Employer’s Arbitration Clause Costs Them $1.2M In Appeals Court Ruling

A North Carolina employer learned that an arbitration clause can be costly when a federal appeals court overturned a lower court’s decision. The 4^th Cir. ruling favored a securities dealer who challenged the termination of his employment after the lower court threw out an arbitrator’s award.

The trial court said the arbitrator disregarded N.C. law and court precedent in awarding the worker almost $1.2 million. However, the U.S. Court of Appeals for the Fourth Circuit (4th Cir.) disagreed.

The appeals court reinstated the arbitrator’s award.

Arbitration agreement only allows “for cause” firing

Icon Advisers hired the plaintiff in 2017 to be a securities wholesaler. They terminated his employment by the end of the same year.

He challenged the decision. He said he could only be fired “for cause” because employment disputes had to be resolved through arbitration. The arbitrators agreed. They awarded the plaintiff almost $1.2 million in damages.

The plaintiff asked the trial court to enforce the award. Instead, the court vacated the arbitrator’s decision at the company’s request.

The trial court said North Carolina is an “at will” employment state. As a result, North Carolina law and 4th Cir. precedent did not allow the plaintiff’s wrongful termination without just cause claim. The arbitration panel had disregarded the law, the court said.

The plaintiff appealed the ruling. The 4th Cir. reversed the trial court’s ruling.

An arbitration clause “sky-high standard” of judicial review

The appeals court said vacating an arbitrator’s award is a “herculean task.”

The court explained that allowing full scrutiny of an arbitrator’s decision frustrates the purpose of going to arbitration which is resolving disputes quickly and avoiding the delay and expense associated with a lawsuit.

When reviewing an arbitration award, “a district or appellate court is limited to determining whether the arbitrators did the job they were told to do – not whether they did it well or correctly or reasonably but simply whether they did it,” the court said, quoting an earlier decided case.

The employer had failed to meet the high standard imposed when it claimed the arbitrators ignored North Carolina law and 4th Cir. precedent, the court said.

Overturning arbitration decisions is rare

Courts rarely reject arbitrator decisions. The process is legally binding. Appealing a decision can only happen in rare circumstances, such as a disregard for the law. As the 4th. Cir. said in this case that legal standard “is a sky-high standard of judicial review.”

Employers favor arbitration

Employers, especially large businesses, prefer arbitration to litigation. Clauses calling for mandatory arbitration are common in most employer-drafted employment agreements. The Economic Policy institute found that more than half of the workers it surveyed are subject to a mandatory arbitration clause.

Advocates cite many reasons for using arbitration:

• Confidentiality. Arbitration proceedings are generally private. This can be beneficial if the dispute might reveal embarrassing information.
• Arbitrators make decisions in less time than judges. Scheduling arbitration and having a resolution can happen in months. Litigation can take years, especially when it comes to getting a trial date.
• Flexible scheduling. Arbitration hearings can take place on weekends and evenings.
• Simple rules of evidence and procedure. Unlike the formal atmosphere of the courtroom, an arbitration can take place around a table.

That being the case, what process do workers prefer?

Worker advocates oppose arbitration

On the other hand, consumer advocates oppose arbitration. They argue that:

• Arbitration favors employers. Some studies have shown that employers tend to win arbitration cases.
• Workers’ options are limited when using mandatory arbitration in deciding how disputes should be handled.
• Arbitrators might have a conflict of interest if used by the same company repeatedly. The arbitrator might tend to make decisions in the company’s favor to stay employed.
• Appeals are difficult. The decisions can only be appealed in limited circumstances.
• Arbitration clauses often forbid class action lawsuits. Worker and consumer advocates view class actions as an important means of changing corporate behavior.

Employees sign arbitration agreements when they’re hired. They sign at a time when they can’t imagine needing an option.

Recent changes in the arbitration clause landscape

Notwithstanding the corporate preference for arbitration, employer reliance on the alternative method of dispute resolution has been reduced because of recent action by Congress and the courts.

The “Ending Forced Arbitration for Sexual Assault and Sexual Harassment Act” was signed into law on March 3, 2022. It forbids mandatory arbitration clauses in employment agreements for workplace sexual harassment or assault claims. The measure also applies to consumer contracts.

The U.S. House of Representatives took matters a step further on March 17, 2022. It passed the “Forced Arbitration Injustice Repeal Act (FAIR Act).”

The federal bill bans mandatory arbitration in a broader range of areas, including antitrust and civil rights matters. Although the White House has indicated support for the bill, the outlook for passage in the Senate is uncertain.

Courts recently made a move that curtails employer use of arbitration. The U.S. Supreme Court limited federal jurisdiction over arbitration awards under the Federal Arbitration Act (FAA) on March 22.

Arbitration clauses may be swinging toward the employee’s favor

On his firm’s blog, Christopher Murray and Hera Arsen, attorneys with the law firm Ogletree, Deakins, Nash, Smoak & Stewart P.C., said the decision means employers will “more often need to turn to state courts to confirm, modify, or vacate arbitration awards under the FAA.”

Arbitration, he said, could become “marginally less reliable” for employers because state courts “historically have been more hostile to arbitration than federal courts.”