily enforced the arbitration agreements in those instances where a franchisee signed a Franchise Agreement containing an arbitration clause. Id. at 7. 

However, the Franchise Agreements also permitted franchisees to assign the Agreement to a person ('the assignee') meeting the qualifications established by Coverall for granting new franchises. Thirty-one  of the franchisees, including the sixteen appellees, did not enter into the Franchise Agreement with Coverall but rather became Coverall franchisees either by signing Consent to Transfer Agreements ("Transfer Agreements") and Guaranties to Coverall Janitorial Franchise Agreements ("Guaranties"), or by signing only the latter Guaranties. Id. at 3-6. The sixteen appellees at issue in the appeal never even received a copy of the Franchise Agreement, but did execute the Transfer Agreements and/or the Guaranties, both of which incorporated the Franchise Agreement by reference.

The Underlying District Court Ruling

On September 22, 2011, the district court refused to enforce the arbitration agreement for certain of the franchisees and certified a class consisting of "all individuals who have owned a Coverall franchise and performed work for Coverall customers in Massachusetts at any time since February 15, 2004, who have not signed an arbitration agreement or had their claims previously adjudicated." Id. at *7 (emphasis added) (citing Awuah II, 843 F. Supp. 2d at 174). On November 29, 2011, plaintiffs filed a motion for a ruling on the scope of the class, arguing that "those who purchased their Coverall franchises through certain 'Consent to Transfer' agreements[ ] that do not contain arbitration clauses" should be added to the class. Id. The district court found that some of the transferee plaintiffs had received copies of the Franchise Agreement and therefore had notice of the arbitration clause. Id. at 8. Thus, the district court's resolution of whether or not to order franchisees to arbitrate was based on whether they had received copies of the Franchise Agreement containing the arbitration clause.

With respect to the sixteen franchisees who had not received copies of the Franchise Agreement, the district court concluded that "Coverall did not give the Transferees information sufficient to put a reasonably prudent employee on adequate notice of the agreement to arbitrate." Id. at 9. Thus, the district court "expanded the class to include these new plaintiffs who had not been given copies of the Franchise Agreement, [although it was] referred to in the documents they did receive." Id. The district court also held that a franchisee could not be bound to an arbitration clause if he does not have notice of it," and that "Coverall . . . has not produced any evidence that the transferees were ever themselves shown the transferors' franchise agreements or that they were in any other way informed about the existence of an arbitration clause." Id. at 8. Coverall argued that "[p]laintiffs' assertion that some specific level of notice is required before the Transferee-Owners may be bound by their agreements to arbitrate is contrary to settled law." Id.

The First Circuit's Decision

On appeal, the First Circuit agreed with Coverall, holding that while the Transfer Agreements did not all use the traditional language of "incorporating by reference" the arbitration clause of the Franchise Agreement, no such magic terms are required and other language in the agreements clearly communicated the purpose of incorporating the arbitration clause. Id. at 13. These agreements provided that the transferees "succeed to all of Franchisee's rights and obligations under Franchisee's Janitorial Franchise Agreement," or "become liable with the Franchisee for all of the obligations imposed by the Janitorial Franchise Agreement." Id. (internal quotation marks omitted). Moreover, the First Circuit held that the Transfer Agreements were not the only pertinent documents executed by the parties and other Transfer Agreements incorporated the responsibilities, duties, and obligations with respect to arbitration.

Implications For Employers

This case is an interesting one for employers because while it is always preferable to have an employee execute the arbitration agreement itself, this ruling implies that an employer may enforce an arbitration agreement where the employer has incorporated it by reference into another document it has provided to the employee.

With less colorful language than its last arbitration opinion, the First Circuit sided with the Second and Third Circuits in limiting the application of the 2010 Stolt-Nielsen decision on the availability of class arbitration. Fantastic Sams Franchise Corp. v. FSRO Assoc. Ltd., __ F.3d __, 2012 WL 2402560 (1st Cir. June 27, 2012).

Decisions from these three circuits suggest that as long as the party seeking a class action can show it did not stipulate that the agreement was "silent" on the availability of class arbitration, the courts (or the arbitrator) will consider arguments based on contractual interpretation and the parties' actions to find the parties' intent.

In Fantastic Sams, a coalition of 35 franchisees demanded arbitration against the franchisor for common violations of their agreements and statutes. Twenty five of the agreements had arbitration clauses that prohibited class arbitration. Ten agreements did not expressly prohibit class arbitration, and broadly provided for arbitration of "any controversy or claim arising out of or relating in any way to this Agreement." The franchisor brought a petition in federal court to compel the coalition members to arbitrate individually, relying on Stolt-Nielsen.

The 25 franchisees whose contracts prohibited class arbitration were compelled to arbitrate individually. But the remaining ten were not. The First Circuit concluded that Stolt-Nielsen was not as broad as the franchisor argued: "We thus reject the very different precept, on which [the franchisor's] argument depends, that there must be express contractual language evincing the parties' intent to permit class or collective arbitration.

Stolt-Nielsen imposes no such constraint on arbitration agreements." The court focused on the fact that the Stolt-Nielsen parties had stipulated that their agreement was "silent" on class arbitration, whereas in this case it was possible the arbitrator could find evidence that the parties did intend to allow class or collective arbitrations. The First Circuit noted its agreement with the Second and Third Circuit decisions on this point, but did not address the recent Fifth Circuit decision coming out in favor of the franchisor's argument.

Furthermore, the First Circuit noted that Stolt-Nielsen did not clearly apply because this coalition of franchisees was not a "class action" and did not have the same issues that SCOTUS noted with class arbitrations. (No absent parties, no certifying a class or providing public notice, etc.)

Finally, the court found that the question of whether the remaining ten franchisees could proceed in a collective arbitration was a decision for the arbitrator, because it characterized that question as a "procedural" one and because the agreements incorporated the AAA Rules, which delegate jurisdictional questions to the arbitrator.

At least one lesson from these cases is: never stipulate your arbitration agreement is silent regarding the availability of class actions! Give the courts some reason to distinguish your facts from the unusual facts in Stolt-Nielsen, if you want any chance of arbitrating as a class.

That is how one noted lawyer described what would happen if HR and Risk Management people could hear courthouse conversations amongst plaintiff lawyers. Unless your company is bankrupt or has never in its history had a disgruntled employee, you likely will, sooner or later, be in the crosshairs of a plaintiff’s attorney looking for an easy mark in an employment base. And then, if the action that is eventually brought turns out to be a class action, you can multiply that risk by a factor of hundreds or even thousands, as Wal-Mart and others have learned.

Unfortunately, our legal system is based on an adversarial model. Like a sports team preparing for a critical game, from the first day of law school, lawyers are trained to advocate totally for their client’s victory. Defenses are concocted to minimize the impact of any weakness in their side’s case. The opposing side is attacked and demeaned at every opportunity. The bedrock principal underlying the adversarial means of dispute resolution is that if both parties were to advocate totally their respective claims of their clients, the most just resolution of the dispute would obtain. Of course, this is a fiction.

Applying our traditional legal adversarial system to workplace disputes, however, is rarely the best means of dispute resolution. The adversarial system is expensive, disruptive, and protracted. More significantly, by its very nature, it tends to drive the parties further apart weakening their relationship, often irreparably. Far too often the process completely ignores the real underlying problem. As a result, by the very nature of the adversarial process, the minor disagreements and the stress inherent in the employment relationship escalate into a full-scale war, typically resulting in the termination of the employment relationship, years of litigation, tens of thousands of dollars in legal expenses, and only the lawyers profit.

In the recent past, several external factors have combined to result in a marked increase in both the frequency and intensity of litigation between employer and employee. These include:

• Enactment of legislation providing employees with additional workplace rights.
• The erosion of the traditional employment-at-will rule that, for most of our industrial history, precluded employees from suing their employers.
• Recognition of new legal theories permitting employees to sue their employers and supervisors.
• The continuing diversification of the American workplace with respect to the attributes of its workers, their lifestyle choices, and their core beliefs.
• Increase use of jury trials in employment litigation.
• Larger demand awards.
• Class action cases.

When these factors are combined with the systemic escalation of disputes resulting from our legal system’s use of an adversarial system of dispute resolution, the contemporary employer is charged with an impossible task: to successfully manage its human resources in an increasingly competitive environment, while keeping legal claims from arising and, when they do, responding to them with minimal cost and disruption

A Solution – ADR

Alternate dispute resolution (ADR) is simply use of a means to resolve disputes other than the traditional court and administrative forums. A nebulous and ever-expanding concept, ADR encompasses a broad spectrum of activities ranging from a simple open door policy through binding arbitration of statutory claims. Intermediate ADR possibilities include an internal grievance procedure, ombudsman, executive and peer review, and mediation.

A carefully structured ADR policy would typically use different types of ADR at different stages of the dispute. For example, an ADR policy may have the following progressive steps: an employee may first be required to informally discuss a concern with a supervisor, then file a written grievance with higher management, submit the dispute to mediation and, if necessary, then finally proceed to final binding arbitration.

Where ADR is effective and resolves the dispute, it is far less costly and time-consuming than court litigation. More importantly, a carefully instituted and well-planned ADR mechanism becomes a very effective risk management/loss control tool. Because mediation focuses the parties to concentrate both on the other side’s perspective as well as their own, and to structure their own mutually agreeable resolution to their dispute, it is usually far more effective in employment settings than litigation. This is because litigation imposes a third party’s findings as to the relative claims of the dispute upon the parties. As often as not, the result is an appeal or initiation of a scheme to secure revenge. The parties to a mediated settlement, in contrast, have invested time and effort into reaching their mutually accepted resolution to the dispute. They are, therefore, by the very nature of the process, committed to its success. Finally, a skillful mediator can assist each disputant with appreciating the concerns and positions of the other party. This reduces the tension between them, enhances empathy, and can lead to innovative solutions.

Basically, the well-crafted ADR program will require non-binding mediation before mandatory binding arbitration. A well-crafted ADR program should cover all claims of an employee except workers’ compensation and unemployment compensation. That includes wage-and-hour claims as well and this can be particularly important in a prospective wage-and-hour class or collective action.

The ADR program must be balanced. An employer will not be able to shift the balance in its favor by use of an ADR procedure that is unfair to employees and does not preserve all legal rights and remedies of an employee, and preserve due process. Courts would have little trouble invalidating any program which purports to limit the statutory remedy of an employee, including any remedies for punitive damages, legal fees, or any other remedy under which the claim brought would allow. Courts will not validate an ADR program which artificially limits the statute of limitations, allows the employer to unilaterally change the arbitration rules, or allows the employer to choose the arbitrator.

There are significant risk management advantages to a well-crafted ADR program.  Those advantages include reduction in cost as compared to conventional litigation, both in terms of legal fees and expenses, and time required by the employer and its managers involved in protracted judicial litigation. Arbitration proceedings are non-public which means that publicly sensitive businesses would not have their dirty laundry aired in public. One significant advantage is the certainty that management and employees have in the process. Everyone understands what the rules are and manage their expectations accordingly. This result can improve employee relations and reduce turnover. Another important factor is that when an arbitration ruling is made the award will be final and binding on the parties. This allows the parties to achieve finality and can get on with their lives. One of the most important aspects of a carefully crafted ADR program is the prospect of eliminating or significantly reducing class or collective actions. Also, exposure to frivolous lawsuit will be significantly curtailed. Implementation of an ADR program requires some careful planning but when executed properly can be relatively painless process to the organization irrespective of its size.

ADR is the dispute resolution risk management mechanism of the future. For workplace disputes, it is far superior to conventional litigation. It offers employers a far less expensive, less risky, quicker, and potentially more effective means of dispute resolution than does traditional litigation. It can improve organizational health by identifying and addressing the root cause of employment disputes and structuring creative resolution.

As with all policies and core values, the particular form of ADR an organization elects to employ, as well as the policies implementing it, should be carefully structured to enhance your particular operations, your employee relations philosophy, your core values, and your past experience in adjudicating employment disputes. The variety and flexibility of ADR enhances its potential for effectiveness. 

Michael Millerick, correctly in my opinion, notes that the passage of the Fair Arbitration Act which bans mandatory arbitration in franchise agreements is more likely to pass because of the Supreme Court (US) decision in Rent-Center v Jackson, which allowed the arbitrator to take jurisdiction over the question whether there was an agreement to arbitrate or not.



"Two significant events have, and are occurring, which will change the entire landscape concerning how franchise disputes are going to be resolved.