7th Circuit getting its crack at arbitration agreements

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By Olwen Jaffe
and Jason Knutson

Recent years have seen a great proliferation of mandatory arbitration clauses, the so-called arbitration agreements that preclude potential plaintiffs from bringing class-action claims.

As a result of U.S. Supreme Court rulings upholding the Federal Arbitration Act — an act that favors enforcing these types of clauses — arbitration agreements have started appearing in a wide array of contracts. The development must be deemed unfortunate for the simple reason that arbitration agreements frustrate individual rights.

The Supreme Court has consistently enforced arbitration agreements in consumer contracts in recent years. The court first reversed the 9th Circuit in AT&T Mobile v. Concepcion (2011), holding that California law “impermissibly interfere(d) with fundamental attributes of arbitration” and that the Federal Arbitration Act took precedent over California law in the matter.

In 2013, the court upheld Concepcion in Am. Ex. Co. v. Italian Colors Rest. and reaffirmed that courts must “rigorously enforce” arbitration agreements. The Am. Ex. court went on to reject the argument that the Federal Rules of Civil Procedure grant fundamental litigation rights that cannot be waived.

Most recently, the court upheld the idea that the Federal Arbitration Act trumps state law when it enforced a service provider’s arbitration agreement with its customers in DirectTV v. Imbrurgia (2015).

Yet, despite all this, the court has not dealt squarely with the question of whether arbitration agreements are enforceable in employment contracts. It may be asked to do so soon.

Four federal circuit courts have held that the reasoning of Concepcion and Am. Ex. applies to arbitration agreements found in employment contracts. Now a new challenge, originating in Wisconsin, is bringing precisely the same issue to the 7th Circuit.

That case involves an employee of the medical-software developer Epic Systems, of Verona. An employee is challenging the arbitration agreement Epic imposed upon him as a condition of working at the company.

The enforceability of arbitration agreements in employment contracts may hinge on whether the Federal Arbitration Act conflicts with the National Labor Relations Act. In the Epic case, the plaintiff’s argument relies largely on a provision of the labor relations act allowing employees in wage disputes to choose to seek resolution either through a class action or through individual arbitration.

The contention is that this trumps the Federal Arbitration Act’s support for contracts that require employees to resolve disputes through the use of individual arbitration.

The district court agreed with the employee and the 7th Circuit heard oral arguments in the case on Feb. 12. If the 7th Circuit were to uphold the district court’s ruling, it would create a circuit split and possibly set up the Supreme Court to take the issue.

Anyone interested in protecting the rights of employees should pay close attention to these developments.

If the courts continue in the direction of Concepcion, Am. Ex. and DirectTV, arbitration agreements will continue to deny individuals their rights to a judge, jury and meaningful appeal.

Arbitrations are not decided by judges and juries, but instead by “independent” arbitrators. In practice, arbitrators are often selected by defendant companies.

Arbitrators may also look at a particular issue in a narrow scope and fail to take into account other applicable laws that may be relevant to the case. Additionally, arbitration decisions are difficult to overturn. Courts will only vacate an arbitration decision in response to extreme circumstances.

These criticisms aside, there are times when arbitration might make sense. But this tends to be when the option to litigate remains open and when both parties voluntarily consent to arbitrate their claims.

When individuals have little ability to negotiate the terms of their contract — as is the case in many consumer and employment contracts – arbitration agreements are usually inappropriate.

Financial burden is another reason arbitration agreements are prejudicial to individuals. Although companies claim arbitration saves time and money, the process can still be prohibitively expensive.

First, there is usually a large fee to initiate arbitration. Even if someone is able to afford that initial cost, there are many other costs to arbitration that can eventually force him or her to drop the claim.

For example, companies can specify where the claims will be arbitrated and require individuals to travel long distances at their own expense. A series of articles published by The New York Times in November drew a great deal of attention to the many drawbacks of arbitration.

Arbitration agreements undermine individual rights while protecting companies from the potential expense of having to comply with the law and face reputation-damaging class-action suits. In the employment law context, employers may be using arbitration to sidestep wage-and-hour laws.

Instead of paying their employees properly, they are simply moving their potential exposure to a more favorable venue. Unfortunately, Wisconsin is no different than any other state in seeing a rapid increase in the use of these sorts of agreements.

The final word on the enforceability of arbitration agreements in employment contracts, however, has yet to be written. With the Western District of Wisconsin’s recent ruling invalidating an arbitration agreement in an employment context, the fate of employees’ rights to challenge wage disputes now rests in the hands of the 7th Circuit.

Olwen Jaffe is a second year law student at the University of Wisconsin. She received her master’s degree in Public Policy from George Washington University and her bachelor’s degree from Boston University.

Jason Knutson is a shareholder in the Madison office of Habush Habush & Rottier. His practice features complex litigation, including class action, environmental accidents, and personal injury cases.