Poorly Drafted Arbitration Agreement Results in Litigation, Not Arbitration

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By:  Claudia D. Orr

A recent Michigan Court of Appeals’ decision provides a good reminder just how important it is to carefully draft agreements with employees, including arbitration agreements. Shaya v City of Hamtramck.

Plaintiff Steve Shaya is the former director of Public Services for the City of Hamtramck.  On February 29, 2012, he entered into a written employment agreement that provided, in relevant part as follows:

Any controversy or claim arising out of or relating in any way to this agreement shall be settled exclusively by arbitration administered by the American Arbitration Association under its then-current National Rules for the Resolution of Employment Disputes, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.  This agreement to be submitted to binding arbitration specifically includes, but is not limited to, all claims that this agreement has been interpreted or enforced in a discriminatory manner. … (emphasis added)

After Shaya was discharged, he filed a civil lawsuit claiming national origin discrimination and retaliation as a whistleblower.  The defendant sought dismissal on the basis of a binding arbitration agreement…or so it thought.

While the trial court agreed, the Michigan Court of Appeals found the agreement unenforceable as to the claims that were asserted.  Quoting Rembert v Ryan’s Family Steak Houses, 235 Mich App 118, 161-62 (1999), the appellate court reminded that, in order to be enforceable, a pre-dispute arbitration agreement must afford procedural fairness by providing all of the following:

(1)  Clear notice to the employee that he is waiving the right to adjudicate discrimination claims in a judicial forum and opting instead to arbitrate these claims…

(2) The right to representation by counsel…

(3) A neutral arbitrator…

(4) Reasonable discovery…

(5) A fair arbitral hearing…

The court found that, by including within the scope of the agreement “all claims that this agreement has been interpreted or enforced in a discriminatory manner” was insufficient notice that statutory discrimination claims under the Elliott-Larsen Civil Rights Act had to be arbitrated. It also concluded that claims under the Whistleblowers’ Protection Act “protect similar statutorily recognized interests and deserve like treatment.”

Lastly, the City argued that the arbitration agreement provided an administrative remedy that had to be exhausted before Shaya could file civil litigation. “The doctrine of exhaustion of administrative remedies requires that where an administrative agency provides a remedy, a party must seek such relief before petitioning the court.”  However, that argument also failed because arbitration is not an administrative remedy and no governmental agency is involved in that process.

Not only is important to have a carefully drafted arbitration agreement, but it is important to consider whether arbitration is right for your company and whether the process, as drafted, serves your interests.  I recently served as an arbitrator on a panel of three arbitrators.  That meant that every time anything had to be decided (such as a discovery motion, a motion to dismiss, etc.), the parties were paying for three arbitrators to make that decision costing nearly $1000/hour.  Given the value of the claims, it made no sense at all. Before you enter an arbitration agreement with your employees, consult with experienced employment counsel, such as the author.

This article was written by Claudia D. Orr, who is Chair of the Legal Affairs Committee of Detroit SHRM, and an experienced labor/employment attorney at the Detroit office of Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM).  She can be reached at corr@plunkettcooney.com or at (313) 983-4863. For further information go to: http://www.plunkettcooney.com/people-105.html.

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