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ANALYSIS: GCs Can Be Change Agents for Ending Forced Arbitration

April 21, 2022, 9:00 AM

In–house lawyers will play a crucial role in helping companies comply with the recently enacted federal legislation invalidating forced arbitration agreements and joint–action waivers for sexual assault and harassment claims.

From advising human resources departments on process and policy changes to counseling the board and senior management on increased disclosure, financial, and reputational risks, general counsel and their staffs will be instrumental in guiding companies to navigate this changed landscape.

In–house counsel’s expertise will aid companies in developing a comprehensive game plan to respond to a shifting social environment, as the ramifications of the new legislation and additional proposed legislative changes (see below) continue to develop.

Arbitration Favors Commercial Parties

The standard practice for many organizations has been to require mandatory pre–dispute arbitration clauses and joint–action (class action) waivers in agreements with employees and in consumer contract boilerplate.

Arbitration is generally believed to be quicker and less expensive than judicial proceedings, and its procedures and outcomes are typically confidential, unlike those for most court cases. But arbitration outcomes have tended to significantly favor employers and commercial parties; moreover, without publicity, it’s difficult for claimants to find out about similar cases for comparison’s sake.

Hundreds of samples of these forced arbitration provisions are available publicly on the EDGAR database of the Securities and Exchange Commission, linked here as a Bloomberg Law Precedent Search.

Under “Consent to Arbitration” or a similar caption, these provisions typically state: “It is agreed that any and all claims that one party may have against the other arising out of or relating to this Agreement shall be adjudicated and resolved exclusively through binding arbitration before the American Arbitration Association . . . .”

In–House Counsel Role

With the enactment of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 in March, companies will likely see changes to how these claims unfold.

With the new law, organizations can expect increased publicity about employee disputes and routine business complaints, increased litigation expenditures and internal investigations, and the possibility of increased damages awards, class actions, and even punitive damages. Liability insurance premiums could rise and coverages could shrink.

In–house counsel will be asked for advice—both legal and business—about these changes and the various alternatives available to the organization. That advice will reflect the unique position in–house counsel occupy to balance these business risks consistent with the law, ongoing legal developments, and the values and culture of the company.

For instance, will the company dispute claimants’ attempts to broaden the law’s impact by bringing suit on claims that pre–date the law’s effective date? What position will the company take when a claimant includes unrelated, arguably arbitrable claims in a suit for sexual assault or harassment?

Should the company stand firm or acquiesce? The client may be best served by having these issues debated in advance rather than after initiation of an actual proceeding.

Whether coordinating new strategies with the human resources department, adjusting the practices of in–house HR investigative teams, drafting new policies, or auditing and evaluating old agreements, in–house counsel will be at the forefront of change in the organization’s posture toward forced arbitration generally and sexual abuse claims specifically.

Public company counsel may have a more complex set of issues, including risk disclosure, than their private company counterparts, particularly in industries such as public media and entertainment that are traditionally male–dominated or have a history of sexual abuse complaints.

Companies will rely on in–house counsel to initiate, lead, and influence these discussions.

A New Norm?

Ending forced arbitration for sexual assault and harassment claims may simply be the first step. In–house counsel may be called upon to address other forced arbitration clauses in the near future: For instance, pending legislation would prohibit subjecting race discrimination and other non–sexually based employee claims to mandatory arbitration.

A bill that passed the House in mid–March—the FAIR Act of 2022 (Forced Arbitration Injustice Repeal Act), H.R. 963—would invalidate pre–dispute arbitration agreements and joint–action waivers generally in employment, consumer, antitrust, and civil rights disputes. Arbitration may soon become a relic of the past for these types of disputes. If so, how do in–house counsel prepare their client for the road ahead?

While passage of the FAIR Act of 2022 is far from a foregone conclusion, forward–looking practitioners may begin to counsel their clients to prepare for likely changes. Reputational issues may lead some companies to abandon mandatory arbitration for all employee and consumer disputes. Organizations that are sensitive to environmental, social, and governance (ESG) matters could gain some reputational credit with shareholders, activists, and current and prospective customers and employees from such a move.

A workplace climate survey for employees and vendors may be a good starting point for some companies. Others may decide that it’s simply the right thing to do.

Bloomberg Law is analyzing how the enactment of the new forced arbitration law affects lawyers in practice areas like employment, M&A, securities, and commercial law. Click here for the original article on the law’s passage, which will be updated to add links to each follow-up analysis as it is published.

Bloomberg Law subscribers can also conduct research using Bloomberg Law’s Transactional Precedent Search and find related content on our Labor & Employment Practice Center, Securities Practice Center, In Focus: Sexual Harassment and In–House Counsel Resources pages. Subscribers can also use Bloomberg Law’s Transactional Precedent Search.

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