Companies relying on arbitration clauses in their contracts must be more careful, particularly in employment discrimination claims, about how the arbitration is conducted, making sure that the proper procedures are followed. Otherwise, the lack of an adequate forum may rebound and render their arbitration agreement a nullity.
People expect arbitration awards to be “final and binding,” as arbitration clauses often recite. The Federal Arbitration Act and state laws provide for an extremely limited judicial review of such awards, restricted only to cases of an arbitrator’s fraud, manifest disregard of the law, conflict of interest, transcendence of his or her authority or similar egregious conduct. There is no explicit authority for a court to re-examine the factual determinations. In a rare example of theory-meets-practice, occasions where courts have overturned awards are almost nonexistent.
A recent decision, however, by the federal court of appeals in New York, and last month’s refusal by the U.S. Supreme Court to hear the appeal, bodes ill for businesses that assume that arbitration decisions cannot be upset. The decision has potential far-reaching effects for businesses relying on arbitration to resolve disputes, particularly with respect to employment discrimination claims. The case, Halligan v. Piper Jaffray, Inc., 148 F.3d 197 (2nd Cir. 1998), cert. denied, 119 S.Ct. 1286 (1999), involved a discrimination claim brought by an employee of a securities firm under the Age Discrimination in Employment Act (ADEA). Mr. Halligan, and later his estate, claimed that he was terminated in 1992 because of his age in violation of the ADEA. When Halligan was hired in 1973, he signed as a condition to employment and as required by the NASD a standard form agreement to arbitrate any future disputes. In 1993, Halligan submitted his ADEA claim for arbitration before a panel of NASD arbitrators. In 1996, the arbitrators rendered a written award denying any relief to Halligan’s estate. The award contained no explanation of a rationale for the result.
Halligan’s estate petitioned the federal district court to vacate the award, arguing that, given the strong evidence and clear description of the applicable legal standards, the arbitrators award reflected manifest disregard of the law. Piper Jaffray argued that, while the law was not disputed by the parties, the court’s function was not to review the merits of the arbitrator’s decision and that the award was supported by the evidence presented. The district court, holding that it was not the court’s role to second-guess the arbitrators’ fact-finding, refused to vacate the award, confirmed it and dismissed the lawsuit and confirmed the award.
The Court of Appeals for the Second Circuit disagreed, reversed the lower court’s decision and vacated the award. It also refused to remand the case to the arbitrators, instead permitting Halligan’s lawsuit to proceed in federal court. The court reasoned that the evidence presented “overwhelmingly demonstrated that Piper Jaffray’s conduct was motivated by age discrimination.” In view of the strong evidence of age discrimination, and that the arbitrators were briefed on the applicable law, the court inferred that the arbitrators ignored “the law or the evidence or both.”
The court emphasized the arbitrators’ decision not to explain their award. Issuing awards without any written explanation is commonplace in arbitration, particularly in an employment dispute, and the court noted that arbitrators are not required to offer explanations for their decisions. Notwithstanding, it held that, where the facts indicate that the arbitrators ignored the law, as occurred here, the court could, and would, take the failure to explain the award into account.
It would be an error to view this decision as one that is purely result-oriented or fact-specific. The most interesting aspect of the decision is that the court did not merely vacate the award, it refused to remand the case to the NASD for another arbitration. By this holding, the court effectively vitiated the agreement between the parties to arbitrate their disputes, permitting Halligan to sue in court instead. That holding is a clear message that transcends the specific facts of this case.
Moreover, the evidence proffered by Halligan was hardly as “overwhelming” as the court suggests. The incriminating statements that Halligan testified to were denied by Piper, and they were not corroborated by people who overheard the statements, but by Halligan’s contemporaneous notes. The evidence in the case was quite strong, and there was precious little proof of poor performance to rebut the charge, but calling the facts “overwhelming” was a stretch. Had the arbitrators in Halligan issued a written decision, it is questionable whether the court would have vacated the award, even in light of the “overwhelming” evidence. The arbitrators instead decided the case cavalierly, both in spite of strong proof and without bothering to explain how they reached their unlikely outcome.
What this means for businesses is that employment disputes are not necessarily beyond the reach of the courts, notwithstanding the parties’ agreement to arbitrate. The Halligan decision is a warning to the arbitration community – the courts will weigh the evidence in employment discrimination awards and may vacate an award if it is against the weight of the evidence, particularly where the arbitrator does not provide some analysis of his or her rationale.
The decision is also a warning to parties to arbitration agreements, particularly employers, that courts will void the agreement to arbitrate itself if faced with facts that call into question whether the arbitrators have afforded an impartial dispute resolution forum. The court noted that mandatory arbitration clauses for discrimination claims as a precondition to employment have come under criticism in recent years, particularly when the practice is industry-wide and driven, as with the securities industry. The court refused to pass judgment on these criticisms, but reference to them clearly creates a context for the decision.
The best practice is to keep the arbitrator “honest.” At the contract stage, a company should consider including in its contractual provisions a clause requiring the arbitrator to make detailed factual and legal findings and issue a written opinion. Arbitrators are required to, and will, follow the arbitration provisions of the parties’ contract. At the litigation stage, a company arbitrating a dispute, particularly an employment discrimination or other claim with some public policy aspect, should encourage and ask for a written opinion explaining the decision, even if the arbitrator is reluctant to issue one. During the hearings, the company should create a proper record, file briefs with the arbitrator, obtain a transcript and otherwise create a factual record, just as it would in court, even if the arbitrators are eager to conclude the proceedings. If taken, these steps can go a long way toward reducing the risk of re-litigating the dispute in court. If not taken, the company is well advised to keep its eyes peeled and be prepared to duck.
Further to the Arbitration article above, in Whale Securities Co. v. Godfrey, a Manhattan State Supreme Court Justice vacated an NASD arbitration award to Whale Securities Co. because the arbitrators would not grant an adjournment to the respondent, a former broker being sued for defaulting on a loan. Godfrey’s attorney had requested the adjournment because he was engaged in a Federal jury trial, and the arbitrators refused, requiring Godfrey to proceed alone or with a junior attorney. The Court held that the arbitrators’ refusal to grant a scheduled change constituted misconduct within the meaning of New York’s arbitration laws and rules (CPLR 7511(b)) and thus warranted vacatur. The court noted that, because the arbitration was compulsory, the scope of judicial review was broader than the usual arbitrary and capricious standard.