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ARBITRATION CLAUSES THAT MAY NOT PROTECT YOUR COMPANY

Labor and Employment

ARBITRATION CLAUSES THAT MAY NOT PROTECT YOUR COMPANY

Many of our clients and friends are aware of the recent United States Supreme Court decision (Circuit City Stores, Inc. v. Adams), in which the legal validity of arbitration agreements was affirmed. However, in New Jersey, the Circuit City case must be read in conjunction with a recent New Jersey Supreme Court decision (Garfinkel v. Morristown Obstetrics & Gynecology Associates, P.A.), where the court held that an arbitration clause in an employment agreement was so ambiguous as to negate its effect.

Arbitration agreements are often used to force disputes to be arbitrated, the theory being that arbitration, as opposed to a court trial, can sometimes result in a quicker resolution of the dispute at a reduced cost. In the Garfinkel case, a doctor signed an employment agreement with his employer. The agreement contained the following clause:

…any controversy or claim arising out of, or relating to, this Agreement or the breach thereof, shall be settled by arbitration in Morristown, New Jersey, in accordance with the rules then obtaining of the American Arbitration Association, and judgment upon any award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof.

The New Jersey Supreme Court held that the ambiguous nature of this language allowed the doctor to avoid arbitration and to proceed in court on his charges of sex discrimination.

The Court first affirmed that arbitration is “a favored method for resolving disputes” and that an employee may surrender his or her right to pursue in court a statutory claim of discrimination. However, it further noted that if an employee is being asked to waive access to the courts, the waiver “must be clearly and unmistakably established, and contractual language alleged to constitute a waiver will not be read expansively.”

In light of these pronouncements, the Court then held that the arbitration clause in Doctor Garfinkel’s employment agreement was too vague. It did not include the kind of language which would ensure a complete, knowing and voluntary waiver of statutory remedies. Doctor Garfinkel was thus able to avoid arbitration and to proceed with a trial in Superior Court on his claims of discrimination.

The practical meaning of this is that if you or your company intend to utilize arbitration as a means to resolve disputes, the arbitration agreement or the arbitration clause in the employment agreement must clearly state the exact nature of the statutory claims being waived. In absence of a knowing and voluntary waiver of his or her statutory rights, the employee may avoid arbitration, despite the existence of an arbitration agreement.

January 2002