On March 3, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act, a new law that invalidates clauses in employment agreements that were forcing employees to arbitrate claims of sexual assault or sexual harassment—prohibiting them from suing the employer on their own or joining class action law suits. Professor Deborah Hensler led the Stanford Law policy practicum Examining Mandatory Arbitration and NDAs for Gender Discrimination Claims that explored the use of arbitration and non-disclosure agreements, with its client Lift Our Voices, the advocacy group founded by former Fox News star Gretchen Carlson that focused on sexual harassment at the workplace. Here, Professor Hensler discusses the new law and issues of mandated arbitration, class actions, and NDAs.
What are the key points of the new law?
The amendment, in lay terms, states that despite other provisions of the Federal Arbitration Act, a mandatory pre-dispute arbitration clause in a contract of adhesion in employment disputes cannot be enforced by an employer where the claims are for sexual harassment or sexual assault. In other words, even if an employee has signed an employment agreement that includes an arbitration clause and they subsequently have a sexual harassment or sexual assault claim against the employer, they cannot be required to arbitrate.
Does the new law prohibit arbitration?
It’s important to note, because it’s been an issue, that this does not prevent an employee from saying that she/he/they want to bring this claim to arbitration. And, an employee might well do that. They might want the confidentiality that’s provided by arbitration. They might think it will be faster. They might think that, assuming they can hire a lawyer, it will be less expensive than it would be to litigate. There are lots of reasons for wanting to go to arbitration and the new law does not keep an employee from doing that.
How widespread are mandatory arbitration agreements in American employment?
The standard statistic is that 60 percent of workers are covered by these agreements. But the evidence for that statistic is shaky. It comes from one study that was then updated, but it’s the best data we have. But we have every reason to believe that a very large percentage of workers, particularly workers employed by large corporations, have signed employment agreements that include these arbitration clauses. If you work for a small company with five or six employees, a neighborhood business, et cetera, they may well not include this clause. The clauses are more characteristic of large U.S. corporations, although, many law firms and other professional firms include such clauses in their employment agreements, as well. Importantly, we seem to have gone from a small fraction of workers covered by these agreements to some number like 60 percent in just a few decades.
Why do you think there was such a big increase in the number of workers covered by these agreements in such a short timeframe?
Well, here’s what I think was the corporate counsels’ calculus: If a case is litigated, there is a potential for it to go to a jury trial. And the overwhelming view of lawyers is that when cases have the potential to go to a jury, if plaintiffs win the dollars are likely to be larger. And there is a perception that juries are very friendly to plaintiffs. It’s not clear that the data support that, but a lot of what happens in the legal system, as in the rest of our lives, is driven by anecdotes. Whereas an arbitrator sitting in private—knowing it would not be disclosed, and the plaintiff would not be talking to other people—might award a smaller amount.
So, there was perceived to be a significant cost benefit to a corporation for having a forced arbitration clause? Anything else?
On the surface, the benefit to the corporation—and the corporation’s lawyers would argue the benefit is also to the workers—is that arbitration has been traditionally viewed as being faster, more efficient, and usually providing confidentiality, because the decisions that arbitrators issue have historically been kept private. That’s beginning to change, but in these kinds of cases my expectation is they would still be private, not publicized. And the fact that the arbitration had even taken place may not be public. So, from the corporation’s standpoint, one could argue it protects their reputation.
Did class actions have anything to do with the increase in mandatory arbitration clauses in employment?
Yes. About 25 years ago, some very smart general counsels for large corporations thought they could include in their arbitration provision, a provision that says not only that the employee will be required to arbitrate, but that she won’t be a member of a class action. My own research shows that this was a period when the number of class actions was increasing and the size of the class actions were increasing. And you might remember some 10 years ago the Walmart case when a million female workers brought a class action against the company. Walmart apparently at the time did not have an arbitration clause. So, corporate counsel started including anti-class action language in their arbitration clauses. Of course, most workers didn’t know what that meant. Initially, when some workers tried to join class actions, the lawyers argued to the courts that this was essentially an “unconscionable” use of the arbitration agreement because it was coercing people into giving up their rights to participate in a class action, which was really what makes them more powerful when they are bringing a dispute against some kind of corporate practice.
And fast forward, there were a lot of cases challenging these provisions, but in the end, the U.S. Supreme Court not only supported the use of arbitration clauses to preclude class actions, but also said it was entirely acceptable to have the agreements say that an employee can’t bring something like a class action in arbitration.
Can we talk about NDAs? The perception is that they have been used as muzzles to shut women up—and to prevent discipline and justice for serial sexual harassment and sexual attack offenders.
Yes. Because of the privacy and lack of publicity that arbitration forced, women were less likely to talk to each other and, even when some of them were filing similar claims with complaints about the same person in arbitration, the different parties wouldn’t know. And then companies often forced plaintiffs to sign nondisclosure agreements, or NDAs, after they settled their case, that forced them to agree not to tell anybody. The important thing to keep in mind, though, is that absent mandatory arbitration, those same women could have gone into court and would still have signed an NDA. The NDA is not a product of arbitration—it is a product of how our settlement system works.
And what about class actions within arbitration?
So, up until the Federal Arbitration Act was amended this month, the only chance that workers covered by arbitration agreements had to bring any kind of complaint against their employer was in arbitration and all by themselves. They could not join together with anybody else in a class action.
Denying employees the right to join in a class action really curtails their ability to push back, doesn’t it?
What we know from U.S. class actions is that they are a way of empowering people who, if they had to proceed individually, are not going to do very well.
Are these types of agreements used in many parts of the world?
In many jurisdictions outside the U.S., these clauses are unenforceable because other countries’ legislatures and judiciaries view them as unfair. It’s not that they view arbitration as unfair. They would say that if people want to choose arbitration, they support that. The issue is that we’ve been forcing people into arbitration and we’re almost unique in that regard. And so, in my normative framework, I also think that’s inappropriate because I think it unfairly discriminates against the less powerful people in the society.
So, over the last few decades, this forced arbitration clause found its way increasingly into employment contracts. The courts didn’t stem the tide?
Taking a step back, if we look at the legislative history, I do not believe that the Congress that passed the Federal Arbitration Act intended for it to be used that way. The intention was for it to be used in business-to-business transactions. When doing a deal there can be an agreement from both parties that they’ll arbitrate if there’s a problem. That can be written into the contract being negotiated by both sides. That was what arbitration was for when the FAA was passed. The idea that it could be used in a coercive way is a construction of the U.S. Supreme Court. It’s actually an example of judicial activism. They’ve created this entire jurisprudential structure with a series of decisions which built upon each other. Now there’s this whole super structure supporting mandatory arbitration. One reason why the new law is a big deal is it’s the first chink in that super structure. And one reason why there was so much opposition to this legislation, and why a lot of people, including me, were surprised that it actually passed, is because there are powerful corporate interest groups that are now asking “Now we’ve carved out sexual harassment claims. What’s next?”
Does the new law correct that judicial activism?
To a degree. This is a victory for interest groups, individuals, et cetera, who oppose this use of arbitration, but it’s a quite narrow victory. And there’s little reason to believe that anytime soon this will be expanded. The House just passed a broader amendment but unlike the vote on the amendment President Biden signed a couple of weeks ago, which had bipartisan support in the House and passed on a voice vote in the Senate, the vote on the broader amendment was strictly partisan. And there’s currently no schedule for bringing it to the Senate.
You mention civil rights. What other employment areas are limited by forced arbitration—and will not be helped by this new law?
In the federal system, it’s Title VII, covering all the worker rights for things such as fair promotion, gender discrimination, race discrimination, and sexual orientation discrimination. That whole panoply of rights. And forced arbitration prevails in the consumer context as well. If you have a claim that you’ve lost money as a result of a violation of some marketplace regulation like the regulations that govern financial institutions, or the regulations that govern how much your cable service provider can charge you, that’s likely covered by a mandatory arbitration agreement as well. And importantly, in those kinds of consumer cases, the consumer is unlikely to be successful if she has to pursue a claim individually because usually there’s a small amount of money at stake for each individual.
And these customers might be prevented from joining a class action too?
Right. The legislation that just passed the House of Representatives tries to do away with this prohibition in all kinds of claims, including consumer claims.