Be Clear: Include Class Arbitration Waivers in Arbitration Clauses

This post was contributed by Esch McCombie, a Summer Associate with McNees Wallace and Nurick LLC. Mr. McCombie will begin his third year of law school at the Penn State University Dickinson School of Law in the fall, and he expects to earn his J.D. in May 2014.

The Supreme Court of the United States continued its hot streak in the arbitration and class action waiver arena with two recent decisions. These decisions are important for employers because they may offer employers a way control expenses related to dispute resolution with employees. Because those expenses can be so high, many employers are considering implementing employment arbitration agreements, consistent with the direction provided by the Court.

In Oxford Health Plans, LLC v. Sutter (pdf), the Supreme Court held that courts owe almost complete deference to arbitrators' interpretations of arbitration agreements. And, if an arbitrator determines that the parties agreed to allow class proceedings, a court should not overturn the arbitrator's interpretation no matter how "good, bad or ugly" the interpretation may be. This means that an employer could be forced into a class action arbitration even if not specifically provided for in an agreement. Just a few weeks later, however, the Supreme Court provided direction to employers to avoid the potentially troubling situation presented by Oxford Health.

In the subsequent decision, American Express Co. v. Italian Colors Restaurant (pdf), the Supreme Court held that individuals can waive their right to class proceedings under federal law by agreement.  In short, the Supreme Court ruled that the law only requires that individuals can pursue their statutory claims. Class action waivers, the High Court said, only effect individuals' abilities to prove, not pursue, statutory claims. The plaintiffs in Italian Colors attempted to bring a class action antitrust suit despite having signed a class action waiver. The expert fees to prove damages would cost over $100,000 (and perhaps up to $1 million) when even the treble recovery would be only around $35,000 per plaintiff. Without a class proceeding, the plaintiffs argued, they could not share this cost and their claims were therefore not worth the cost of proving them.

Nonetheless, the Supreme Court held that a class proceedings waiver is enforceable, unless there is no actual agreement under state law [because the agreement is "unconscionable," for example] or if a federal statute guarantees parties' rights to class proceedings for a particular claim. The Supreme Court left open the door for plaintiffs, however, to argue that excessive filing and administrative fees, as opposed to expert fees, meet an exception designed to prevent "prospective waiver of [the] right to pursue statutory remedies."

So, you might ask: What does this mean? It is simple, really. An employer who wishes to avoid class proceedings should have employees expressly waive that option in an agreement. In so doing, the employer not only removes the uncertainty associated with an arbitrator's interpretation of the agreement, but also helps ensure that class proceedings are avoided, assuming there are no statutory rights to class proceedings for the specific claim and that the agreement is not otherwise unenforceable. 

 

Three in a Row? That's a Trend

It seems like we have been spending a lot of time discussing successful appeals of arbitration decisions lately, which is been a good thing for Pennsylvania employers. Recently, we reported on two cases in which an employer successfully appealed a negative arbitration decision. Historically, such successful appeals have been difficult. However, the current trend continued when a decision from the Commonwealth Court of Pennsylvania, sitting en banc (as full court rather than simply a three judge panel), rounded out the trifecta.

In Pa. Dept. of Corr. v Pa. State Corr. Officers' Assoc. (pdf), the court was asked to analyze whether a grievance arbitrator's decision reinstating corrections officers accused of inmate abuse was rationally derived from the collective bargaining agreement, and of so, whether the award violated a well-defined public policy. You may recall from our prior posts that these questions call for the application of the "essence test" and the limited public policy exception to that test.

Let's take a step back.  The grievants had been suspended pending investigation of corroborated allegations of inmate abuse, and the union filed grievances challenging the suspensions. The first issue before the arbitrator was whether the grievances were timely filed. The parties' agreement required that grievances be filed within 15 days of the alleged "occurrence" giving rise to the dispute. The arbitrator found that the grievances were in fact timely filed, even though they were filed well beyond 15 days after the implementation of the suspensions. The arbitrator reached this conclusion by finding that the suspensions constituted continuing violations of the agreement. The arbitrator held that, as a result, the grievances were timely filed even if back pay would be limited to the date the grievances were filed. Basically, the arbitrator held that each day of suspension gives rise to a new occurrence, triggering a new 15 day period.

What did the court have to say?  The court disagreed and succinctly concluded that the arbitrator's decision, which did not cite to any provision of the agreement, lacked foundation in and failed to logically flow from the agreement. Put simply, the arbitration decision failed the essence test. The court did not reach the issue of whether the decision would violate a public policy.

So what?  For those of us with responsibilities for responding to grievances, this decision is significant. The court seems to have thrown out the continuing violation theory, a theory that unions often rely on when grievances are untimely filed, but there is some ongoing impact on the grievant.  Because most agreements prohibit an arbitrator from adding language to the agreement, as the agreement did here, without a specific provision providing for its use, employers should strongly consider taking the position that the continuing violation theory is dead.

Appealling An Arbitration Decision - A Success Story Part II

The Supreme Court of Pennsylvania recently confirmed that sexual harassment is against public policy. Seems like a no brainer, right? The court seemed to agree, stating that the decision in Phila. Housing Authority v. AFSCME, District Council 33, Local 934 [WARNING EXPLICIT] (pdf) was not "a difficult case." So, why did it take over a decade to reach this conclusion?

Let's look at what happened.  The union representing an employee of the Philadelphia Housing Authority filed a grievance challenging the employee's termination for sexual harassment. An arbitrator reinstated the employee, with back pay, despite finding that the employee was not credible and had refused to take responsibility for his "lewd, lascivious and extraordinary perverse" physical and verbal harassment of a coworker. After the decision was appealed and wound its way to the court (for the second time), the court held that it was against public policy for an arbitrator to reinstate an employee who was terminated by a public employer for engaging in physical and verbal harassment. Although the arbitrator's award was entitled to deference under the essence test, the award essentially amounted to a reward for the employee's borderline criminal behavior and was contrary to the clear public policy prohibiting sexual harassment in the workplace.

You may recall from our prior posts that the essence test is an extremely deferential standard of review by which courts review the decisions of arbitrators. Under that test, if an arbitrator's decision is grounded in the collective bargaining agreement, and is rationally derived from that agreement, then the court will not disturb the arbitrator's findings. In the majority of cases, the courts simply defer to the decision of the arbitrator.  So what happened here? 

The court has carved out a limited exception to the essence test, known as the public policy exception. This exception may be used to vacate arbitration decisions that violate well defined public policies. The exception was first recognized while the Phila. Housing Authority case was already on appeal, which explains why this case took so long to decide. When this case made it back to the court a second time, the court was given the opportunity to provide guidance for determining when an arbitrator's decision violates a "well defined and dominate" public policy.

In explaining the contours of the exception, the court stated that while an arbitrator's decision is entitled to deference, such deference cannot allow the court to sanction a violation of such a clear public policy as the prohibition of sexual harassment in the workplace. The court noted that the arbitrator reinstated the employee even though he engaged in physical and verbal harassment of his female coworkers and demonstrated no remorse for his behavior. The decision amounted to a reward for the employee in this case. The court concluded that any other holding would essentially eliminate the public policy exception to the essence test.

The court's decision was limited to the specific facts of the case, and while the court noted that a public employer should be free to implement a zero tolerance policy for sexual harassment, the court and both parties agreed that termination is not necessarily the appropriate level of discipline in every case of harassment.  So, about that guidance for future cases . . . well if your arbitration decision lacks a "reasonable, calibrated, defensible relationship" between the conduct violating public policy and the arbitrator's response, you may have a basis for appeal.

Translation: the courts know it when they see it, and everyone knows that under any analysis, sanctioning sexual harassment is against public policy.
 

Appealing an Arbitration Decision - A Success Story

Recently, the Commonwealth Court of Pennsylvania issued an interesting decision involving the appeal of a grievance arbitration decision filed by a Commonwealth Agency – the Pennsylvania Department of Corrections. The decision, Department of Corrections v. Pa. State Corrections Officers' Association (pdf), offers unionized employers a reminder of the difficult hurdle that they face when appealing a grievance arbitration decision. But the decision also demonstrates that such appeals can be successful.

The decision resolved a conflict between the Department and the union that represents the Department's corrections officers regarding how positions, or posts, would be filled at state correctional facilities. The union was seeking to have all (or nearly all) posts be designated as “bid posts.” A bid post is one where, upon vacancy, the position would be filled according to a seniority bidding procedure that, in effect, left the choice to the officers. The Department, on the other hand, was trying to limit the number of bid posts so as to retain its right to assign employees to posts at its discretion. Bid posts had been a point of contention between the parties for some time and had been the subject of many prior disputes. In the past, the individual correctional facilities were left to determine through negotiations with the local union which posts would be designated as bid posts at the particular institution. This approach lead to a great deal of inconsistency in the designation of bid posts across the Department.

The parties continued to struggle over the bid post designation, and eventually an arbitrator defined the criteria to be used to designate jobs as "bid post" positions. The arbitrator’s definition of bid post was incorporated into the parties' 2008-2011 Collective Bargaining Agreement (“CBA”). The CBA also directed the parties to review all existing posts and mutually determine whether each post satisfied the arbitrator’s definition for a bid post. Not surprisingly, the parties could not agree on the application of the definition to the posts. In fact, the parties were unable to reach agreement on a single post designation. To break the logjam, the parties again turned to an arbitrator, who was asked to review every post in every correctional facility to determine whether it was a bid post.

This second arbitrator reviewed every post and, applying the original arbitrator’s definition, determined which posts would be bid by seniority. Interestingly, the arbitrator ordered that any post that previously had been designated as a bid post at the local level, whether it met the new definition or not, was also to remain a bid post. As this approach significantly increased the number of bid posts, the Department appealed this portion of the arbitrator's decision to the Commonwealth Court. On appeal, the Department argued that the arbitrator, by grandfathering the bid post designation for certain posts regardless of whether they met the new definition, contradicted the language of the CBA.

Those with experience in grievance arbitration know that attempting to overturn an arbitrator's decision can seem nearly impossible.

In fact, the Commonwealth Court noted in this case that courts owe great deference to arbitrator's decisions. Courts apply what is known as the "essence test" to review arbitration decisions on appeal. Under the essence test, an arbitration decision will be upheld so long as it is rationally derived from the language of the agreement. Only where the decision completely lacks foundation in, or fails to logically flow from, the collective bargaining agreement will it be overturned. In applying the essence test, a court does not consider whether the arbitrator's decision is factually or legally correct. Even where the court disagrees with the arbitrator’s interpretation or believes that the award is legally incorrect, the interpretation will be upheld as long as it is rationally derived from the language of the agreement.

Only if the decision is wholly illogical and altogether inconsistent with the language of a collective bargaining agreement will it be subject to reversal on appeal under the essence test. To be sure, this is a rather high hurdle to get over in most cases.

The Commonwealth Court concluded that, in this case, the arbitrator's decision, specifically the grandfathered bid post designations, was illogical. The Court found that not only was this portion of the award contrary to the language of the agreement, it was also contrary to the arbitrator's own conclusion! The arbitrator himself noted that some of the grandfathered bid post designations were inconsistent with the criteria set forth in the CBA, but nonetheless retained the bid post designation.

The Court concluded that the arbitrator acted with complete disregard for the CBA’s language when he reasoned that posts that did not meet the new bid post definition should nonetheless be designated as such. This portion of the arbitrator’s decision failed the essence test to the extent it was illogical and could not be reconciled with the language of the CBA.

Many labor practitioners have probably received arbitration decisions that have left them scratching their heads. This decision, while again highlighting the difficulty of successfully appealing an arbitration decision, provides a glimmer of hope.  If a decision is completely irrational, illogical and contradictory, it can be successfully overturned.
 

Arbitration of Discrimination Claims upheld by U.S. Supreme Court

The United States Supreme Court upheld a provision in a collective-bargaining agreement that clearly and unmistakably requires union members to arbitrate ADEA claims is enforceable as a matter of federal law. Accordingly, there is no legal basis for the Court to strike down an arbitration clause in a collective bargaining agreement, which was freely negotiated by a union and company, and which clearly and unmistakably requires employees to arbitrate the age-discrimination claims. However, the Court declined to rule on specific factual issued related to whether the waiver of discrimination claims under the contract by employees' in this case was clear and unmistakable. It also would not rule on whether the contract waived substantive rights protected by federal law which could not be vindicated in an arbitration. These issues were not properly before the Court.

The decision in 14 Penn Plaza LLC v. Pyett has important implications for unionized employers who face employment discrimination charges and lawsuits. These claims may be forced into the arbitration forum and out of court depending on the language in the contract. The scope of the arbitration clause including any limitations will be an important focus of future litigation.