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.