Mandatory arbitration in the securities industry: Efficiency at the cost of justice for all?

I. INTRODUCTION

Christine Litaker was an African-American administrative assistant working for Lehman Brothers, one of the major brokerage houses in the United States.1 Because of her gender and race, her boss regularly called her a "black bitch,"2 and other employees

frequently used the term "lazy nigger."3 Moreover, one senior vice president constantly touched her and also grabbed other female employees.4 After years of blatant sexual harassment, Lehman Brothers fired Litaker the week her maternity leave was set to begin, despite an "excellent" performance evaluation.5 Litaker subsequently brought suit in federal court against Lehman Brothers for sex and race discrimination, but the court dismissed the case and granted Lehman Brothers' motion to compel arbitration.6 Litaker now faced the prospect of presenting her case not to a jury of her peers, but rather to a homogenous industry arbitration panel comprised of mostly white, older males.7

This frightening scenario represents a common problem in the securities industry. Christine Litaker slammed into a little known, but extremely daunting roadblock many employees working in the securities industry face: predispute arbitration clauses.8 As an employee in the securities industry, Litaker had to sign, at the commencement of her employment, the Uniform Application for Securities Industry Registration or Transfer, more commonly called the Form U-4.9 The National Association of Securities Dealers (NASD), through the Form U-4, requires every employee who deals directly with the public in the purchase and sale of securities to resolve all employment-related disputes through arbitration. 10

In signing the mandatory arbitration agreement, employees within the industry are denied court-provided rights such as due process, trial by jury, appellate review, and full discovery. 11 "In essence, mandatory arbitration contracts reduce civil rights protections to the status of the company car: a perk which can be denied at will."12 While seemingly unfair, arbitration as a method of alternative dispute resolution (ADR) has a long tradition in American jurisprudence. In 1925, Congress established a policy favoring arbitration when it enacted the United States Arbitration Act,13 today called the Federal Arbitration Act (FAA).14 The FAA provides for the enforcement of valid, written arbitration clauses in contracts involving transactions in interstate commerce.15 Accordingly, the FAA expresses a strong federal policy favoring arbitration.16 That policy has been articulated at all levels of the federal judicial system, including the U.S. Supreme Court. 17

Moreover, the use of arbitration in the securities industry to resolve disputes has a tradition that even predates the FAA.18 Participants in the securities industry have created their own organizations, rules, and practices to promote the fair and efficient operation of financial markets (namely, mandatory arbitration procedures) for over 150 years.19 Use of arbitration, rather than litigation, to resolve disputes is a long-established industry practice used in the securities industry since at least 1817.20

Nevertheless, despite Congress's policy favoring arbitration, the enforceability of mandatory arbitration clauses is under siege in the courts, administrative agencies, and even in legislatures. For example, the Ninth Circuit Court of Appeals recently held that the 1991 amendments to the Civil Rights Act of 1964 preclude compulsory arbitration of claims arising under Title VII of that Act.21 Other courts continue to find that mandatory arbitration agreements are enforceable and consistent with the strong federal policy favoring arbitration, making this issue ripe for Supreme Court review.

This Note focuses on mandatory arbitration within the securities industry and argues that the practice fails to comport with the current status of our nation's civil rights laws. Mandatory arbitration creates a disparate impact on and undermines the statutory rights of minorities and women. Parts I and II trace the development of mandatory arbitration contracts and examine recent resistance to their application in the context of civil rights.22 Part III evaluates the pros and cons of mandatory arbitration23 and reviews the current discrepancy in the circuit courts regarding the enforcement of mandatory arbitration clauses in employment discrimination cases.24 Part IV scrutinizes the enforcement of mandatory arbitration contracts in the context of federal statutory claims of racial discrimination and sexual harassment.25 Part IV ultimately concludes that the resulting inequities and prejudices outweigh efficiency arguments supporting mandatory arbitration.26 This Note concludes by advocating the need for reform within the securities industry, which can best be achieved by instituting a voluntary system with better internal monitoring and quality control procedures.27

II. THE LEGAL DEVELOPMENT OF MANDATORY ARBITRATION

A. The Federal Arbitration Act

Prior to the 1990s, the majority of courts viewed mandatory arbitration contracts as unenforceable in the context of statutory employment claims.28 In 1925, however, Congress paved the way for the institution and enforcement of mandatory arbitration agreements by enacting what is known today as the FAA.29 The purpose of the FAA, which provided for the enforcement of valid, written arbitration clauses involving

commercial transactions,30 was to "reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts."31

Section 2, the primary substantive portion of the Act, states:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.32

The FAA allows for a stay of proceedings in federal district court "when an issue in the proceeding is referable to arbitration," as well as "for orders compelling arbitration when one party has failed, neglected, or refused to comply with an arbitration agreement."33 Since its enactment, the FAA has been broadly interpreted as expressing Congress' desire to encourage arbitration.34 In fact, it seems to be the strongest legal argument for enforcing mandatory arbitration agreements, even though doubts about whether the FAA even applies to employment contracts exist.35

B. Case Law

I Alexander v. Gardner-Denver

The Supreme Court first addressed the enforceability of mandatory arbitration agreements in Alexander v. Gardner-Denver Co.36 Harrell Alexander, an African-- American, was discharged from his position as a drill operator trainee at Gardner-- Denver's plant.37 Because Alexander's collective bargaining agreement (CBA) governed his employee rights, Alexander filed a contract-based claim (as distinguished from a statutory claim) against Gardner-Denver.38 Alexander submitted to the grievance-- arbitration procedure outlined by his CBA, and in the final pre-arbitration step alleged that his employer terminated him on the basis of his race.39 Under the CBA, "the company retained `the right to hire, suspend or discharge [employees] for proper cause.-40 Before the arbitration hearing, Alexander filed a complaint that eventually reached the attention of the Equal Employment Opportunity Commission (EEOC).41 The arbitrator later issued a ruling that Alexander had been "`discharged for just cause.",42 The Commission then issued a right to sue letter to Alexander, who filed suit under Title VII of the Civil Rights Act of 1964 (Title VII)43 with the district court.44 The district court granted the employer's summary judgment motion on the ground that the arbitration decision precluded Alexander from bringing a judicial action.45 The Tenth Circuit Court of Appeals affirmed the district court's decision, and the Supreme Court granted certiorari.46

The U.S. Supreme Court unanimously held that employees under a CBA are free to litigate statutory claims under Title VII in federal court.47 The Court's rationale was that an employee's contractual rights under a CBA are distinct from the employee's statutory

rights under Title VII.48 The Court reasoned that by submitting a grievance to arbitration, an employee seeks to resolve a contractual right provided by the CBA.49 However, in filing a lawsuit under Title VII, the employee is asserting "independent statutory rights accorded by Congress."50 As such, "no inconsistency results from permitting both rights to be enforced in their respectively appropriate forums."51

The reason for the difference in treatment is that an arbitrator only has the authority to resolve contractual disputes to construe the intent of the parties.52 The Court stated that the arbitrator does not have the "general authority to invoke public laws that conflict with the bargain of the parties."53 The Court stressed that "there can be no prospective waiver of an employee's rights under Title VII."54 Accordingly, the Court concluded that "the federal policy favoring arbitration disputes and the federal policy against discriminatory employment practices can best be accommodated by permitting an employee to pursue fully both his remedy under the grievance-arbitration clause of a CBA and his cause of action under Title VII."55

Overall, Alexander manifests a strong aversion to compelling mandatory arbitration of Title VII claims. The Court reiterated this notion in subsequent cases when finding that no agreement to arbitrate could bar a civil rights plaintiff from going to court.56 In fact, for nearly twenty years, courts continued to interpret Alexander as permitting employees with mandatory arbitration agreements to bring independent statutory claims against their employers both with respect to CBAs and individual employment disputes.57

2. The Mitsubishi Triology

Only a decade later, however, the Court reversed the long-standing presumption against enforcing mandatory arbitration in a series of three cases.58 All three cases involved plaintiffs attempting to bring actions in a judicial forum despite signing mandatory arbitration agreements.59 The first case in this series, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,60 involved an antitrust dispute between a Japanese automobile manufacturer and its American distributorship in Puerto Rico.61 In Mitsubishi Motors, the Supreme Court compelled the arbitration of antitrust claims brought under the Sherman Act.62 The Court held that an antitrust dispute was subject to arbitration pursuant to the FAA's "liberal federal policy favoring arbitration agreements."63 Recognizing its departure from "judicial suspicion" of arbitration,64 the Court enunciated a new standard for addressing agreements to arbitrate statutory claims: "Having made the bargain to arbitrate, the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue."65

In Shearson/American Express, Inc. v. McMahon,66 customers brought tort and securities fraud actions against their brokerage firm, alleging excessive and fraudulent trading and omission of material facts.67 Here, the Court extended its holding to complaints under the Racketeer Influenced and Corrupt Organizations Act (RICO).68 Additionally, the Court announced that in order to circumvent an arbitration agreement for purposes of bringing a statutory claim, the party opposing arbitration has the burden of showing "that Congress intended to preclude a waiver."69 The Court stated that in determining congressional intent, lower courts should look to the text of the statute at issue, its legislative history, and any underlying conflict between arbitration and the intended purpose of the statute.70

Finally, in Rodriguez de Quijas v. Shearson/American Express, Inc.,71 securities investors brought an action against their brokerage firm that allegedly had engaged in fraudulent trading on customer accounts and misrepresented material facts regarding new investment opportunities.72 The investors signed a standard customer agreement which

included a provision to settle account disputes through arbitration unless the agreement was found unenforceable under federal or state law.73 The Court enforced the mandatory arbitration provision of the customer agreement, which required parties to arbitrate all statutory claims under the Securities Exchange Act of 1933.74

As a consequence of the Mitsubishi trilogy, the Court presumed that the FAA applied to all mandatory arbitration agreements unless one of three conditions existed. The plaintiff must show "that Congress had expressed an intent to preclude compulsory arbitration, either in the statute's text or its legislative history; that there was an inherent conflict between compulsory arbitration and the statute's purpose; or that the arbitral forum was inadequate to vindicate the plaintiffs rights effectively."75 Accordingly, the Mitsubishi trilogy established that statutory claims were arbitrable where the parties had entered into an agreement mandating arbitration, and thus, it stands as a restriction of Alexander's stance against the enforcement of mandatory arbitration contracts and clauses.

3. Gilmer v. Interstate/Johnson Lane

In 1991, the Supreme Court took the next step in mandatory arbitration analysis and allowed for the arbitration of a statutory employment-related complaint in Gilmer v. Interstate/Johnson Lane Corp.76 Gilmer involved a discrimination claim under the Age Discrimination in Employment Act (ADEA).77 The plaintiff, a registered securities representative, signed, as a condition of his employment, a mandatory arbitration clause that required the plaintiff to arbitrate "any dispute, claim or controversy" in accordance with New York Stock Exchange (NYSE) rules.78

Upholding the arbitration clause, the Court stated, "It is by now clear that statutory claims may be the subject of an arbitration agreement, enforceable pursuant to the FAA."79 The Court explained, "`By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum. `80 In addition, the Court noted that while all statutory claims may not be appropriate for arbitration, the AREA should be subjected to the analysis set forth in Mitsubishi.81 Therefore, the Court held that the mandatory arbitration agreement is enforceable unless the plaintiff can show congressional intent "to

preclude a waiver of a judicial forum for ADEA claims."82 Should such congressional intent exist, the Court observed that "it will be discoverable in the text of the AREA, its legislative history, or an `inherent conflict' between arbitration and the ADEA's underlying purposes."83

Gilmer, conceding that nothing in the text or legislative history of the ADEA "explicitly precludes arbitration,"84 resorted to the general argument that compulsory arbitration of ADEA claims was inconsistent with the Act's "statutory framework and purposes."85 Gilmer supported this contention on four grounds, which mirrored much of the Court's analysis in Alexander. First, Gilmer claimed that arbitration panels would be biased.86 However, the Court found that the danger of a biased panel was minimal given that applicable NYSE arbitration rules already offered protections against potentially biased arbitrators.87

Next, Gilmer argued that arbitration's limited discovery would thwart a successful showing of discrimination.88 On the contrary, the Court found that the discovery provisions contained in the agreement were more than adequate when compared to other claims, such as RICO and antitrust claims, that the Court rendered arbitrable.89 In response to Gilmer's third concern about the arbitrators' option not to reduce their decisions to writing, the Court simply noted that the applicable rules required a written arbitration award and public disclosure of award decisions.90 Finally, the Court rejected Gilmer's argument that arbitration precluded broad equitable relief and class action suits on the ground that the arbitration agreement provided for all forms of relief.91

The Court likewise found that mandatory arbitration did not undermine the role of the EEOC.92 The Court asserted that "[a]n individual ADEA claimant subject to an arbitration agreement will still be free to file a charge with the EEOC, even though the claimant is not able to institute a private judicial action."93 The Court further maintained that "nothing in the ADEA indicates that Congress intended that the EEOC be involved

in all employment disputes," and concluded that such disputes have the potential to be settled fully and competently without EEOC involvement.94 Moreover, the Court deemed the fact that an administrative agency, such as the EEOC, was involved in the enforcement of a statutory claim to be an insufficient reason for precluding arbitration.95

However, the Court did not expressly overrule the Alexander decision, but rather distinguished it from Gilmer on three specific grounds.96 First, the Court noted that Alexander and its progeny did not involve the question of whether to enforce agreements to arbitrate statutory claims.97 Instead, these cases "involved the quite different issue [of] whether arbitration of contract-based claims precluded subsequent judicial resolution of statutory claims."98 Second, the Court argued that the Alexander line of cases occurred in the context of CBAs, and, therefore, the individual statutory rights of claimants were jeopardized by the fact that they were represented by unions in the arbitration proceedings.99 The Court noted that the tension between collective representation and individual statutory rights, which is inevitable in the case of a CBA, was not present in Gilmer.100 Finally, the Court explained that the Alexander line of cases was not decided under the FAA, which was subsequently interpreted to reflect a "liberal federal policy favoring arbitration agreements."101

Concluding that Gilmer had failed to show that Congress intended to preclude arbitration of claims under the ADEA,102 the Court established precedent for the enforcement of mandatory arbitration contracts concerning age discrimination claims. In opening this door, however, the Court failed to indicate exactly where the line was to be drawn. For instance, "[a]lthough Gilmer clearly stated that `statutory claims may be the subject of an arbitration agreement,' it left a few issues unresolved, including the question of whether its holding is limited to securities licensing and the ADEA or whether it can be extended to other statutes affecting employment."103 Furthermore, by distinguishing Alexander, instead of overruling it, the Court left open the question of whether arbitration agreements made through CBAs can prevent an employee from litigating a statutory claim. As such, lower courts have been left with little guidance regarding the mandatory arbitration of sexual harassment or racial discrimination complaints. Consequently, the Gilmer decision has resulted in a great deal of confusion regarding the validity of mandatory arbitration contracts outside of the securities industry.

C. Challenges to Mandatory Arbitration

Despite the fact that Gilmer left unresolved issues, several cases involving a wide range of discrimination claims, based on Title VII,104 the ADA,105 the ADEA,106 and the Family and Medical Leave Act (FMLA),107 have extended Gilmer to cases involving other statutes as well as to cases involving CBAs.108 Courts have even extended Gilmer to cases outside the realm of the securities industry,109 including cases in which mandatory arbitration clauses were included in employment contracts, employee handbooks, and employment applications.110

More recently, however, there has been a "minority backlash" against Gilmer, prompted by a growing concern "about the fairness of requiring employees to waive certain statutory rights to judicial review and jury verdicts."111 Some courts have taken steps to limit Gilmer's holding to cases arising under the ADEA or to cases where an employee has made a "knowing" agreement to arbitrate.112 Other courts have rendered mandatory arbitration unenforceable on the grounds that such provisions undermine statutory rights and violate employee rights under the Civil Rights Act of 1991.113 Even members of Congress and the EEOC and the Securities and Exchange Commission

(SEC) commissioners have publicly criticized mandatory arbitration in the employment setting.114

1. The Civil Rights Act of 1991

In 1991, the same year that the Supreme Court handed down the Gilmer decision, Congress enacted the Civil Rights Act of 1991 (CRA).115 The 1991 CRA was designed to amend Title VII and to reinforce the civil rights of employees subjected to employment discrimination.116 In addition, the Act contained a specific section dealing with the arbitrability of employment discrimination claims.117

The 1991 CRA had two primary goals in augmenting the existing remedies available under Title VII: (1) to increase the remedies available to plaintiffs under Title VII, so as to ensure full compensation for all injuries caused by discrimination; and (2) "to make enforcement of the Act more effective through substantive and procedural amendments" that would make it easier to bring, as well as prove, discrimination suits.118 Moreover, section 3 announced an additional goal: "to respond to recent decisions of the Supreme Court by expanding the scope of relevant rights statutes in order to provide adequate protection to victims of discrimination."119 Congress intended the 1991 CRA to respond to 1989 Supreme Court decisions such as Rodriguez de Quijas v. Shearson/American Express, Inc. that Congress considered to be too restrictive an interpretation of Title VII.120

The 1991 CRA was designed to codify a specific rule of construction for future courts to follow: all civil rights laws were to be given a broad interpretation to effectuate their remedial purposes.121 In codifying this rule of construction, Congress intended that when the statutory terms in civil rights laws were "susceptible to several alternative interpretations, the courts... [were] to select the construction which most effectively advances the underlying congressional purpose."122 Thus, Congress was ultimately attempting to rein in the Supreme Court's conservative interpretations of Title VII.

2. NASD's Proposed Rule Change

The backlash against a broad use of mandatory arbitration also surfaced in the securities industry. In August 1997, the National Association of Securities Dealers (NASD) proposed a rule change that would eliminate the requirement that broker-dealers must arbitrate statutory employment discrimination claims123 pursuant to the Form U-- 4.124 Employees would have the choice between entering into an individual agreement with their employers or filing a statutory discrimination claim with the courts.125 In advancing the change, the NASD indicated that "enhanced disclosure would be made to industry employees to make it clear to them that they have a choice as to whether to give up their rights to go to court."126

But, as expected, the proposal provoked a hostile response from organizations such as the Securities Industry Association (SIA), the industry group representing employers in the securities and financial sectors.127 Stuart Kaswell, the SIA's senior vice president and general counsel, proclaimed that the SIA considers arbitration to be "`the best mechanism for resolving disputes relating to the business of the securities industry'"128 Kaswell added that employees who allege workplace discrimination "fare better before arbitration panels than before juries."129 Kaswell also claimed that discrimination claims are not only more quickly resolved by arbitration, but arbitration ensures that claims will actually be heard and not dismissed on pre-trial motions.130

Despite the SIA's outcries, the SEC approved the NASD's proposed rule change on June 23, 1998.131 Moreover, at a September 1998 board meeting, the NYSE also joined

in the movement by eliminating its requirement that its employees arbitrate statutory discrimination claims.132 The new rule took effect January 1, 1999.133 The rule allows all persons registered with the NASD under the U-4 statement to assert their right to have any claims of sexual harassment or racial discrimination presented to a court of law.134 All other types of claims remain subject to mandatory arbitration.135

III. MANDATORY ARBiTRATioN OF CML RIGHTS DISPUTES

A. Pros and Cons of Mandatory Arbitration

1. Efficiency

One of the most compelling arguments justifying mandatory arbitration of statutory claims is efficiency. Primarily, advocates contend that arbitration dramatically reduces the costs of litigation.136 In fact, it has been estimated that the use of arbitration in the industry has saved firms approximately two-thirds of the cost of litigation.137 Employers also argue that arbitration is far quicker than seeking the assistance of the already overburdened federal courts.138 Moreover, arbitration allows for a quicker resolution "without having to provide the retainer that many plaintiff's employment lawyers require to take on a case," thereby benefiting the employee and the employer.139

The efficiency of arbitration is further supported by the fact that "[u]nlike arbitrators who can cut to the heart of the matter, judges are bound by vexing evidentiary and jury instruction problems."14 In terms of the employer, this efficiency argument can be extended to arbitration's lower defense costsI41 and damage awards.142 Finally, "because

of limited discovery and motion practice, as well as the informality of hearings, arbitration may cost far less than civil litigation."143

Some critics have argued that arbitration is not "efficient" despite the time and money that arbitration saves, because it does not "really reach the most efficient outcome overall"-deterring sexual harassment and racial discrimination in the workplace.14 "If arbitration fails to adequately deter workplace discrimination, the net result will be an inefficient allocation of human capital."145 In other words, an extremely talented employee might be deterred from advancing solely on the grounds of race or gender.146 In addition, praising arbitration for its cost-effectiveness ignores the reality that arbitration often fails to remedy the harms caused to individuals, both physical and emotional, by illegal discrimination in the workplace.147

2. Fairness

Advocates also have advanced arguments concerning arbitration's inherent "fairness."148 For instance, many contend that "arbitrators are more reasoned, predictable decisionmakers than most jurors" because of their alleged expertise in the claimant's field of employment.149 This "expert knowledge" possessed by the arbitrator arguably saves the employer from having to face the "inherent difficulty of explaining to judge or jury the business reason for the employment action."150 In addition, the arbitrator's role in determining awards has been viewed as enhancing the fairness of arbitration because juries are unpredictable and often return awards that are deemed unreasonable.151 Proponents of mandatory arbitration seem to assert that jury unpredictability means a sympathetic jury could award millions of dollars without merit, and that this possibility unfairly assists employment plaintiffs in negotiating higher settlements. 152

This argument, however, assumes an employment plaintiff can present his or her case in court in the first place. Under mandatory arbitration, no real possibility of taking the claim to a jury exists.153 Unfairness is perhaps the most popular argument advanced

by opponents of mandatory arbitration. It is repeatedly argued that arbitrators favor employers.154 This premise generally is supported in terms of the disparate power evident in negotiations between an employer and an employee.155

This power imbalance is only heightened when the plaintiff is a woman or person of color, especially in the securities industry where "the existence of the `glass ceiling' and other forms of gender discrimination continue to prevent [such people] from attaining positions of power."156 More specifically, "empirical evidence raises a serious concern that arbitration of employment disputes systematically favors employers."157 For instance, a survey of sixty-two arbitration awards in employment disputes conducted by the NASD and the NYSE between 1989 and 1994 revealed that the average award granted in a case where the plaintiff prevailed on at least one claim was $125,000, compared to $703,600 in jury verdicts during the same time period.158 Statistics also reveal that the median arbitration award is a mere $49,400, compared to $264,700 in cases involving juries. 159

Opponents further contend that mandatory arbitration is unfair because it fails to provide parties with adequate due process. Not only are written opinions explaining the bases of decisions rare, but judicial review is extremely limited because many courts refuse to hear arbitration cases on appeal.160 In fact, even "if the arbitrator has misapplied the law, the losing party is most likely out of luck."161 Under most plans, the time for filing claims for arbitration is shorter than the statute of limitations under Title VII,162 punitive damages are typically prohibited, and confidentiality clauses are almost always imposed.163

Moreover, with arbitration filing and administration fees totaling thousands of dollars per case, and hourly rates charged by arbitrators ranging from $200 to $700, arbitration can be extremely expensive for plaintiffs, especially in more complex cases, and particularly in light of the fact that plaintiffs are almost always required to pay at least half of the costs.164 In fact, these figures are comparable to the costs of going to trial.165 Consequently, while arbitration may be cost effective for the employer, arbitration often yields no cost advantages over trials for the employee. As such, "an out-- of-work plaintiff facing a `deep pocket' employer" may be severely disadvantaged.166

In addition, the plaintiffs ability to obtain a fair hearing with adequate representation may be frustrated by the fact that attorneys generally view arbitration as an unfavorable forum and are thus less likely to take on a case involving arbitration.167 There exists a mindset that arbitrators give smaller awards than juries.168 Hence, attorneys may be hesitant to take arbitration cases in light of the prospect of a smaller award compared to a jury trial. At the same time, employers will favor arbitration for the same reason. In fact, considering that arbitrators typically are selected from within the industry, "[c]orporate defendants, with some empirical justification, may believe that they are likely to get more sympathy from arbitrators, if not downright bias in their favor."169 Even where the arbitrators are not selected from within that particular industry, they still have "an economic stake in being selected again, and their judgment may well be shaded by a desire to build a `track record' of decisions that corporate repeat users will view approvingly."170 Independent arbitration companies likewise have an obvious interest in being viewed favorably by corporations.171

Severe restrictions imposed on discovery also have evoked an outpouring of criticism regarding fairness. "Limited discovery usually works to disadvantage employment discrimination plaintiffs because these plaintiffs bear the burden of persuasion while at the same time are usually the party with less information."172 These discovery limitations "deprive plaintiffs of the opportunity to make their own choice of how much time and money to spend on the discovery process, within the limits sanctioned by the courts."173 Moreover, "the ethical prohibition against lawyers' `ex parte' contacts with opposing parties (ie., informal, and without opposing counsel present) extends to many current, and possibly some former, employees of a corporate defendant," thereby further frustrating the plaintiff's ability to collect evidence.174

The fact that the industry itself, and not an independent group, such as the American Arbitration Association (AAA), oversees mandatory arbitration has sparked yet further

controversy.175 Despite the contention that the various self-regulating organizations (SROs) overseeing arbitrations have instituted procedures and policies to temper impartiality and prejudice, there is absolutely no assurance that arbitrators correctly apply the law.176 In fact, there is no assurance that arbitrators will even have knowledge of the substantive law on which the claim is based.177

This danger "that arbitrators will misapply or even ignore the law" arises every time a statutory claim is alleged and multiplies exponentially when an employee asserts a violation of civil rights178-an inequity only heightened by the fact that arbitrators are appointed for their expertise in their respective fields of employment. The fact that an arbitrator may be a renowned expert in the field of securities certainly does not render him an expert in matters of racial or sexual discrimination. Because of the foregoing arguments, critics have accused the securities industry of preserving "a locker-room culture that can seem bizarrely out of step with the rest of the business world."179

Finally, the homogenous nature of arbitration panels within the industry is another notable source of unfairness that has frustrated many dissenters. 180 A 1994 United States General Accounting Office study revealed that 89% of the NYSE arbitrators were men. 181 The report also indicated that only a very small percentage of the arbitrator pool was comprised of minorities.182 "Of the 349 arbitrators whose race was identifiable, 97% were white, .09% were black, .06% were Asian and 1% were `other."'183 In contrast, jurors who are selected to serve in federal court are selected with care to avoid excluding candidates on the basis of their race, color, religion, sex, national origin, or economic status. 184 Accordingly, women and minorities are unable to face a jury of their peers and are instead subjected to "a lack of procedural protections and an arbitrator pool that is demographically unrepresentative in terms of gender and race."185

3. Freedom of Contract

The notion of freedom of contract is another common ground for extolling the benefits of arbitration. Proponents advocate for enforcement so long as "the contract was not signed under 'duress'-conceived of narrowly so as not to encompass economic compulsion."186 Critics, however, have attacked this "freedom of contract" notion by

asserting that mandatory arbitration is nothing more than a contract of adhesion.187 They contend that "all contracting takes place within a set of background legal norms and assumptions."188

Coinciding with this background is the notion that certain "mandatory terms" exist which cannot be waived under any circumstances, even if the parties agree.189 In other words, with mandatory arbitration, there is no freedom to shop for terms or room to bargain. This is especially true in the securities industry, where the practice is industrywide. The problem is heightened by the fact that an imbalance of power between the employee and employer exists. Moreover, "when one views an arbitration clause as the waiver of the most important right of access to the courts," the mandatory nature of arbitration contracts becomes an even greater injustice.190

B. Discrepancy in the Enforcement of Mandatory Arbitration

1. Discrepancy Since Gilmer

Confusion remains as to whether Gilmer validates mandatory arbitration of all statutory claims, especially in light of the fact that Gilmer did not expressly or impliedly overrule Alexander.191 The Ninth Circuit, in particular, has made headlines in narrowing the scope of Gilmer.192 For instance, in Prudential Insurance Co. of America v. Lai,193 the court refused to enforce the same type of arbitration provision approved by the Supreme Court in Gilmer, given that the plaintiff did not "knowingly" waive her right to bring a civil action over sexual harassment and discrimination.194

In Lai, the plaintiffs alleged that they never had a chance to read the Form U-4, and their employers never even mentioned arbitration or provided them a copy of the NASD manual.195 The court reasoned that "Congress intended there to be at least a knowing agreement to arbitrate employment disputes before an employee may be deemed to have waived the comprehensive statutory rights, remedies and procedural protections prescribed in Title VII and related state statutes."196 The court cited support in the text and legislative history of Title VII, as well as the enactment of the 1991 CRA.197 The court stressed that in the context of sexual harassment claims, the procedural protections

contemplated by the legislature "may be particularly significant."198 Accordingly, the court concluded that "a Title VII plaintiff may only be forced to forego her statutory remedies and arbitrate her claims if she has knowingly agreed to submit such disputes to arbitration."199

The Ninth Circuit extended the Lai holding in Nelson v. Cyprus Bagdad Copper Corp.,200 finding that the employee did not enter into a "knowing agreement" to arbitrate his ADA claims.201 In Nelson, the court noted that the form signed by the employee, which acknowledged the receipt of a revised employee handbook, did not suffice as a waiver under Lai.202 Not only did the acknowledgment fail to notify Nelson of the arbitration clause, it also failed to inform him that his acceptance of the handbook constituted a waiver of his right to a judicial forum.203 Moreover, the fact that Nelson continued employment subsequent to receiving the handbook, and after supposedly having read its contents, also fell short of a knowing waiver under Lai.204 Despite such a decision, Lai nevertheless remains a limited holding in so far as it concerns a knowing waiver.205

2. Duffield v. Robertson Stephens

The Ninth Circuit specifically examined the legality of the securities industry's licensing agreement in Duffield v. Robertson Stephens & Co.206 and ultimately found it to be in violation of the 1991 CRA.207 In 1988, Tonja Duffield began working as a securities dealer for Robertson Stephens & Company.208 Prior to the start of her employment, Duffield, like the plaintiff in Gilmer, was required to "waive her right to a judicial forum to resolve all `employment related' disputes and to agree instead to arbitrate any such disputes."209 She waived these rights by executing, as a condition of her employment, the industry's securities registration Form U-4.210 Robertson Stephens was a member of the NYSE and the NASD, and both organizations had rules in place to

"compel employees to arbitrate any employment-related dispute at the request of their employers."211

In January of 1995, Duffield brought suit against Robertson Stephens, alleging sexual discrimination and harassment in violation of Title VII.212 As a threshold matter, Duffield sought a declaratory judgment stating that securities employees cannot be compelled to arbitrate claims pursuant to the arbitration clause in the Form U-4.213 Robertson Stephens subsequently moved to compel arbitration pursuant to the Form U-4 clause.214 The district court denied Duffield's request for declaratory judgment and granted Robertson Stephen's motion to compel arbitration.215 The court, however, refused to enter final judgment on the declaratory judgment claim and certified its order for immediate appeal.216 Duffield then appealed the order to the Ninth Circuit.217

On appeal, the three-judge panel held that Duffield could not be denied her right to pursue her claim in court under Title VII by virtue of having signed a U-4.218 The court stated that the Form U-4 compels precisely what Congress intended to prohibit in section 118 of the 1991 CRA-mandatory requirements under which prospective employees agree as a condition of employment to surrender their rights to litigate future Title VII claims in a judicial forum and accept arbitration instead.219 The court cited support for this contention in the purpose, text, and legislative history of section 118.220

The purpose of section 118, according to the Ninth Circuit, is to expand the substantive rights of employees and increase the remedies available for civil rights violations.221 Moreover, the court noted that to accept Robertson Stephens' argument, that the 1991 CRA was intended to encourage mandatory arbitration, would create "at least a mild paradox."222 To conclude that Congress encouraged a system whereby employees surrendered their judicial forum rights to the resolution of future claims would be "at odds" with the primary purpose of strengthening those available remedies.223 Indeed, such agreements limit the remedies available.224 Hence, the panel concluded that the purpose of section 118 did not sustain the argument advocated by Robertson Stephens.225

The court then turned to the text of section 118 and noted that it was "the critical statutory language."226 Section 118 of the Civil Rights Act of 1991 reads: "Where appropriate and to the extent authorized by law, the use of alternative means of dispute resolution, including settlement negotiations, conciliation, facilitation, mediation, factfinding, minitrials, and arbitration, is encouraged to resolve disputes arising under the Acts or provisions of Federal law amended by this title."227 Acknowledging that the phrase "where appropriate" could be ambiguous if read out of context, the court interpreted the language in light of the 1991 CRA's "object and policy," to place substantive limitations on the use of mandatory arbitration.228 The panel interpreted the phrase to mean "where arbitration furthers the purpose and objective of the Act-by affording victims of discrimination an opportunity to present their claims in an alternative forum... not by forcing an unwanted forum upon them."229

Similarly, the panel went on to consider the second qualifying phrase "to the extent authorized by law." The court conceded that because of the temporal conflict between section 118's passage and the Gilmer decision, the endorsement of existing law under section 118 was ambiguous.230 The court, however, interpreted the term "law" to mean the law existing at the time the section was drafted (the rule of Alexander) and not the law at the time the section was passed (the interpretation of Gilmer as Robertson Stephens argued).231 "The overwhelming weight of the law at the time Congress drafted Secs.118 ... was to the effect that compulsory agreements... were unenforceable."232

To further support its conclusion, the panel relied on the legislative history of section 118.233 The court found that the legislative history "unambiguously confirms" that Congress intended to adopt the rule of Alexander.234 In fact, House Report No. 10240(I) seems to resolve the question in favor of Alexander.235 The report, drafted before Gilmer, plainly states that "any agreement to submit disputed issues to arbitration, whether in the context of a collective bargaining agreement or in an employment contract, does not preclude the affected person from seeking relief under the enforcement provisions of Title VII."236 Congress declared that "[t]his view is consistent with the Supreme Court's interpretation of Title VII in [Alexander]."237

Consequently, the court rejected the possibility that Gilmer could be the existing law under section 118.238 It stated that while Gilmer undermined Alexander's holding, this in

no way altered Congress' intent.239 The panel declared that the legislative history clearly implied that section 118 intended "to codify [Congress'] position that `compulsory arbitration' of Title VII claims was not `authorized by law,' and that compelling employees to forego their rights to litigate future Title VII claims as a condition of employment was not `appropriate.-240

Thus, the Ninth Circuit held that Title VII claims are not subject to mandatory arbitration.241 The court concluded that the "take-it-or-leave-it" nature of the Form U-4 is "fundamentally at odds with a provision of the Civil Rights Act of 1991, 118, that was intended to help deter employment discrimination by increasing claimants' choice of fora."242 The court stated that the 1991 CRA manifested an intent to endorse the spirit of Alexander in the context of employment agreements.243

3. Aftermath of Duffield

Any hope, however, that Duffield would bring an end to the enforcement of mandatory arbitration agreements in the securities industry was misplaced. In fact, exactly one month later, the Third Circuit directly opposed the Duffleld holding in Seus v. John Nuveen & Co., Inc.244 Like Tonja Duffield, Sheila Seus signed the Form U4 to register with the NASD as a condition of her employment with John Nuveen.245 In 1996, Seus filed suit against her employer, alleging discrimination under the ADEA and Title VII.246

The court held that the Form U4 constituted a valid and binding agreement by Seus to arbitrate all employment discrimination claims.247 Unlike the Ninth Circuit, the Third Circuit concluded that the 1991 CRA established Congress' intent to encourage the use of mandatory arbitration.248 Consequently, the Seus court found that employees' statutory claims can be subject to arbitration as a condition of employment, except where "fraud, duress, mistake, or some other ground recognized by the law applicable to contracts" is present.249 More recently, the Fourth Circuit ruled that an applicant who signs an

arbitration agreement as part of an application process is required to arbitrate his race discrimination claim.250 A number of other circuit courts have similarly found mandatory agreements to arbitrate Title VII claims permissible under Gilmer.251

Meanwhile, the First Circuit reversed the reasoning of a Massachusetts district court's decision in Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,252 that found the mandatory arbitration of Title VII claims unenforceable.253 The First Circuit, while affirming the district court's ultimate decision, specifically overruled the reasoning of the district court and held that neither the language of the statute nor the legislative history demonstrates an intent in the 1991 CRA to preclude predispute arbitration agreements.254 Moreover, the court found the NYSE arbitration procedures sufficiently adequate to resolve Rosenberg's Title VII claims.255 Nevertheless, despite expressly rejecting the district court's reasoning, the Rosenberg court concluded that the arbitration agreement was unenforceable.256 The court explained that "compelling arbitration would not be `appropriate"' under the 1991 CRA257 in light of the arbitration agreement's failure to define the range of claims subject to arbitration.258

The Ninth Circuit is presently the only circuit court of appeals to hold that mandatory arbitration agreements are prohibited by Title VII, as amended by the 1991 CRA.259 Although the Ninth Circuit stands alone, there is no doubt that uncertainty still exists in the wake of Gilmer. On November 9, 1998, the Supreme Court denied

Robertson Stephens' petition for certiorari.260 The Court's denial of certiorari only perpetuates the inconsistency, contradiction, and debate already surrounding mandatory arbitration. Until the Supreme Court promulgates a uniform rule, the question remains as to whether employees have to arbitrate civil rights.

IV. THE ENFoRcEmENT OF MANDATORY ARBITRATION IN CIVIL RIGHTS CASES

The numerous advantages of arbitration make its mandatory nature highly attractive to corporate employers. However, the inequities grossly outweigh any benefits derived. Arbitration's informality creates a type of "second-class" justice, with little regard for the rules of evidence and little room for discovery. This notion is only bolstered by the reality that arbitrators are not required to correctly apply the law,261 and arbitration awards are subject to limited judicial review.262 Moreover, the relatively private nature of arbitration proceedings and the lack of written opinions prevent public monitoring of arbitration decisions, removing a critical check on impartiality and bias. In addition, the fact that contracts are often entered into without equal knowledge and bargaining power, coupled with the fact that arbitrators statistically favor employers, creates an inherent imbalance of power. Finally, the homogenous nature of arbitration panels stands in sharp contrast to the composition of those asserting the claims.

A. Congressional Intent and Legislative History of the Civil Rights Act of 1991

Mandatory arbitration also fails to comport with the purpose and history of the 1991 CRA. Most obviously, the plain meaning of section 118 does not support the notion of mandatory arbitration. Section 118 merely "encourages" the use of arbitration "[w]here appropriate and to the extent authorized by law."263 This latter limitation is critical to the interpretation of congressional intent. While there is no doubt that Congress recognized the efficiency of arbitration and encouraged its use, Congress supported arbitration only in circumstances where it would be both appropriate and legally permissible to do so. The mandatory nature of arbitration in an undesirable forum does not fall under such a definition.

Furthermore, in listing the various forms of ADR, including "settlement negotiations, conciliation, facilitation, mediation, fact-finding, minitrials, and arbitration," the words "mandatory" or "pre-dispute" are never used.264 In fact, all of the forms of ADR listed prior to arbitration "are voluntary and do not prospectively bar either party from access to a jury trial."265 A closer look at other portions of the text reveals that Congress did not intend to support mandatory arbitration contracts in enacting the 1991

CRA, especially in light of the sections providing for jury trials and punitive damages.266 It would seem "inconsistent for Congress to pass a bill to strengthen the rights available to employment discrimination plaintiffs and then, in the very same bill, contrive to deny these plaintiffs redress in court for employment discrimination claims."267

Congressional intent to preclude mandatory arbitration under Title VII is likewise evinced by the 1991 CRA's legislative history.

The legislative history of Secs.118 unambiguously confirms that Congress sought to codify the law as it stood at the time the section was drafted, and eliminates any possibility that Congress intended to write Gilmer into Title VII law or leave the question of which forms of arbitration were permissible to the whims and presumptions of future court decisions .268

Moreover, the legislative history of the ADA and the Civil Rights Act of 1990 (1990 CRA), each passed one year before the 1991 CRA, support precluding mandatory arbitration in the context of Title VII.269 For instance, during the adoption of the ADA, the House Judiciary Report stated:

This amendment was adopted to encourage alternative means of dispute resolution that are already authorized by law. The Committee wishes to emphasize, however, that the use of alternative dispute resolution mechanisms is intended to supplement, not supplant, the remedies provided by this Act. Thus, for example, the Committee believes that any agreement to submit disputed issues to arbitration, whether in the context of a collective bargaining agreement or in an employment contract, does not preclude the affected person from seeking relief under the enforcement provisions of this Act.270

The 1990 CRA's language concerning arbitration was derived from the ADA, and the statements responding to and interpreting the legislation mirrored each other.271 Despite the fact that the 1990 CRA ultimately was vetoed, its language pertaining to ADR was incorporated into the 1991 CRA,272 thereby reflecting the mentality that while arbitration was to be encouraged, its application should be knowing and voluntary. This interpretation is borne out in the following remarks made by President Bush upon signing the 1991 CRA:

[S]ection 118 of the Act encourages voluntary agreements between employers and employees to rely on alternative mechanisms such as mediation and arbitration. This provision is among the most valuable in the Act because of the important contribution that voluntary private arrangements can make in the

effort to conserve the scarce resources of the Federal judiciary for those matters as to which no alternative forum would be appropriate.273

President Bush's reiteration of the word "voluntary" certainly rebuts the notion that arbitration should be mandatory or a condition of employment.

Finally, the ideals that motivated the enactment of the 1991 CRA are undermined by the notion of mandatory arbitration. For instance, Congress enacted the 1991 CRA to increase the procedural rights and remedies afforded to Title VII plaintiffs.274 "The Supreme Court has long recognized that in enacting Title VII Congress envisioned that decisions and remedies from the federal courts would play a unique and indispensable role in advancing the social policy of deterring workplace discrimination on the basis of race, sex, and national origin."275 In placing the ultimate responsibility for enforcing Title VII with the federal courts, the Court was implicitly stating that such claims should not be deferred to arbitration. Therefore, it would be rather disingenuous to conclude that Congress supported mandatory arbitration irrespective of the rights provided by both the 1991 CRA and Title VII.

B. Women and Minorities Disadvantaged by Mandatory Arbitration

ADR, in its abstract form, would seem to be a welcoming option for disgruntled minorities and women in the workplace, especially in fields traditionally dominated by white men. Not only would arbitration allow employees to resolve their disputes in complete confidentiality, but employees could terminate the harassment or discrimination at a far earlier stage. Perhaps even a single phone call to the person in charge of company arbitration might be enough.

Praising arbitration for its confidentiality and swiftness, however, ignores the reality that public scrutiny is sometimes essential. Even if arbitration could resolve a case of employment discrimination or sexual harassment, the confidential nature of arbitration would also silence the inappropriateness of the employer's conduct. Also, with other employees in the firm and the industry ignorant of such practices, the firm has little incentive to make changes. In this respect, the securities industry, more than any other, insulates defendants from responsibility. The potential for such behavior to continue unchecked is more than enough to warrant concern, but when coupled with the grave risk that arbitrators will grossly favor the employer, the inequity of mandatory arbitration is obvious.

For example, in June of 1994, the Wall Street Journal conducted a report on several cases of blatant sexual harassment in the securities industry.276 Every case analyzed was one of obvious liability; however, despite clear-cut facts, the awards were minimal at

best.277 In fact, the report noted that one woman who had prevailed in a sexual harassment arbitration against a securities firm recovered only $300.278 The article reported: "So grim are the prospects for most women who go through the securities industry arbitration process that lawyers say they now often advise their clients not to bother with arbitration at all. Instead, they urge women to take modest settlements and walk away."279 Given the reality that women are the primary targets and victims of sexual harassment and discrimination in the workplace,280 the foregoing study is especially disturbing.

Of equal concern is the fact that most discrimination and harassment plaintiffs are minorities and people of color, "reflecting historical racial patterns and hierarchies."281 In fact, according to a survey of the percentages of people bringing racial discrimination claims to the EEOC in 1996, eighty-four percent were black, nine percent were white, two percent were Asian, one percent were American Indian, and three percent were "other."282 Given the homogenous nature of arbitration panels in the securities industry, minorities may also be severely disadvantaged by the racial, ethnic, or socioeconomic background of the arbitration panel.

The reality that arbitrators do not represent the parties that most often come before them is not the only drawback to arbitration for minorities and women. Arbitration also gives securities firms little incentive to take action against the sexual harassment and discrimination that permeate the industry. Mandatory arbitration in the face of the growing number of discrimination claims can be interpreted as "an attempt by employers to reduce their liability for gender and race discrimination without correspondingly reducing the amount of discrimination in their workplace."283 In other words, because employers know that going to court is never a realistic possibility for employees, mandatory arbitration permits them to tactfully avoid taking any active steps to temper the inequities and discrimination that so obviously exist. This argument is especially credible given the reality that punitive damages are rarely, if ever, awarded in arbitration forums.284 In this respect, mandatory arbitration contracts blatantly undermine Title VII.

C. Proposed Reforms

With the Supreme Court remaining silent on mandatory arbitration of Title VII claims within the securities industry, firms may continue to employ mandatory arbitration employment provisions as they see fit.285 However, with the NASD and NYSE refusing to honor all contracts of mandatory arbitration regarding sexual discrimination and harassment claims, firms must prepare for the changes that inevitably lie ahead. First and foremost, employers should establish clear, written policies regarding sexual harassment and racial discrimination. Employers should implement these policies within each department to control the degree of sexual harassment and discrimination in the workplace. These procedures should include, at a minimum, training sessions for all employees and internal mechanisms that can resolve disputes as they arise. Even in the face of the movement toward a voluntary system, employers will continue to enjoy the benefits of arbitration. Arbitration resolves disputes quickly, cheaply, and confidentially, and will therefore remain a popular choice for many employees. As such, it is crucial that arbitrations are conducted in a manner that ensures due process.286

An arbitration system that benefits both employers and employees is not beyond reach. Such a system could take many shapes. For example, using non-industry panels composed of legal professionals with expertise in statutory claims when resolving harassment and discrimination cases would not only boost the validity and accuracy of the rulings,287 but also alleviate many of the employees' concerns. Providing panels composed of a greater percentage of minorities and women would achieve similar results. The establishment of higher standards and qualifications for arbitrators would better control the risk of bias and disregard for the law. In addition, an educational system that would keep arbitrators apprised of the current substantive law on which statutory claims are based should be developed. Finally, a review of all awards for errors of law, as well as a requirement that all decisions be written and made public, will enhance the ability to monitor and oversee arbitrators and provide a crucial check on impartiality.288

It is important to add, however, that none of these changes are required in a voluntary system. Whereas in a mandatory system, the parties have arbitration imposed on them, a voluntary arbitration scheme would allow individuals knowingly and voluntarily to agree to arbitration or to decline to place their claims into this form of ADR. Voluntariness is a critical element for the parties because the unique importance of the laws against employment discrimination requires that a federal forum always be available to an aggrieved individual. Parties must knowingly, willingly and voluntarily enter into an ADR proceeding. Likewise, the parties have the right to voluntarily opt out of a proceeding at any point prior to resolution for any reason, including the exercise of their right to file a lawsuit in federal district court. In a voluntary arbitration scheme, under no circumstances will a party be coerced into accepting the other party's offer to resolve a dispute. If the parties reach an agreement, the parties will be allowed to settle as long as the proposed agreement is lawful, enforceable, and both parties are informed to their rights and remedies under the applicable statutes.

Allowing employees the option of taking their claims to court will provide employers with an incentive to find the best mixture of efficiency and fairness. In a voluntary system, the employer will be competing against the federal courts, as well as other employers for the best system of dispute resolution. This free competition will lead to a resolution system that is both fair and efficient, as opposed to the current system of second-class justice.

V. CONCLUSION

The overall efficiency of arbitration is irrefutable. In fact, studies reveal that ADR techniques such as arbitration and mediation are now being used routinely and with a significant degree of success in the resolution of various disputes.289 This trend is not at all surprising given the statistics-employers win more and pay less.290 However, swift justice is not always fair. The time and money that arbitration saves employers come at a very high cost to some employees. Legal fees cannot be reduced without lower damages and higher threshold costs to plaintiffs. Quicker resolutions are dependent upon limitations on evidence and discovery. Privacy goes hand-in-hand with a lack of public scrutiny.

Arbitration certainly has benefits, but those benefits are undermined when the procedure becomes one of force rather than choice. There is simply no correlation between the claimed benefits of arbitration and the mandatory nature of arbitration within the industry. The two issues are not related. Giving people a choice, especially with respect to civil rights complaints, would be the best way to ensure fairness, and, at the same time, preserve the integrity of the court. Allowing mandatory arbitration contracts to continue unchecked ultimately could render the courts' ability to enforce antidiscrimination laws moot. In light of its efficiency, arbitration is sure to remain an advantageous option for employers whether it is voluntary or mandatory. Accordingly, eliminating mandatory arbitration clauses is the logical and essential first step in achieving the best dispute resolution system for all parties involved.