Courts Question Rules Barring Suits by Workers

After a decade of siding with employers, courts are showing newfound skepticism over a growing practice by businesses of requiring new employees to sign away their rights to sue.

Companies generally have seen the practice of mandatory arbitration, which uses private judges rather than public juries, as a quicker, less costly and more rational way of dealing with workplace disputes. But workers, who often believe they are being coerced into signing these agreements, increasingly are attacking them as unfair, and judges have begun to respond.

“Courts generally have backed away from a kind of naive blanket acceptance of anything that is called arbitration,” said former California Supreme Court Justice Joseph Grodin, now a distinguished professor of law at Hastings College of the Law and also an arbitrator and mediator.

“They have begun to look at these agreements and how they operate a little more carefully,” he said.

How far that new judicial skepticism will go could be determined by two cases pending before the California Supreme Court and the U.S. Supreme Court.

In both cases, workers are complaining that the private judging system was forced on them as a requirement to get a job.

The California Supreme Court will act first. In the next few days, the justices will rule in Armendariz vs. Foundation Health Psychcare Services Inc. The case is expected to produce a broad pronouncement on how arbitration should be applied in the nonunion workplace. Legal scholars say courts in other states and federal courts often follow California’s lead on arbitration issues.

The decision “will be an indication of how far the tide has turned” on arbitration, said Glenn M. Clark, who is representing two former employees of Foundation Health who have sued over alleged sex discrimination.

The U.S. Supreme Court will decide by June whether a 1926 federal arbitration law, which says arbitration agreements are enforceable in court, applies to employment contracts signed by nonunion workers. In that case, Circuit City Stores Inc. vs. Saint Clair Adams, the U.S. 9th Circuit Court of Appeals had ruled that employers cannot require workers to arbitrate without their knowing consent.

Series of Complaints

On both sides of the arguments over arbitration, the two cases are being eagerly watched.

“The time has arrived to fix arbitration,” said Thomas J. LaLanne, a San Francisco business and real estate lawyer. “It has gone amok.”

“If people don’t respect this forum and don’t want to be there, they are going to use every device possible to stay away,” said Cliff Palefsky, a San Francisco-based employment lawyer. “No justice system will work as long as it is perceived as unfair.”

Employers counter that the private judging is quicker and more efficient than the court system and produces more rational decisions. Arbitrators usually have expertise in employment law, said Steve Drapkin, a lawyer for the Employers Group, the largest employer association in the state.

“They can render decisions impartially and without regard to emotions and biases, which typically affect juries hearing lawsuits,” Drapkin said.

Critics, including California Atty. Gen. Bill Lockyer, however, levy a series of complaints against the system:

Employers are requiring workers to sign arbitration agreements that deny them rights guaranteed by state law; litigants must pay for an arbitrator’s time, which discourages people who lack money from filing claims; and no one looks over the shoulders of arbitrators. Unlike judges, whose rulings can be appealed, arbitrators need not explain their decisions, and courts in California cannot overturn their rulings even if they made legal errors.

More and more employers use arbitration each year. In 1991, a study found that only four of 111 employers hired arbitrators to resolve workplace disputes, said Lisa B. Bingham, an Indiana University professor. By 1995, another survey by a federal agency found that 10% of all employers with 100 or more workers used it, and almost half imposed it as a job condition.

One recent case involving a nationwide chain of discount cigarette stores called Cheaper Cigarettes illustrates some of the complaints about the practice.

The company has used a pre-employment form that requires workers to arbitrate any claims and specifies that the arbitrator must be a retired Superior Court judge. Lawyers who represent workers complain that retired judges are mostly older, white men who charge significant fees.

The agreement also says the worker must pay for the arbitration. Arbitrators’ fees range from $150 an hour to more than $1,200 an hour in California.

And if a worker wins, the agreement says he or she would be entitled only to six months’ back pay or reinstatement. A worker also would have to pay his or her own attorney’s fees.

“It’s a complete opt out from the legal system, plus you have to go to Oakland to get a hearing,” said Richard Teitel, a lawyer who represents two former employees of the chain.

But Jay Chapman, vice president and personnel director of the 750-store company, said workers are free to look for jobs elsewhere if they do not want to sign the agreements.

“Employees are not slaves,” he said. The agreement, instituted about 15 years ago, ensures disputes will be resolved “very quickly, economically and expeditiously,” he said.

The case before the state high court involves somewhat less dramatic restrictions.

Marybeth Armendariz and Dolores Olgue, who brought the case against Foundation Health, which is based in Northern California, said they were harassed and discriminated against by gay supervisors because they are heterosexual.

They said their lesbian and gay managers made derogatory remarks about heterosexuals in their presence and then demoted them from their supervisory jobs.

Olgue said a lawyer they consulted told them they had a good case--before they discovered that the employment applications they had signed bound them to arbitrate any legal disputes.

“You have to sign it to come on board, so of course we had signed it,” said Olgue, 40, who now works for a different health plan in Los Angeles. “I think a lot of employees do that without paying attention to the fine lines.”

California has a law that prevents discrimination in the workplace and offers remedies. But the arbitration agreement the women signed permits employees to obtain only a fraction of the amount of damages they could receive under the state law.

In addition, the agreement prohibited workers from suing the company, but not the other way around.

A Los Angeles Superior Court judge said the agreement was “so one-sided” as to “shock the conscience” and threw it out. A Court of Appeal reinstated the agreement, although only after nullifying certain provisions.

During California Supreme Court arguments on the case in May, several justices seemed troubled by the contract. They questioned whether employees had voluntarily agreed to it when it was presented as a requirement to get a job.

Clark, the lawyer for the two former employees, told the court that the judiciary “cannot step out of the enforcement of employees’ civil rights laws” by leaving complaints to be decided by arbitrators.

If courts do not strike down arbitration agreements with illegal provisions, employers will have “every incentive to push the envelope to see what advantages can be obtained,” attorneys for the women argued.

The state attorney general’s office, siding with the workers, complained that private arbitration of workplace discrimination gets in the way of enforcing antidiscrimination laws.

Proceedings Behind Closed Doors

Court proceedings generally are open to the public, but arbitration is held behind closed doors, Deputy Atty. Gen. Kathleen W. Mikkelson wrote in a brief to the court. “There is little, if any, accountability, even for employers who have been determined to have violated the law,” she wrote.

“The lack of public disclosure not only weakens deterrence, but also prevents assessment of whether practices of individual employers or particular industries are in need of reform.”

But William Gaus, representing the employer, argued that the agreement was simply a contract that should be enforced.

“It is nothing more. It is nothing less,” he said.

Another major issue involves the neutrality of arbitrators. Many legal analysts believe arbitrators tend to favor institutional clients who provide repeat business.

“If you [an arbitrator] are getting a lot of work from one side, they will probably not use you again if you rule for the other,” said Los Angeles mediator Stefan Mason, who learned this painfully.

After practicing employment law for 33 years, Mason decided in 1993 to become a neutral arbitrator. His career as an arbitrator ended three years ago after he awarded a victim of age discrimination $1.7 million, $700,000 of that in punitive damages, against his former employer.

“It was the worst treatment I have ever seen of an employee,” Mason said.

He said he awarded punitive damages “to set an example” and figured the employee would have received 20 times as much money from a jury.

But the award was publicized and management labor lawyers stopped hiring Mason. “I have not been asked to arbitrate an employment case since then,” he said.

He now works as a mediator to help parties settle cases.

“If you want to make a living as an arbitrator in these kinds of cases, you just can’t go overboard for an award for plaintiffs because this will happen,” he said. “That is just a fact of life.

“When you get into this business, if you are going to sleep at night and if you have any integrity, you just hope that case doesn’t come to you like it came to me,” he said.