Forced Into Arbitration? Not Any More

More employees are saying it's unfair--and many judges agree

When Marybeth Cremin joined Merrill Lynch & Co.'s broker training program in 1982, she paid little attention to the contract she signed requiring her to take any dispute with the financial services giant to an arbitrator. This "mandatory arbitration" policy, similar to those at hundreds of other companies, barred her from ever suing Merrill Lynch in court.

When Merrill fired Cremin in 1995, the then 38-year-old mother of four suddenly regretted having consented to those terms. She believes she was illegally terminated for exercising a basic right: having children. Throughout her stay at Merrill Lynch, Cremin claims, her boss demeaned her for trying to combine family and career. Finally, Cremin's complaint says, he badgered her into quitting and accepting a part-time position--which never materialized.

But even though Cremin believes she has a strong case, Merrill's mandatory arbitration policy means that she will never get a chance to seek compensation before a jury. So now, Cremin is the lead plaintiff in a sexual discrimination class action that is trying to strike down the company's arbitration program. "I didn't know I'd signed away my constitutional rights," she says. "I was 21, just out of business school. I was dumbfounded when I found out." Merrill Lynch denies the allegations of sexual discrimination and contends that its mandatory arbitration policy is legal.

Cremin is not the only one crying foul. Ever since 1991, when the U.S. Supreme Court approved the use of mandatory arbitration for workplace disputes, the number of companies implementing the practice has soared. Employers praise the procedure as an antidote to runaway litigation costs. After all, 70% of the cases in mandatory arbitration are decided in favor of the company, and damages are generally lower than those in court.

Employees, though, are increasingly convinced that the system is allowing companies to break laws prohibiting sexual, religious, and racial discrimination, among other things. But until recently, people such as Cremin had little chance of escaping the in-house system.

UNDER ATTACK. That's rapidly changing. For at least a year, a broad backlash against mandatory arbitration has been gaining force. Companies with policies that strip away too many employee rights are seeing their policies attacked, and sometimes disregarded, by judges, federal agencies, and organizations and private companies that provide arbitrators (table). And on Mar. 2, the U.S. Supreme Court decided to hear a case brought by a South Carolina longshoreman who is trying to break free of his employer's mandatory arbitration program to bring a disability claim. A high court ruling against the company could sharply limit the use of such policies.

While this backlash is no threat to other forms of "alternative dispute resolution"--for example, mediation and voluntary arbitration--it's forcing many employers to reevaluate the legality of their current mandatory arbitration schemes. Others that had plans to implement binding arbitration programs are putting them on hold, says New York City attorney Wayne Outten, president of the National Employee Rights Institute. "A lot of companies that have been considering mandatory arbitration are afraid of the brouhaha," he says.

The most recent blow against mandatory arbitration occurred in February, when a Boston federal judge refused to apply Merrill Lynch's policy in a sexual discrimination suit brought by a broker prior to the Cremin class action. There, the plaintiff's attorney showed that arbitrators sided with brokerage firms in 93 out of 97 cases brought against New York Stock Exchange members over the past five years. In November, meanwhile, Smith Barney agreed to give workers new rights under its mandatory arbitration policy to settle a New York sex discrimination suit.

In November, the National Association of Securities Dealers announced that it wants to delete the mandatory arbitration requirement from the form brokers fill out to be registered. Triggered by the mounting complaints about such programs, the proposal is under consideration by the Securities & Exchange Commission.

HIGHER STANDARDS. It isn't just the securities industry that's feeling the heat. In May, 1997, a Maryland federal court ruled that Circuit City Stores Inc. could not force its arbitration program on a job applicant accusing the company of race discrimination. And in January of that year, a state court in San Francisco disregarded a program of hair salon chain Supercuts Inc. because it limited employees' potential damages (the case later was settled). "Finally, some courts are beginning to say we are going to have some standards here. We are not going to just go with anything the employer tries to do," says Ellen J. Vargyas, legal counsel for the Equal Employment Opportunity Commission. Over the past three years, the EEOC has filed briefs opposing mandatory arbitration in more than 25 employee lawsuits.

Rising opposition to binding arbitration has caught the attention of the major associations that supply arbitrators for the approximately $200 million industry. Fearful that companies will stop using the process if too many judges disregard it, they are raising their standards. Last summer, the American Arbitration Assn. issued a statement saying employment disputes are best resolved when the parties "knowingly and voluntarily agree on the process"--an unprecedented swipe at mandatory arbitration.

The National Academy of Arbitrators, meanwhile, in May issued new guidelines calling for both sides to have equal rights of representation and factual investigation. "Many employers have adopted plans [that] are quite unfair," acknowledges past President George Nicolau. That's the kind of thinking Marybeth Cremin is banking on to keep her out of arbitration. And the rising chorus behind her gives Cremin a fighting chance to get her day in court.

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