But first, to mandatory arbitration. Using non-negotiable employment agreements, a growing number of companies require their employees to resolve all disputes through arbitration, a method of dispute resolution involving a private decision-maker rather than a trial in state or federal court.

Research by Professor Alexander Colvin of Cornell University indicates that an estimated 56.2 per cent of non-union, private sector employees in the U.S. are subject to mandatory employment arbitration procedures.¹

Supporters of arbitration contend that it is a faster, less intrusive and less expensive alternative to litigation. However, most employee advocates condemn mandatory arbitration as denying important protections to plaintiffs, including broadly based pretrial discovery, the availability of a jury trial and the opportunity for substantial verdicts based on emotional distress or an award of punitive damages.

Moreover, mandatory arbitration clauses permit employers to arbitrate disputes confidentially, without the public scrutiny available to courtroom litigants. Added to these shortcomings are widespread concerns that arbitrators will more generally favor companies, who are regular participants in major arbitration forums and who will veto the selection of an arbitrator who rules too generously for individual claimants.²

To put this in perspective, our firm, representing an individual with a claim of discrimination, was recently advised in mediation that an arbitration clause in our client's employment agreement supposedly made our client's claims less valuable — because arbitrators in a large national arbitration forum would never risk their livelihoods by awarding substantial damages against an institutional client who might provide repeat business for the arbitrators over the years. Although we obtained a good result for the client, this sort of limitation on an employee's options is commonplace.

Nationwide, arbitration as a dispute resolution mechanism has been given primacy by virtue of the Federal Arbitration Act ("FAA"), a federal law enacted in 1925 to promote the use of arbitration through federal protections and procedures.

Over the years, state legislatures and courts have sought to place various restrictions on the scope of mandatory arbitration proceedings, especially where unequal bargaining power distorts the relationship between the parties.

These restrictions have included state requirements that mandate a judicial forum for certain kinds of legal disputes, as well as heightened procedural safeguards on the arbitration process. However, these efforts have largely been stymied by the FAA.

The FAA was enacted to ensure the validity and enforcement of private arbitration agreements. Section 2 of the FAA provides that "[a] written provision in...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."

The U.S. Supreme Court has repeatedly held that Section 2 "permits agreements to arbitrate to be invalidated by 'generally applicable contract defenses, such as fraud, duress, or unconscionability,' but not by defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue."³

The Supreme Court has also held that "Section 2 'declare[s] a national policy favoring arbitration' of claims that parties contract to settle in that manner" which "foreclose[s] state legislative attempts to undercut the enforceability of arbitration agreements" so that "[t]he FAA's displacement of conflicting state law is 'now well-established,' and has been repeatedly reaffirmed."⁴

Recently, for example, New York State enacted legislation (CPLR 7515) designed to exempt employment discrimination claims from mandatory arbitration. However, a series of federal district courts sitting in New York have held that Congress did not intend that discrimination claims be exempted from the FAA, and enforced the employer's arbitration agreement requiring arbitration of such claims despite the enactment of the New York statute.⁵

Plaintiffs in a number of cases have also tried to contend that the FAA does not apply to their claims if both parties reside within the state, because under Section 2 the FAA only covers disputes arising out of "a transaction involving [interstate] commerce." However, such claims have been largely unsuccessful, because "commerce" is broadly defined to include any transaction in any way "affecting" interstate commerce.⁶ Under this test, virtually all employment relationships fall under the FAA.⁷ A contrary decision on interstate commerce from a New York state trial court judge was overturned on other grounds, and has not been followed by any other state or federal court addressing the issue.⁸ The FAA continues to stand as a bulwark for firms seeking to enforce mandatory arbitration agreements with their employees.

Not only does the FAA protect an employer's right to enforce mandatory arbitration of individual employee claim — it also blocks access to the courts for class action employment claims.

In Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), the U.S. Supreme Court reaffirmed that the FAA requires courts to enforce agreements to arbitrate according to their terms, including mandatory agreements with terms providing for individual proceedings only and requiring the employee to waive the right to participate in a class action.

Employers have taken full advantage of this ruling to avoid class action lawsuits over discrimination or statutory employment rights.

As a result, employees, their advocates and various political leaders have pushed back against mandatory arbitration provisions in employment agreements, but with mixed results, as discussed below.

Amidst the #MeToo movement, many have called for an end to mandatory arbitration of employee disputes, especially with regard to claims of sexual misconduct. Some companies, especially technology companies reliant on the good will of their key employees, have forsworn the use of mandatory arbitration for at least some disputes.

Microsoft was the first Fortune 500 company to do so. On December 19, 2017, following employee unrest over charges of sexual harassment in the workplace, Microsoft announced that it would no longer require its employees to arbitrate sexual harassment cases.⁹

On May 15, 2018, Uber jettisoned mandatory arbitration for individual claims of sexual assault or sexual harassment by Uber riders, drivers or employees. That same day, Lyft did so as well.

Other technology companies followed suit, largely under pressure from their employees. On November 1, 2018, some 20,000 workers at fifty Google locations worldwide walked off the job, protesting a "culture of complicity, dismissiveness, and support for perpetrators" and setting out a series of demands, including the mandatory arbitration of sexual misconduct claims.

This protest came amidst press reports that Google had suppressed allegations of sexual misconduct against several of its executives and had reportedly paid one executive, Andrew Rubin, $90 million in severance when he left the company in the wake of a sexual misconduct investigation.

A week after the walkout, on November 8, 2019, the company agreed to a number of changes in company policy, including an end to mandatory arbitration of "individual sexual harassment and sexual assault claims."¹⁰

Google was joined the following day, November 9, 2018, by Facebook.¹¹ Airbnb and eBay followed in short order. Ultimately, in February 2019, facing further employee agitation, Google gave up on mandatory arbitration with its employees altogether, and ended its requirement of a class action waiver.¹²

The problem for opponents of mandatory arbitration is that for most companies, the advantages of preventing class action lawsuits and keeping disputes away from juries and public scrutiny far outweigh any fleeting good press which might be gained through a public disavowal of mandatory arbitration.

A handful of major technology companies were the exception: facing public scandals over sexual misconduct, concerns about the increasingly disruptive role of technology in society, or organized action by a highly valued workforce, they abandoned at least some of the protections afforded by arbitration. And in the U.S. economy they became arbitration unicorns . . . rare creatures indeed.

As for the rest of U.S. companies protected by the bulwarks of mandatory arbitration, advocates for change have looked elsewhere for reform. For example, in a statement provided to us by Galen Sherwin, a Senior Staff Attorney with the ACLU Women's Rights Project, she states that:

There are ongoing efforts to pressure individual corporations to change their practices and abandon forced arbitration, including some powerful advocacy from those who have been subjected to the practice. Unfortunately, absent legislative reform, there is only a limited amount that can be done to change the landscape from a legal standpoint….Until Congress acts to correct course and limit the scope of forced arbitration, corporations will continue to be free to adopt these policies that strip employees and consumers of their rights to obtain justice.

In the next sections, we discuss two alternatives to voluntary reform: on one front, pressure from institutional investors, and on the other, for federal legislation narrowing the scope of the FAA.

In the wake of the #MeToo movement, a number of publicly traded companies in the U.S. faced votes at their annual shareholder meetings on whether they should publish a report on how its mandatory-arbitration policy impacts employees and workplace culture (or some variant of this proposal). Of course, this sort of a proposal is designed to pressure the companies to abandon such policies altogether.

The vehicle for calling these shareholder votes is the SEC's Rule 14a-8, issued under the Securities Exchange Act of 1934, which permits a company's shareholders to present proposals to be included in the company's proxy materials for a vote at its next annual meeting. However, if the shareholder proposal falls within one of 13 prohibited categories, a company may exclude a shareholder's proposal.

Companies often oppose measures aimed at mandatory arbitration under Rule 14a-8(i)(7), which bars proposals relating to a company's "ordinary business" which should be left to control of company management, and Rule 14a-8(i)(10), which bars proposals which have been "substantially implemented" by a company.

When a company wants to exclude a shareholder's proposal from its voting materials under Rule 14a-8, it submits a "no-action request" to the Staff of the SEC. The Staff usually responds to a no-action request, stating whether it agrees or not with the company's intention to exclude the shareholder proposal.

When a shareholder proposal survives challenge by the company, it will often be institutional investors, such as pension funds and universities, who will provide the deciding votes. These institutional investors will often seek guidance from independent advisors on whether to approve the measures or not and will often leave it to these advisors to vote on proxy initiatives on behalf of the institution.

Leading advisory firms include Institutional Shareholder Services, Segal Marco Advisors and Glass Lewis & Co., and they analyze and/or vote for proposals which they view as increasing or supporting shareholder value or rights, and which align with the goals and directives of their shareholder clients.

During an interview, Maureen O'Brien, Vice President for Corporate Governance at Segal Marco, stated that her firm has assisted investors in filing proposals to end mandatory arbitration in cases of sexual harassment and negotiated with companies over such proposals.

When advocating such proposals, she emphasizes the harm that can befall companies which cover up sexual wrongdoing by their executives, stating that "sunshine is the best disinfectant." She believes that investors "want transparency" on claims of sexual misconduct, and that employees do not want to be bound by arbitration clauses barring access to the courts on these matters.

In 2019 and 2020, a handful of shareholder proposals on studies of mandatory arbitration made it past the SEC's vetting process and were presented to shareholders for a vote. Thus, in 2020, six such proposals were submitted for a possible shareholder vote, and two reached a vote. ISS recommended votes in favor of both proposals with one receiving majority support of 51% at Chipotle and the other, at Alphabet (Google's parent company), receiving just over 16% support.¹³

A prime example of how activist investors can successfully agitate against mandatory arbitration is provided by Wells Fargo & Company and its 2020 proxy vote. Since 2016, Wells Fargo had been buffeted by a major scandal, when it was discovered that the bank's personnel had created millions of fraudulent savings and checking accounts without client consent.

Presumably, Wells Fargo did not want to face another round of bad publicity and wanted to prove its good corporate citizenship. Thus, in November 2019, when Clean Yield Asset Management, a shareholder with a small ownership position in the bank, proposed a public analysis of mandatory arbitration's impact on sexual assault claims within the company, Wells Fargo chose to accede to the demand rather than face a showdown.

As reflected in correspondence with the SEC, in December 2019, the bank stated its intention not to submit the Clean Yield proposal to the shareholders, on the ground that "the Company has published on the Company's website the requested report on the impact of mandatory arbitration policies on the Company's employees, including an evaluation of the risks that may result from the Company's current mandatory arbitration policy."

Clean Yield then withdrew its proposal to the shareholders in light of this success. Correspondence on the topic between company counsel and the SEC is publicly available on the SEC website.¹⁴ Ultimately, in February 2020, Wells Fargo made the decision to voluntarily give up any contractual right to force an employee to arbitrate sexual harassment claims.¹⁵

Most recently, some 49% of Goldman Sachs Group Inc. shareholders voted in favor of a proxy proposal from the Nathan Cummings Foundation, requesting that the bank examine its use of mandatory arbitration in employee complaint cases.

The nearly successful measure had been actively supported by Gretchen Carlson, who faced a mandatory arbitration agreement when she pursued her own sexual harassment claims against Roger Ailes of Fox News, and who has actively agitated against such agreements.¹⁶

These types of results make it likely that proponents of abolishing mandatory arbitration of sexual misconduct claims will meet with at least a few more significant wins over the next few years. However, most proposals will face high hurdles of overcoming Rule 14a-8 scrutiny and acceptance by a majority of shareholders.

Moreover, as noted during an interview by Renaye Manley, the Deputy Director of the Strategic Initiatives Department of the Service Employees International Union (which undertakes socially progressive shareholder initiatives), the focus of proxy initiatives during the last year has very much shifted toward "racial equity and fairness" issues.

Thus proxy initiatives are unlikely to seriously undercut the protections that mandatory arbitration provides to so many major employers nationwide. Sweeping change is going to require legislative action at the federal level.

In 2019, House Representative Hank Johnson (D-Georgia) introduced the Forced Arbitration Injustice Repeal Act ("FAIR Act") to amend the FAA to bar the use of arbitration in employment, consumer, and other cases. This has been the key proposed amendment to the FAA to watch ever since.

In the last Congress, the FAIR Act passed the Democratically controlled House by a vote of 225 to 186. However, the U.S. Senate, then with a majority of Republicans, did not take up the legislation.

In February 2021, following the November 2020 elections and with a narrow Democratic majority in the Senate, Rep. Johnson reintroduced the legislation, which was co-sponsored by 155 House members.

There will be hearings and committee activity in both the House and the Senate for the FAIR Act and other legislative proposals related to arbitration. However, with the filibuster in the Senate, it may be impossible to enact the sort of change in the FAA which would satisfy those seeking reform.

1 J. Colvin, "Access to the Courts is Now Barred for More than 60 million American Workers," Economic Policy Institute Website (Sept. 27, 2017), https://bit.ly/3gkBuIn.

2 See J. Silver-Greenberg & M. Corkery, "In Arbitration, a Privatization of the Justice System," N.Y. Times (Nov.1,2015), https://nyti.ms/3xioXe4.

3 AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011) (internal citations omitted).

4 Preston v. Ferrer, 552 U.S. 346, 353 (2008) (internal citations omitted).

5 See, e.g., Gilbert v. Indeed, Inc., No. 20-CV-3826, , at *16 (S.D.N.Y. Jan. 19, 2021).

6 Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 274 (1995).

7 See, e.g., Simeon v. Domino's Pizza LLC, , at *3 (E.D.N.Y. Feb. 6, 2019) ("It is highly likely that everything from the cardboard used to make the pizza boxes, to the cheese and tomatoes used to prepare the pizza, to the car parts in Simeon's [plaintiff's] delivery vehicle traveled in interstate commerce.").

8 Newton v. LVMH Moët Hennessy Louis Vuitton Inc., No. 154178/2019, (N.Y. Sup. Ct. July 10, 2020), rev'd, 192 A.D.3d 540 (1st Dep't 2021).

9 B. Smith, "Microsoft Endorses Senate bill to Address Sexual Harassment, Blog Post on Microsoft Website (Dec 19, 2017.), https://bit.ly/3pQAFdv.

10 See, e.g., T. Taylor, "After Walkouts, Google Agrees to Step Up its Transparency, Harassment Policies, Wash. Post (Nov. 8. 2019), https://wapo.st/3gnkcKu.

11 D. MacMillen, "Facebook to End Forced Arbitration for Sexual-Harassment Claims," Wall St. J. (Nov. 9, 2018), https://on.wsj.com/3pP7304.

12 See, e.g., N. Tiku, "Google Ends Forced Arbitration After Employee Protest," Wired (Feb. 21, 2021), https://bit.ly/3wsLHZ0.

13 Georgeson LLC, 2020 Annual Corporate Governance Review at 37, https://bit.ly/3gpqyZO.

14 https://bit.ly/2RXrmfk

15 I. Moise, "Wells Fargo ends Forced Arbitration for Sexual Harassment Claims," Reuters (Feb. 12, 2020), https://reut.rs/3iTjQxd.

16 S. Kishan, "Goldman Narrowly Defeats Carlson-Backed Arbitration Vote," Bloomberg Equality (April 29, 2021), https://bloom.bg/3zsHyWE.