Employment arbitration in Oklahoma: Two new cases

published in Oklahoma Employment Law Letter | June 1, 2010

It’s a continuing wonderment to us that more employers don’t use mandatory arbitration programs in the workplace. (I bet Novartis wishes it had one after being hit for $250 million in punitive damages in a gender discrimination case on May 19.) Arbitration programs are lawful (at least until Congress decides otherwise) and generally provide significant cost savings in the litigation process. Arbitration programs also remove the jury from the decision-making process — i.e., when it’s being decided whether an employer or, more appropriately, its managers or employees violated someone’s employment rights, it won’t be a jury making the determination but rather a single arbitrator who is either a neutral, experienced employment law practitioner or a retired judge. No matter which, employers typically don’t have to worry about an arbitrator either deviating from or altogether ignoring the record of evidence and making ill-founded decisions based on fairness rather than the applicable law.

But enough preaching. Some Oklahoma employers already have mandatory employment arbitration programs in place, especially regional and national employers with Oklahoma facilities. For those employers, there are two recent court decisions of which to be aware, one from the Tenth Circuit (which is the controlling federal court for Oklahoma) and one from the Oklahoma Court of Appeals.

Did employer wait too long?

In the Tenth Circuit case, an employee sued his former employer, alleging retaliatory discharge. Five months after the lawsuit was filed and after litigation was well under way, the employer asked the federal district court to close the case and compel the employee to arbitrate his claims before a private arbitrator in accordance with an arbitration agreement contained in his employment agreement. The district court denied the request, finding the employer had improperly delayed its demand for arbitration and instead had engaged in litigation in court. As a result, the district court concluded that the employer’s actions indicated that it had no genuine interest in arbitration, had waived its right to enforce the arbitration agreement, and was stuck litigating the case in federal court.

The district court’s decision was based on well-established law. In short, arbitration law has long held that once an employer has been sued in federal or state court, it must quickly notify the court if it has an arbitration program and must demand that the court action be closed and arbitration be pursued. Significant delay in asserting the arbitration right typically leads to what courts call a “waiver” of the right to enforce an arbitration agreement.

When that happens, not only does an employer lose the opportunity to pursue arbitration and thus lose the opportunity to save a significant amount of money and avoid a wildcard jury, but the waiver also may be used against it in future litigation by other employees who may argue that the employer’s waiver in one case indicates that the arbitration program isn’t enforceable. Believe it or not, there have been some courts that have agreed with this argument. Therefore, when an employer delays demanding arbitration after an employment lawsuit has been filed, it not only risks that case but also puts the entire program at risk.

Moreover, in many cases, courts have held that even short delays in time and minimal involvement in the litigation process are enough for them to conclude that the employer has waived its right to compel arbitration, even if it was done inadvertently.

The importance of this case is that the Tenth Circuit, somewhat contrarily, held that even though the employer waited five months before asking the court to compel arbitration and only after written discovery (i.e., the pretrial exchange of evidence) was under way, it wasn’t enough to find that the employer had waived its right to compel arbitration. The Tenth Circuit specifically held that the employer’s failure to assert arbitration as a defense in its answer to the employee’s complaint wasn’t required. The court went on to state that there is no set rule regarding what may constitute a waiver or abandonment of an arbitration agreement. Instead, it stated that whether a waiver has occurred depends on the facts of each case.

The factors the court used to determine whether the employer had waived its right to demand arbitration included:

  1. whether its actions were inconsistent with the right to arbitrate;
  2. whether litigation was significantly under way;
  3. the length of time the employer actually waited to request arbitration;
  4. the degree of its involvement in the litigation process – for example, whether it had filed requests with the court, such as a request for summary judgment (dismissal before trial); and
  5. whether the employee would be prejudiced (harmed) by a demand for arbitration.

The court explained in several contexts the factors that it used. For example, it stated that an employer may not engage in federal court litigation and then invoke its right to demand arbitration only after it appears the litigation isn’t going well for it – i.e., switch horses midstream just because it doesn’t like the direction the case is taking. The court explained that would be an improper manipulation of the judicial process.

The court also employed an efficiency analysis, stating that whether an employer has actually waived the right to demand arbitration depends not so much on the passage of time but rather on where in the litigation process the case is at the time of the demand. If a federal court case has been pending for some time without any activity (which can happen), then the mere passage of time becomes relatively unimportant.

With regard to the prejudice factor, the court didn’t focus on whether the employee personally wanted to litigate his claim rather than arbitrate it. Instead, it said the burden of persuasion to show prejudice lies with the employee as opposed to the employer. It also held that prejudice is best shown by how far along the federal court litigation is at the time the employer demands arbitration. When, as in this case, not too much activity has taken place before the employer’s demand for arbitration, the court held that the employee can’t show actual prejudice. The court also noted that federal law favors arbitration: “We give substantial weight to the ‘strong federal policy encouraging the expeditious and inexpensive resolution of disputes through arbitration’.” (Note the court’s comment that arbitration is “expeditious” — i.e., faster — and inexpensive by comparison to federal court litigation.) Hill v. Ricoh Americas Corporation.

What do you do? Although the employer prevailed, it’s somewhat surprising that it did based on earlier law. Needless to say, no employer — or more appropriately, no manager — wants to drop the ball in using and protecting its arbitration program. Those programs are there for a reason. As stated above, they save money and bring sanity to the decision-making process. The smart employer with an arbitration program will send a letter demanding arbitration to the employee’s attorney immediately upon receiving notice of the lawsuit, even before answering. Then, in your answer, arbitration should be asserted as a defense to the case. Next, before any other activity, you should demand that the court compel arbitration if the employee and her attorney don’t agree to it voluntarily.

Agreement not retroactive

In the second case, the Oklahoma Court of Appeals held that when the claims asserted in court arise before an arbitration agreement is executed between the parties, the arbitration agreement won’t have retroactive effect and the earlier claims may be pursued in court despite the fact that there presently is an arbitration agreement between the parties. Although this case arose in a dispute between a securities broker and its customer, the rule most assuredly will be applied by Oklahoma courts in challenges to the enforceability of employment arbitration agreements.

In the case, a customer filed a claim against a security brokerage house and her father (nice), who was an employee of the brokerage, alleging that her father had misappropriated funds held in a trust account established for her benefit. The brokerage immediately asked the court to compel arbitration and provided it with an arbitration agreement signed by the customer. So far, so good.

The court began its analysis by stating that both federal and Oklahoma law recognize and support arbitration agreements. It further stated that under federal law, any doubt about the scope of an arbitration agreement is to be resolved in favor of arbitration. However, the court also found that the dispute related to a trust account that had been closed before the customer signed an arbitration agreement. The court further found that there was no explicit language in the arbitration agreement providing that it would have retroactive application, i.e.,it would encompass any claims between the parties to specifically include those arising before the date of the agreement was executed. Lacking that, the court held there was no express agreement by the customer to arbitrate her claims. Morgan v. Edward D. Jones & Co., 2010 OK Civ. App. 36.

Practical application. Unlike the Tenth Circuit’s decision in the Hill case, this case exhibits Oklahoma courts’ generally hostile attitude toward private arbitration agreements. Although most Oklahoma cases give lip service to the broad federal and state-law mandates in favor of arbitration, they generally take pains to find an exception to the rule and to hold an arbitration agreement unenforceable. Needless to say, existing arbitration agreements need to be reviewed to ensure they have explicit language stating that they apply to all claims between an employer and employee to include any claims related to the employment relationship that may have arisen before the agreement was executed or accepted.

That may sound insignificant, but in reality, arbitration agreements aren’t always expressly stated in applications, signed off on by applicants and employees, or provided to employees on the first day of employment. Instead, an employee acknowledgment or the delivery of arbitration documents often doesn’t occur for days or weeks into the employment relationship, leaving a gap for claims to arise before formalization of the arbitration agreement. Additionally, there are employers that implement arbitration programs and make them applicable to existing employees, not just new employees, which makes the inclusion of retroactive language especially critical.