Judge Lawrence Flood speaks during a hearing at the Leighton Criminal Courthouse on September 17, 2019 in Chicago, Illinois. | Antonio Perez/Getty Images
The FAIR Act would ban forced arbitration. That’s a big deal.
The House just passed a groundbreaking bill that would restore legal rights to millions of American workers and consumers.
Lawmakers voted 225-186 Friday to pass the Forced Arbitration Injustice Repeal (FAIR) Act, a far-reaching bill that bans companies from requiring workers and consumers to resolve legal disputes in private arbitration — a quasi-legal forum with no judge, no jury, and practically no government oversight.
These clauses, which are common in employment and consumer contracts, have made it impossible for workers to sue their bosses in court for sexual harassment, racial discrimination, wage theft, and nearly anything else. Workers are less likely to win their cases in private arbitration, and when they do win, they tend to get much less money than they would in court.
Outlawing forced arbitration is no small thing. It would restore access to the courts to more than 60 million US workers who have signed away their right to sue.
“Arbitration is one of the central ways in which corporate America has rigged the system against middle class families, working people,” Rep. Rosa DeLauro (D-CT) said Friday on the House floor.
The bill may face resistance from Republicans in the Senate, but pushing it through the House was a feat in its own right. Members of Congress have been trying for years to outlaw forced arbitration in various scenarios: for sexual harassment and discrimination claims and consumer complaints. None have ever gotten through the House, so passage of the FAIR Act is a major milestone.
Forced Arbitration Injustice Repeal Act, briefly explained
The FAIR Act, introduced by Rep. Hank Johnson (D-GA) and Sen. Richard Blumenthal (D-CT), would ban businesses from including mandatory arbitration clauses in contracts with employees and consumers. It would also invalidate current agreements that have already been signed, but only for disputes that come up after the law goes into effect.
Lawmakers had introduced the same bill last year, but did not get support from Republicans to pass it in the chamber. This time around, the challenge will be to get it through the Senate. But Republican senators, including Lindsey Graham (R-SC), have recently shown an interest in curbing forced arbitration.
If the bill passes, the law would immediately restore access to the courts to millions of workers who have signed these clauses. Often, workers don’t even know that they did.
Millions of workers can’t sue their employers, and they probably don’t know it
About 60 million American workers have given up their right to go to court just to earn a paycheck.
Mandatory arbitration agreements are often buried in a stack of hiring documents that managers require new employees to sign. About half of non-unionized workers at US companies are subject to these agreements — more than double the share in the early 2000s. America’s best-known companies, including Walmart, Starbucks, Macy’s, Uber, Google, and McDonald’s, now require all their workers, or some of them, to sign them.
The rise of mandatory arbitration has made it nearly impossible for workers to seek legal justice for wage theft, overtime violations, and job discrimination. This secretive system also has the potential to hamper the #MeToo movement.
Women are coming forward, often for the first time, with stories of widespread sexual harassment at work, only to discover that they’ve been shut out of the court system because they signed an arbitration agreement. The practice is particularly harmful to women and black employees, as they are more likely to be subjected to arbitration agreements because they make up a large share of workers in the industries that require arbitration the most: education, retail, and healthcare.
“What’s really happening is that our judicial system is getting privatized,” David Gottlieb, an employment attorney in New York who often represents workers in arbitration, told me last year. “It’s being privatized in a way that really only favors one side, the employer.”
But it’s not just hospitals and universities that have gone this route. Silicon Valley tech companies are also fans of mandatory arbitration clauses. And in the wake of a 2017 Supreme Court ruling that allows employers to prohibit class-action claims from workers in arbitration, companies have even more incentive to add arbitration clauses to their employment contracts.
Arbitration is stacked in favor of employers
The remarkable rise of mandatory arbitration in the workplace is the result of multiple Supreme Court rulings that have allowed businesses to expand its use.
Arbitration, which was once limited to contract disputes between businesses, now extends to legal disputes with consumers and employees. Companies argue that it’s a quicker, less expensive forum to resolve employment conflicts, and that’s true. But there are other incentives for businesses too: Private arbitration allows companies to hide misconduct that would otherwise be made public in court; arbitrators are much more likely than jurors to rule in favor of employers; and arbitrators are far less likely than jurors to give multimillion-dollar awards to workers when they find a company at fault for breaking the law.
Information about arbitration cases is scarce because they all take place outside the court system. But in 2015, California began requiring arbitration firms with clients in the state to publish limited data about all their cases in the United States.
Last year, Vox analyzed the data published by the American Arbitration Association, the largest arbitration organization in the US, which handles about 50 percent of all employment cases. The data showed that the firm handled 8,209 complaints filed by employees bound by mandatory arbitration agreements between 2013 and 2017. Arbitrators awarded monetary damages to the workers in only 1.8 percent of those cases. The vast majority — 78 percent — were settled through an unspecified mutual resolution.
The “heavy veil of secrecy” surrounding arbitration is one of biggest problems with the process, says Cynthia Estlund, an employment law professor at New York University.
“The private and contractual nature of arbitration makes it relatively easy for firms to prevent disclosure of just about anything concerning allegations, evidence, disposition, or settlement of the disputes, not just by parties but by the tribunals themselves…. That means that firms have less to worry about if they violate the law,” she wrote in a white paper published in October 2017.
How arbitration works
The first thing to keep in mind is that no arbitration proceeding is the same, as there are essentially no rules that arbitrators have to follow under the law. That’s because arbitration isn’t bound by court rules and has nearly no legal oversight. The process can vary from one arbitration firm to another, or even from arbitrator to arbitrator.
David Lichter, a Florida arbitrator for the American Arbitration Association, described the process to me last year as “a little bit like the Wild West.”
That said, the most well-known arbitration firms require their arbitrators to follow certain rules, which they make public, and they tend to have some things in common.
To see how arbitration is stacked against employees, it’s important to understand how the process works. Let’s use the example of two female workers who believe they were fired for reporting sexual harassment to human resources.
The first woman — let’s call her Susan — was not asked to sign an arbitration agreement when she was hired. The other woman, Ana, was required to sign one.
Susan would first have to file a complaint with the Equal Employment Opportunity Commission, the federal agency tasked with enforcing civil rights laws in the workplace. EEOC staff might attempt to mediate some sort of solution between Susan and her employer.
The EEOC will review the evidence in the complaint to see if there’s enough proof to show that Susan was likely a victim of sexual harassment and retaliation. If there is solid evidence, the EEOC lawyers will further investigate the case and try to mediate or negotiate a settlement on her behalf. During this entire process, which usually takes six months, Susan can reject all the proposed solutions — at any point, she can ask the EEOC to give her permission to take her case to court. Sometimes EEOC lawyers will choose to sue the employer on the worker’s behalf, though this happens in only a small fraction of complaints filed.
Now consider Ana’s situation. She signed an arbitration agreement. She can still file a complaint with the EEOC, but it’s almost pointless to do so because she signed the agreement, so she cannot sue. The only logical reason for Ana to file a complaint with the EEOC is in the hope that her case may be one of the very few complaints the commission decides to take to court on behalf of a worker or group of workers. (The EEOC is not restricted by arbitration agreements, so it can sue and represent workers who signed them.)
The only other option for Ana is to take her claim to arbitration. As in most arbitration agreements, the employer picks the arbitration firm that will hear the case, and will pay the cost to hire the arbitrator or panel of arbitrators — creating a potential conflict of interest. (This 2015 investigation by the New York Times describes the often-cozy relationship between arbitrators and the companies that hire them.)
After filing the complaint with the arbitration firm, Ana’s attorney and the lawyers representing her former boss are given a list of arbitrators to choose from. They are usually lawyers or former judges, but they don’t need to have any legal training; there are no laws that regulate arbitration proceedings.
Then the two sides schedule a conference call with the arbitrator to discuss what laws may have been broken, what kinds of evidence will be allowed, how many witnesses each side can call, and the burden of proof that Ana needs to meet to prove that her employer illegally harassed and retaliated against her. The individual arbitrator makes the final decision on all of this.
In the court system, Susan would have months to collect evidence, could compel her boss to share certain documents, and could include as many depositions and witnesses as she would like. She would also be required to prove to a jury, by a preponderance of evidence, that her boss violated the law. She would need to show that the harassment was “severe or pervasive” enough to create a hostile work environment for her, and that complaining about the alleged harassment was a motivating factor in why she was fired.
None of that is guaranteed for Ana in arbitration. She will likely have a few weeks to gather evidence and will be limited to one or two witnesses and one or two depositions. She also can’t force her employer to share evidence through a court subpoena, and the arbitrator can decide what standard of proof she has to meet — it could be a higher burden or a lower burden.
While Susan will probably go to public court hearings with her attorney, Ana will probably meet only once with everyone at her arbitration hearing. It will probably be in a hotel conference room, and lawyers from both sides will make opening and closing statements, just like a court trial. They will introduce evidence and witnesses, but unlike the court system, there is no jury weighing the evidence, just the arbitrator or panel of arbitrators.
Susan, in court, would wait for jurors to decide if she proved her case by a preponderance of evidence, and if so, what her award will be. Ana would go home and probably wait 30 to 60 days to find out the arbitrator’s decision, and the potential award, by mail.
Ana’s chances of winning her case in arbitration are much slimmer than Susan’s in the court system.
There’s a reason employers want to avoid a jury
If you ask employers why they require workers to use arbitration, they often say it’s a faster and less expensive process than the courts. They’re not wrong. But legal research, surveys, and employment attorneys point to the largest incentive of all: keeping employment claims from reaching a jury.
Juries are considered more sympathetic to workers’ claims, and more willing to award millions of dollars in damages to workers in these cases. The threat of a high jury award also gives workers leverage in negotiating larger settlements because businesses want to avoid trial.
“Juries tend to be more generous than arbitrators, so keeping a case in the courts means a [worker] is more likely to get an award,” Lichter, the arbitrator, told me.
Research shows that arbitrators can be biased toward employers who repeatedly pick them to handle their cases. This is known as the “repeat player effect,” a term coined in 1997 by Lisa Blomgren Amsler, a public affairs professor at Indiana University Bloomington whose research showed that workers were nearly five times less likely to win their case if the arbitrator had handled past disputes involving her employer. Her research involved a small sample of cases, but later studies have backed up her claim.
Alexander Colvin, a labor relations researcher at Cornell University, published a research paper in 2011 that found another level of potential bias: Not only were arbitrators more likely to rule in favor of businesses that were repeat customers, they were also more likely to award less money to their clients’ employees when they found the business at fault.
Colvin analyzed the outcome of 3,945 employment arbitration cases handled through the American Arbitration Association between 2003 and 2007. His research showed that workers were less likely to win in arbitration than in the court system, and in cases where they did win, their monetary awards tended to be smaller in arbitration.
For example, the median award amount for employees who won in arbitration was $36,500 during the time period that Colvin analyzed, but the median award for employees who won in court was about 10 times larger.
Lichter said there is an unspoken pressure for arbitrators to limit the size of awards for workers who were wronged. That’s largely because most arbitrators get paid based on the hours and the number of cases they handle. If an arbitrator gives a large award against a company, it will impact his or her ability to get picked by businesses to arbitrate future cases, Lichter said. But many arbitrators ignore that unspoken pressure, he said, and do the best they can to decide cases fairly.
“At the end of the day, I have to make sure I can sleep at night,” he said.
Arbitration has no oversight
While arbitration might seem similar to the court process, it’s not really the same thing. Arbitrators are not required to be neutral, their opinions do not need to be written, and there are few options for appeal, argues Elizabeth Roma, an employment attorney.
The Supreme Court has ruled that the courts would only overturn an arbitrator’s decision based on a “manifest disregard of the law,” something most courts have interpreted as an intentional misapplication of the law. That means most federal appeals courts will only overturn an arbitrator’s decision if it involved fraud, evident partiality, misconduct, or exceeding of powers. There’s no way for a worker like Ana to appeal an arbitrator’s decision by arguing that it was an incorrect interpretation of the law and facts, or an insufficient award.
Arbitration is not at all like the court system, but the Supreme Court seems okay with that. The nation’s highest court is largely responsible for the rise of this shadow court.
The Supreme Court unleashed arbitration on American workers
The widespread use of arbitration clauses in the workplace came after a crucial 2001 Supreme Court ruling involving sexual harassment.
In that case, Circuit City Stores Inc. v. Adams, a salesperson working at a California Circuit City store sued the company for sexual harassment. The employee, a man named Saint Clair Adams, said his co-workers harassed him because he was gay. But Adams, like all other Circuit City employees, had signed an agreement to resolve all disputes with the company through private arbitration. Circuit City argued in federal court that Adams had to move his claim to arbitration.
The judge sided with Adams, arguing that the Federal Arbitration Act — which allows businesses to resolve contract disputes through arbitration — has a provision excluding employment contracts. The ruling was upheld by the Ninth Circuit Court of Appeals.
But Circuit City took the case to the Supreme Court, where the justices overturned the lower court’s ruling, allowing businesses to extend arbitration to nearly all employment contracts.
The justices, in their 5-4 opinion, created a very narrow interpretation of the employment exclusion in the Federal Arbitration Act. It came down to this line of the act: “but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in interstate or foreign commerce.” The justices decided that this clause limited the exemption “to transportation workers.” In other words, only workers in the transportation industry were exempt from these mandatory agreements; all other workers could be forced to take their claims to arbitration.
Mandatory arbitration is particularly bad for #MeToo and workers of color
When women came forward to describe rampant sexual harassment at companies like Fox News and the Weinstein Company in recent years, many realized that they could not seek legal justice in the courts because they had signed mandatory arbitration agreements.
Former Fox News anchor Gretchen Carlson was one of them. She ended up suing Roger Ailes for sexual harassment, and they settled for an undisclosed amount. But Carlson could not sue Fox News for the company’s role in allowing the sexual harassment to persist, and neither could dozens of other women who accused the media company of tolerating sexual harassment, had they decided they wanted to sue.
As more women speak up about sexual harassment in the workplace, many of them have pressured members of Congress to restrict or abolish arbitration clauses from US workplaces.
In October 2017, Rep. Beto O’Rourke (D-TX) introduced the Mandatory Arbitration Transparency Act, which prohibits businesses from including a confidentiality clause in their arbitration agreements related to discrimination claims. In December of that year, a bipartisan group of senators and representatives introduced the Ending Forced Arbitration of Sexual Harassment Act, which exempts sexual harassment cases from required arbitration.
Then, in March 2018, Sen. Richard Blumenthal (D-CT) and a group of Senate Democrats proposed an even better idea: Don’t let businesses force employees and consumers to take their claims to arbitration. Their bill, the Arbitration Fairness Act, would let workers and consumers decide where to pursue their legal claims. However, they were unable to get even one Republican to co-sponsor the bill in the Senate or House.
This time around, the FAIR Act has far more co-sponsors in the House — 140-plus — but only one Republican ended up voting for the final bill. The Senate, on the other hand, hasn’t even put the bill up for a debate.