When Is Cost an Unlawful Barrier to Alternative Dispute Resolution? The Ever Green Tree of Mandatory Employment Arbitration


During its last term, the U.S. Supreme Court reaffirmed its approval of mandatory arbitration in Circuit City Stores, Inc. v. Adams and Green Tree Financial Corp.-Alabama v. Randolph. The 5-4 votes in these decisions show, however, that this public policy remains controversial.

Many firms now require employees to waive their right to sue on employment claims and to submit to their employers' exclusively selected arbitration procedures. Some of these agreements also require employees to pay large sums for arbitrator fees and other forum costs. Having no recourse to sue, these workers are denied access to any dispute resolution forum because they cannot afford arbitration. Courts have begun to scrutinize these barriers only recently.

Our Article presents the first empirical research on court enforcement of mandatory arbitration agreements that shift some or all forum and representation costs to employees. Analyzing sixty-two of these federal court decisions-most of which were decided since 1999-we find that district courts ordered arbitration in 77 percent of cases in which employees objected that arbitration was too costly to be an accessible forum. Only 50 percent of appellate decisions ordered arbitration.

These results suggest that even though there is a strong federal policy favoring arbitration of employment disputes, courts do not automatically preclude lawsuits. In particular, if a mandatory arbitration agreement creates a cost barrier to a private dispute resolution process, some courts void the entire agreement or rescind the cost-shifting provision.

We observe some preliminary empirical patterns among federal courts. Counting appellate and district decisions equally in each circuit, the Second, Third, Fourth, Fifth, and D.C. Circuits favored arbitration over litigation when cost was asserted as an argument against enforcement of these agreements. In contrast, the First, Sixth, and Tenth Circuits often denied arbitration in cost-challenge cases, thereby clearing the way for employment discrimination lawsuits. The Seventh, Ninth, and Eleventh Circuits had inconsistent patterns of ordering arbitration.

These conflicting trends reflect emerging doctrinal differences. The forum substitution theory holds that employees cannot be compelled to pay more than court filing fees-a nominal sum. In sharp contrast, there is the comparative cost doctrine. According to this view, employees can be required to pay thousands of dollars in arbitration costs. Judges who endorse this theory compare these expenditures to fully litigated disputes, which average about $50,000 in total costs.

Precedents are in place to institutionalize these competing doctrines. A January 15, 2002 decision, EEOC v. Waffle House, Inc., created a narrow exception to the pro-arbitration rulings in Circuit City and Green Tree, but failed to resolve the developing conflict among the circuits concerning cost-shifting. Thus, a future Supreme Court may need to clarify these fundamental differences in alternative dispute resolution (ADR) perspectives, and judging from the bitter and frustrated tone in Justice Stevens's Circuit City dissent, we believe that four Justices await the opportunity to right some of the wrongs they perceive in mandatory employment arbitration. Our Article also provides important insights to practitioners who draft, implement, or resolve workplace disputes under mandatory arbitration agreements.

About the Author

Michael H. LeRoy is a Professor at the Institute of Labor and Industrial Relations and College of Law, University of Illinois at Urbana-Champaign. Peter Feuille is a Director and Professor at the Institute of Labor and Industrial Relations, University of Illinois at Urbana-Champaign.

By uclalaw