Government Contractors regularly set up alternate dispute resolution (ADR) programs and, for good reasons, require their employees and independent contractors to agree to participate in such programs when hired or retained. Despite the predictability and uniformity that such ADR programs might promote when enforced, the enforceability of such mandatory programs is less predictable. As these three recent decisions highlight, arbitration agreements that contain terms designed to create a fair process and that are clearly articulated have the best chance to be enforced.
On March 13, 2013, Judge Liam O’Grady of the Eastern District of Virginia refused to enforce arbitration clauses in independent contractor agreements based on unconscionability. Winston v. Academi Training Center, Inc., Case No. 1:12-cv-00767-LO-TCB (Docket No. 54) (March 13, 2013).[i] In that case, the plaintiffs worked as firearms instructors as part of Academi’s contract to provide private security to the U.S. State Department. Plaintiffs sought to litigate claims under the False Claims Act (FCA) and state law for an alleged retaliatory firing resulting from alleged reporting of falsified records to the government. First, the court found that the agreements did not fully preserve the rights and remedies available under the FCA – and, therefore, the court would not require arbitration of the FCA claim – because the agreements precluded discovery altogether, and required plaintiffs to pay their own attorneys’ fees and costs no matter the outcome, whereas FCA claims require significant documentary proof and the FCA allows fee shifting. Second, the court found that it also would be unconscionable to enforce arbitration of the state law claims for the additional reason that the plaintiffs allegedly were rushed and pressured when presented with the arbitration agreements.
On April 3, 2013, Judge Susan Illston of the Northern District of California also refused to enforce arbitration clauses based on unconscionability in an action where the plaintiffs sought overtime compensation under the Fair Labor Standards Act (FLSA). Zaborowski v. MHN Government Services, Inc., Case No. 3:12-cv-05109-SI (Docket No. 68) (April 3, 2013). In that case, plaintiffs were engaged as independent contractors to provide counseling services for military service members and their families. Under applicable California law, a court may refuse to enforce an arbitration clause only if it is both procedurally and substantively unconscionable. Here, the court found that the agreement was procedurally unconscionable because it was a “contract of adhesion,” that was not negotiated fairly since one party had considerably more bargaining power than the other. Perhaps most importantly, the clause was buried as paragraph 20 of 23, not highlighted or set-off in any way, did not require a separate signature, and the signature for the contract was on a different page, and therefore could have “surprise[d]” the plaintiffs. The court then found that the agreement was substantively unconscionable because: (1) it created a six-month limitations period in which to bring claims; (2) the plaintiff had to select an arbitrator from a pool of three selected by the contractor; (3) the plaintiffs would be subject to significant forum fees of $2,600; (4) the arbitration agreement allowed for fee shifting that would not be allowed under federal and state law; and (5) the provision excluded punitive damages. However, the court did not find provisions problematic that limited discovery, required the arbitrator to apply the law and required claims to be brought in San Francisco, California.
In contrast, on April 3, 2013, Judge Cacheris of the Eastern District of Virginia compelled arbitration of individual claims and dismissed the class claims in a putative class action brought by employees seeking unpaid wages under Delaware law. Boatright v. Aegis Defense Services, Inc., Case No. 1:13-cv-00091-JCC-IDD (Docket No. 23) (April 3, 2013). In that case, plaintiffs provided security at a U.S. Embassy. The employees argued that the agreements were substantively unconscionable because: (1) employer had the sole discretion to determine whether claims would be arbitrated; and (2) the arbitrator was required to treat the proceedings as confidential. Judge Cacheris found that, because both sides were subject to the same rules during arbitration and both sides were equally bound by the outcome of the arbitration, the agreement was not so one-sided as to be oppressive. Judge Cacheris found that the confidentiality provision did not render the agreement unconscionable because nothing about that provision prevented plaintiffs or other claimants from obtaining relief.
While there is no one-size-fits-all arbitration clause that is guaranteed to be enforceable, there are two key points to consider. First, if a plaintiff cannot fairly pursue his claims before the arbitrator, courts likely will give that plaintiff an opportunity to do so in court. Contractors may be able to require employees and independent contractors to accept mandatory arbitration provisions in their contracts, and can set the rules to a certain degree, but those rules cannot prevent the employee or independent contractor from vindicating his or her rights. Where the rules apply equally to both sides and aim to streamline the process, rather than determine the outcome, courts are more likely to find the agreement to be substantively fair. Second, optics matter: arbitration clauses should be clearly visible and clearly understandable. Because the question of unconscionability turns on state law, the role of procedural unconscionability in the analysis will vary by jurisdiction. Nonetheless, where a plaintiff has been given an opportunity to read, acknowledge and agree to a clearly designated arbitration provision, that opportunity can only increase the likelihood that a court will compel arbitration if the plaintiff does not comply.
While these cases specifically related to government contractors, they are instructive as to the enforceability of arbitration agreements in general.
[i] The Supreme Court held in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), that the Federal Arbitration Act preempted California’s judicial rule that class arbitration waivers were per se unconscionable, but left arbitration agreements subject to contract defenses – including unconscionability – that apply equally to all contracts.