Whistleblower Trapped in Arbitration
An opinion issued earlier this month by the 2nd
U.S. Circuit Court of Appeals shows how willing the courts can be to uphold
binding mandatory arbitration clauses even if the courts find elements of them
unfair.
The case involved Linda Guyden,
who was hired by Aetna Inc. in January 2004 as the company’s internal audit
director. Guyden soon concluded that Aetna’s internal audit department was ineffective,
leaving the company susceptible to violating the Sarbanes-Oxley Act of 2002.
After receiving unsatisfactory responses from various members of Aetna’s senior management team, Guyden
took her concerns to the firm’s CEO in August 2004. A week later, the firm’s
chief financial officer gave Guyden a withering
performance review that conflicted with a positive review he had given her only
a month earlier. Along the way, Guyden won an
intra-company battle to hire an outside auditor. In November, ten days before Guyden was slated to present the outside auditor’s report
to the firm’s audit committee, she was fired.
Guyden’s case was custom-made for a clause in
Sarbanes-Oxley that provides whistleblower protections to employees who are
fired for providing supervisors with information about potential violations of
federal securities law. Guyden filed an
administrative complaint with the Labor Department, as the statute requires.
But Labor failed to take action, later explaining that it takes a hands-off
approach to cases in which employees have signed an agreement to settle
disputes in arbitration and the department is satisfied that the arbitration
agreement will "adequately protect the employee’s interests." Labor
based this decision on a memo by former
Solicitor of Labor Eugene Scalia (son of the Supreme Court justice) that was
written in response to a Supreme Court decision
expressly permitting government
agencies to litigate on behalf of employees who had signed agreements to
arbitrate. While purporting to "welcome" that authority, Scalia’s
memo called for balancing it with our "liberal
federal policy favoring arbitration agreements," as the Supreme Court put
it in 1983. Notably, the Court articulated that sentiment
in the context of a business-versus-business dispute eight years before it even
decided that the Federal Arbitration Act applied to employment disputes.
After Labor failed to take action, Guyden
followed the statute’s instructions to file a case in federal district court. Aetna, predictably, moved to force Guyden
into arbitration. The district court granted the motion, and Guyden appealed.
Guyden’s over-arching argument on appeal was that the
arbitration clause should not apply to Sarbanes-Oxley whistleblower claims
because the statute was intended to serve the public purpose of protecting the
financial markets. But the appeals court was not persuaded, noting that
Congress had rejected amendments that would have forbidden mandatory
arbitration of SOX whistleblower claims.
Aside
from her sweeping claim against arbitration of SOX whistleblower claims, Guyden raised three complaints about Aetna’s
arbitration clause that she argued should have invalidated it.
First,
Guyden attacked the clause’s confidentiality
provision, which said that "all proceedings, including the arbitration
hearing and decision, are private and confidential, unless otherwise required
by law."
The
appeals court sympathized with Guyden, agreeing that "a
lack of public disclosure may systematically favor companies over individuals."
But the panel said it could not act on this concern because "confidentiality
clauses are so common in the arbitration context" that attacking them
would be "an attack on arbitration itself." That would constitute a "generalized
attack" on arbitration, which the Supreme Court has prohibited in light of
its "strong endorsement" of arbitration. Let’s translate. The appeals
panel found that confidentiality terms in arbitration clauses systemically
favor businesses, but that such favoritism is so ubiquitous that it cannot be
policed without impugning the very institution of arbitration, which the
Supreme Court has deemed sacrosanct.
Next,
Guyden argued that the arbitration clause’s
stipulation that the arbitrator would only be required to write a brief summary
of his or her opinion could allow the arbitrator to issue a ruling at odds with
the law and mask the flawed reasoning in a vague summary. That, Guyden said, would leave her without options for judicial
review because "no one would be the wiser." Notably, Scalia’s memo
calls for arbitration clauses to require written awards
"setting out not only the award but also the essential findings of fact
and conclusions of law on which it is based" as a factor in determining
whether arbitration would indeed protect the employee’s interests and thereby
justify Labor opting not to take up a case. But, just as these arbitration
terms did not sway the Labor Department, they also failed to persuade the
appeals court. Because Guyden could not show
that the arbitrator would in fact ignore the law and mask that transgression in
a vague opinion, the appeals court found this factor insufficient to strike
down the clause. Of course, if the arbitrator did do as Guyden feared, that very act
would likely deprive her of the evidence she would need to prove it.
Finally,
Guyden argued that the arbitration clause’s
limitations on discovery, which permitted each party to depose only one person
(aside from expert witnesses) without special permission from the arbitrator
would prevent her from vindicating her claim. The appeals court again
sympathized with Guyden, noting that deposing only
one person was "unlikely to be adequate." Here too, Guyden might have expected support from the Labor
Department, given that Scalia’s memo calls for "access
to the information reasonably relevant to the arbitration" and "reasonable
mutual discovery" as factors in the department deferring to arbitration. But
just as Guyden got no help from Labor, the appeals
court also failed to step in. The panel said a claim about limited discovery in
arbitration constituted "an attack on the character of arbitration itself,"
which, as previously discussed, it deemed off limits. Also, the court
discounted Guyden’s claim because the clause
permitted the arbitrator to allow extra discovery. Because Guyden
was unable to prove that the arbitrator would not exercise that discretion, the
appeals court found Guyden’s complaint insufficient "unless
and until the record proves otherwise." It is unclear what record Guyden would be able to rely on later on.
Thus,
Guyden struck out before the appeals court, and must
decide whether to try her luck in arbitration. Meanwhile, the accounting
problems that she raised and the outside auditor’s report she commissioned
remain secret.
The
court of appeals agreed with some of Guyden’s
concerns but appeared to think its hands were tied by Supreme Court rulings
that have interpreted the Arbitration Fairness Act as making arbitration
agreements almost inviolable. The Court has based this interpretation on the
faulty assumption that arbitration offers an equivalent form of justice to the
courts. Such reasoning ignores the vital point that in nearly all
business-versus-individual disputes, the business chooses the arbitration firm
that handles the case. Obviously, allowing a business to hire a firm to choose
the judges and juries who decide its disputes would be unthinkable in court.
The
clearest solution to this mess is for Congress to pass the Arbitration Fairness
Act, which would ban pre-dispute binding mandatory arbitration clauses in
consumer and employment contracts altogether. Congress also should resolve any
ambiguity that real whistleblower protections require due process and
access to a jury trial. The Private
Sector Whistleblower Protection Streamlining Act would do so by explicitly
banning mandatory arbitration in Sarbanes-Oxley and similar whistleblower
cases. In the meantime, the new president could show leadership on
corporate and government accountability by issuing an executive order
instructing the
Labor Department and other agencies to pursue employment cases solely on the
merits, regardless of any contractual arbitration claims.