October 1998

Workplace Labor Update - Fair ADR is Enforcable ADR – October 1998

5 min

In theory, a jury trial is designed to bring fair and impartial justice to the resolution of a dispute. But in the real world of employee relations, a jury trial can be expensive, time-consuming, and plagued with long delays. Moreover, the results of a jury trial are often disappointing: juries are, at best, unpredictable. In contrast to court litigation, arbitration compares favorably as a means for resolving employment disputes -- including statutory employment disputes such as those that arise under Title VII, the ADEA, and the ADA. Both employees and employers often find arbitration less costly, speedier, and more efficient than litigation. Employers will often find that a more reasonable decision is likely to come from an experienced and knowledgeable arbitrator who understands employment law and the realities of the workplace than from a panel of unknown jurors who might be guided by their own subjective notions of workplace justice. In order to implement a valid and enforceable agreement to arbitrate, however, employers must remember that both the agreement itself and the procedural rules governing the arbitral process must be fair. Further, an employer should not use arbitration as a means to change an employee's substantive rights. To this end, the American Arbitration Association has adopted a "protocol" for the arbitration of statutory disputes arising out of the employment relationship that sets forth clear standards to ensure the fairness of the arbitral process.

A recent case decided by the federal district court in South Carolina illustrates what happens when an employer departs from this protocol. In Hooters of America, Inc. v. Phillips, No. 4:96-3360-22, 1998 U.S. Dist. LEXIS 3962 (D.S.C. March 12, 1998), the court refused to compel arbitration of a Title VII sexual harassment claim because the employer failed to provide the employee with a copy of its rules pertaining to arbitration and because those same arbitration rules placed employees at a considerable disadvantage during arbitration proceedings. The restaurant chain "Hooters" decided to implement an ADR program in early 1994 -- a decision prompted, in part, by a desire to limit exposure to sexual harassment litigation. Hooters unveiled its program to approximately twenty "Hooters Girls," including the plaintiff, at its Myrtle Beach, South Carolina facility in November of 1994. The facility's general manager read aloud the terms of the arbitration agreement to employees. Although the agreement referenced the applicable arbitration rules, which had been drafted by the company's general counsel, Hooters did not distribute the rules or make them available to employees along with the agreement. Hooters informed employees that they could consult an attorney before signing the agreement and instructed employees to "hold" the agreement for five days before executing it. Although employees who refused to sign the agreement would not face termination, Hooters made clear that those employees would forfeit opportunities for future advancement.

The court found Hooter's arbitration rules riddled with both substantive and procedural deficiencies calculated to give Hooters the upper-hand during arbitration. For instance, the rules gave Hooters control over the selection of arbitrators by requiring that all arbitrators be chosen from a list of "Approved Arbitrators," compiled and maintained by Hooters, and permitted Hooters to unilaterally modify the rules and bind employees retroactively to such modifications. The rules also imposed severe limitations on the discovery available to employees -- limiting employees to only one deposition, requiring that only the employee disclose the identity of her witnesses, and granting Hooters the sole discretion to preserve an official record of the arbitration or to seek judicial review. The court found most disturbing the fact that the rules also required employees to forego substantive Title VII rights, including the right to back pay and compensatory and punitive damages and the imposition of a higher burden of proof on employees than ordinarily required under Title VII.

In refusing to enforce the arbitration agreement, the court concluded that Hooters had failed to demonstrate the existence of a valid contract. Under the Federal Arbitration Act, the party who seeks arbitration must first show the existence of a valid written agreement for arbitration. According to the common law, in order for a valid agreement to exist the parties must reach a "meeting of the minds" with respect to all essential and material terms of the agreement. While arbitration rules typically do not constitute a "material" term because they are procedural in nature, the court held that the Hooters' rules did because of their impact on an employee's substantive Title VII rights. Because the arbitration agreement itself did not alert the plaintiff to the fact that by signing the agreement her substantive rights would be curtailed, and because Hooters failed to provide the plaintiff with a copy of its rules, the court concluded that no meeting of the minds had taken place. For the same reasons, the court also concluded that Hooters failed to show that the plaintiff's waiver of her substantive statutory rights was "knowing and voluntary." Further, court held that the arbitration agreement was both unconscionable and in violation of public policy. In so ruling, the court pointed to the severe injury the plaintiff would suffer as a result of the unfair, one-sided provisions in the rules and the disparity in bargaining power and sophistication between the two parties.

Hooters has appealed the decision to the Fourth Circuit. Although this decision is not currently binding on Maryland courts, it serves as useful guidance to employers about how not to draft an arbitration agreement and arbitration rules. Employers are well advised to consult competent labor counsel before implementing an ADR program. We will apprise our readers of further developments with respect to this case.