“Employers should not view alternative dispute resolution provisions as one-size-fits-all.”
By Don Hayden & Yaniv Adar, Law360 | December 15, 2020
In an employment or consumer context, people generally assume that mandatory arbitration provisions are a unilaterally imposed tool of the corporation with far superior bargaining power to the disadvantage of the little guy. In some ways, they are right.
Arbitration provisions often contain class action waivers, confidentiality provisions, limitations on discovery and other provisions meant to contain exposure for the corporate defendant in consumers and employment claims. Perhaps the most prominent trait of arbitration is expedient conclusiveness, forcing parties to accept whatever the arbitral tribunal decides and substantially limiting the ability to have that decision reviewed in a court of law.
The finality of arbitration was recently highlighted by the U.S. Court of Appeals for the Eleventh Circuit in Gherardi v. Citigroup Global Markets Inc. serving as a firm reminder that corporations, just like the employees and consumers they force into arbitration, cannot “get a mulligan in federal court because [they] identif[y] a possible legal error in arbitration.”
This article discusses: (1) the purpose of arbitration and the Federal Arbitration Act; (2) the limited instances when an arbitration award can be vacated by a federal court; (3) the Gherardi court’s decision to prioritize the finality of arbitration over correcting legal errors in arbitration during a district court’s confirmation of an arbitral award under the Federal Arbitration Act; and (4) advice for employers in crafting arbitration provisions.
The primary purpose of the Federal Arbitration Act is the efficient resolution of disputes.
The Federal Arbitration Act provides that written arbitration agreements are “valid, irrevocable and enforceable.”Congress adopted the act “in an effort to counteract judicial hostility to arbitration and establish a liberal federal policy favoring arbitration agreements.”
The purpose of this liberal approach to arbitration is the “efficient and expeditious resolution of claims.”Arbitration involves a give and take, forgoing the “procedural rigor and appellate review of the courts” in exchange for “lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes.”
The U.S. Supreme Court has repeatedly struck down attempts by lower courts to interfere with the Federal Arbitration Act’s goal of efficient resolution of private disputes.
The Supreme Court has: (1) refused to authorize class arbitration absent an express consent to mass treatment of claims; (2) rejecting the “wholly groundless” exception to agreements that delegate the question of arbitrability to an arbitrator; and (3) has held that the Federal Arbitration Act preempts California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts.
Each of these decisions and dozens of others have consistently and unambiguously demonstrated the Supreme Court’s resilience in protecting the efficacy of the Federal Arbitration Act and a strong pro-arbitration position that usually falls in line with the majority’s pro-business stance.
The Federal Arbitration Act only provides for four narrow instances to vacate an arbitration award.
Consistent with its focus on efficiency and finality, the Federal Arbitration Act provides only four narrow instances in which a court can vacate an arbitral award:
- Where the award was procured by corruption, fraud or undue means;
- Where there was evident partiality or corruption in the arbitrators, or either of them;
- Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
- Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.
The Eleventh Circuit previously recognized several nonstatutory grounds for vacatur: “(1) arbitrary and capricious; (2) in contravention of public policy; or (3) entered in ‘manifest disregard of the law.'”
But these exceptions are no longer recognized in the Eleventh Circuit. Moreover, the Supreme Court has consistently held that such attempts are improper and “would become merely a prelude to a more cumbersome and time-consuming judicial review process.”
Accordingly, the current state of the law is that the only bases for challenging an arbitration award in federal court are the four limited provisions set forth in Section 10(a).
Gherardi is a wake-up call to employers that the finality of arbitration applies to everyone.
Gherardi exemplifies the Eleventh Circuit’s refusal to expand Section 10(a)(4)’s “exceeded their powers” basis for vacatur of an arbitral award, regardless of who is asking. In Gherardi, Citibank required each of its employees to submit all employment-related disputes to binding, bilateral arbitration.
Gherardi initiated arbitration against Citigroup for wrongful termination in violation of an anti-retaliation provision. Citigroup responded that Gherardi’s claims were baseless because several agreements between the parties made clear that Gherardi was an at-will employee that could be terminated for any reason.
One provision specifically stated that the arbitration provision did not “constitute, nor should it be construed to constitute, a waiver by Citi of its rights under the ’employment-at-will’
doctrine nor” did it “afford an employee or former employee any rights or remedies not otherwise available under applicable law.”
The arbitration panel unanimously awarded plaintiff Gherardi nearly $4 million. The panel did not make specific findings or explain its reasoning — it was not required to do so.
Faced with dueling motions to compel and vacate the award, the U.S. District Court for the Southern District of Florida vacated the award because, according to the district court, Gherardi had been an at-will employee and the arbitrators exceeded their powers by finding that he had been wrongfully terminated.
The Eleventh Circuit reversed, holding that the district court improperly relied on Section 10(a)(4) to vacate the award. U.S. Circuit Judge Britt Grant, writing for a 2-1 majority, held that the Supreme Court mandates Section 10(a)(4) to be construed “narrowly — very narrowly,” stating that “judicial review of arbitration decisions is among the narrowest known to the law.”
The Gherardi court made clear that arbitrators do not exceed their powers merely by marking an error, even a serious error; rather, the “sole question under Section 10(a)(4) … is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether she got its meaning right or wrong.”
Applying the law to the facts at issue in Gherardi, the sole question was whether the arbitrator had the power to resolve the employment dispute before it. As the parties agreed to arbitrate “all employment-related disputes,” the 2-1 majority held that the panel did not exceed its powers and thus vacatur pursuant to Section 10(a)(4) was in error.[24] Of note, the Eleventh Circuit held,
Our respect for arbitration (a respect that is demanded by the [Federal Arbitration Act]) means that some interpretive errors will go uncorrected. But if it were any other way, the efficiency gains of arbitration would be destroyed and arbitration would become “merely a prelude to a more cumbersome and time-consuming judicial review process.”
In her dissenting opinion, U.S. Circuit Judge Beverly Martin claimed that the majority disregarded an express limitation in the parties’ agreement to arbitrate. Focusing on the arbitration provisions express recognition that the provision shall not constitute “a waiver by Citi of its rights under the ’employment-at-will’ doctrine,” Judge Martin claimed that the majority opinion failed to “enforce the limits the parties expressly agreed to place on any arbitration of their employment related disputes.”
Based on her perceived disregard of this contractual limitation, Judge Martin wrote that vacatur was appropriate pursuant to Section 10(a)(4). One could certainly argue that adoption of the opinion articulated in this dissent could constitute a slippery slope toward reviving nonstatutory grounds for vacatur that the Eleventh Circuit eliminated through a much broader interpretation of Section 10(a)(4) than that previously expressed, and would be contrary to the precedent from the Supreme Court when interpreting the Federal Arbitration Act in modern times.
Employers should not view alternative dispute resolution provisions as one-size-fits-all.
Because arbitration is a matter of contract, employers should be mindful of the indiscriminate finality of arbitration and tailor their alternative dispute resolution provisions accordingly. A few options available to employers are as follows.
1. Incorporate contractual limitations without arbitration provisions.
Arbitration provisions often contain many provisions that are ancillary and independent of the agreement to arbitrate. Such provisions include class action or jury trial waivers, and limitation of remedies, forum selection, or choice of law provisions. Any, or all, of these provisions can be included in standard agreements without an arbitration provision.2. Utilize appellate arbitration options.
Although arbitration presumptively concludes after a single arbitrator renders an award, parties can also bake in limited appellate remedies available within the confines of arbitration. For example, JAMS Inc. offers optional arbitration appeal procedures and the American Arbitration Association offers optional appellate arbitration rules. Parties can also stipulate to their own appellate arbitration terms.
If companies are hesitant to leave the disposition of specified disputes to a single arbitrator, they can and should utilize these optional appellate remedies.3. Specify a panel of arbitrators.
Another tool in an employer’s arsenal is specifying disputes must be resolved by a panel of three arbitrators as opposed to a sole arbitrator. Employing a panel or tribunal reduces the risk of a rogue arbitrator binding the parties. However, this option should be used for the more significant disputes because if you treble the number of arbitrators you also treble the arbitral fees.4. Develop different agreements.
Although the current trend in the legal community is the utilization of templates and forms, employers should consider having different forms for different circumstances. For example, entry level employees should not be given the same employment agreements as senior executives.
As long as these matters are clearly presented to employees in an appropriate employment agreement, employers can tailor alternative dispute resolution provisions to fit the needs of each employee-employer relationship.
Conclusion
Gherardi is yet another example of the Eleventh Circuit militantly enforcing the Federal Arbitration Act, regardless of whether such enforcement would result in clear legal error. As noted by Judge Grant: “No doubt this is a tough rule, but it applies to employer and employee alike.”[30]
Employers should be cognizant of the act’s preference of finality over legal correctness, and prepare their arbitration agreements appropriately.
