One-sided ADR Procedures Invalidate Agreement to Arbitrate

Issue: A bartender quit her job after she was allegedly grabbed and slapped on the buttocks by a company official (who was also the brother of the principal owner of the restaurant) and was told to “let it go” when she appealed to her manager for help. She claimed that the attack and the restaurant’s inadequate response constituted unlawful sexual harassment. The company responded that she was required to submit such claims to binding arbitration according to a predispute agreement. Raises, promotions and transfers were conditioned upon an employee signing the agreement. Part of the agreement stipulated that both sides agreed to resolve any claims pursuant to the company’s rules and procedures governing alternative dispute resolution. Employees were given five days to accept or reject the agreement, but no employee was given a copy of the rules and procedures.

The company filed suit to compel arbitration. The bartender argued that the agreement was unenforceable. Could the company compel arbitration?

Answer: No, because the company itself was found to have breached the agreement by drafting “egregiously unfair” arbitration rules. A number of federal appellate courts have upheld companies’ mandatory predispute arbitration agreements, but this case demonstrates that arbitration procedures must meet minimum due process standards. Here, procedures heavily weighed in the company’s favor were not accepted by the court.

What did the employer do wrong?
Under the agreement, the employer had complete control over the dispute resolution process. It set the rules and reserved the right to modify them whenever it chose, without notice to the employee. Nothing in the rules even prohibited the employer from changing them in the middle of an arbitration proceeding. The rules provided:

• The employee must provide notice of a claim, including the nature of the claim and the specific acts that form the basis of the claim. The employer, however, is not required to respond or to provide notice of its defenses.
• The employee must provide a list of all fact witnesses, but the employer need not.
• The employer provides the list of arbitrators from which the employee may choose. There are no limitations whatsoever on whom the employer can put on the list—it could even name its own managers. Nothing restricts the employer from punishing arbitrators who rule against it by removing them from the list. This ensured a “biased decision-maker.”
• The employer can expand the scope of arbitration to any matter—whether related to the employee’s claim or not—but the employee cannot.
• The employer is permitted to move for summary dismissal; the employee cannot.
• The employer, but not the employee, may record the arbitration hearing.
• The employer, but not the employee, may bring suit in court to vacate or modify an award that was rendered in excess of the arbitrators’ authority.
• The employer, but not the employee, may cancel the agreement to arbitrate with 30 days notice.

“Egregiously unfair.”
By drafting an agreement so “egregiously unfair,” the employer was in “complete default of its contractual obligation to draft arbitration rules and to do so in good faith,” said the court. Even a senior vice president of the American Arbitration Association testified that the company’s arbitration system was so unfair that the Association would refuse to arbitrate under the company’s rules.

Employer’s obligations.
Going forward, this employer will need to amend its rules and procedures to conform to minimal standards of due process, such as adopting the due process standards set forth by the American Arbitration Association. All employers that have mandatory arbitration agreements should thoroughly review the procedures and rules implementing the agreement to ensure they conform to minimum due process standards.

Cite: Hooters of America, Inc v. Phillips (4thCir 1999) 75 EPD 45,822, No. 98-1459.

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