American corporations increased their reliance on mandatory arbitration last year to settle sexual harassment allegations and other worker disputes, even as activist shareholders and lawmakers press to end the practice that prevents employees from taking claims to court.
Forced arbitration providers reported just under 14,000 closed cases with consumers last year, along with more than 5,000 with employees, according to the American Association for Justice. The combined tally represents a 17 percent increase over 2019 and is the highest in years, the advocacy group for plaintiffs’ lawyers said. The figure doesn’t reflect all case filings because forced arbitration providers are not required to disclose them.
Arbitration has historically been seen as more efficient than litigation as a way for parties to settle disputes. The process has less strict requirements than federal and state courts, and the parties involved are often subject to nondisclosure agreements. Still, settlement terms can be detrimental to employees, who may face a hostile work environment without alternative avenues to seek justice.
“While Americans faced grave economic and health circumstances, corporations continued to silence injured and defrauded consumers and workers by forcing them into these secretive, extrajudicial tribunals,” AAJ said in a statement last week.
Mandatory arbitration clauses often legally prevent employees from pursuing litigation on claims of discrimination, sexual harassment, disability rights violations and other infringements of workers’ rights, or from discussing them in public. Instead, an independent arbitrator hears the claims and adjudicates them. This keeps legal costs down and labor disputes out of sight.
As a result, many companies insist on forced arbitration clauses in employment agreements, potentially undermining efforts to promote diversity, equity and inclusion, or DEI, principles in the workplace, according to Courteney Keatinge, the senior director for environmental, social and governance research at proxy advisory firm Glass Lewis & Co.
“I would argue that this is one aspect of diversity: making an inclusive and equitable workplace,” Keatinge said in an interview. “This is the ‘E’ in DEI.”
Scrutiny on tech companies
Tech companies’ mandatory arbitration policies and their handling of discrimination and harassment claims have come under intense scrutiny. Facebook parent company Meta Platforms, Google parent Alphabet, Microsoft and Uber Technologies bowed to pressure to get rid of forced arbitration for sexual harassment claims.
Bobby Kotick, CEO of video game publisher Activision Blizzard, last month told employees that the company would waive forced arbitration for sexual harassment and discrimination claims and implement a “zero-tolerance harassment policy” in the wake of multiple state and federal investigations and lawsuits regarding its work environment.
Glass Lewis and Institutional Shareholder Services, the largest proxy advisory services firms in the country, both recommend voting to support shareholder proposals on companies’ arbitration practices for employment-related cases on a case-by-case basis.
“From an investor perspective, there is also concern that there could be things festering underneath the company if class-action suits aren’t allowed to proceed because they wouldn’t be with mandatory arbitration,” Keatinge said. “Employees not being able to form class actions is also concerning from the perspective that it could allow for a workplace where these issues are allowed to continue unchecked.”
“That’s the crux of why people are paying attention to this now,” she said.
This year, shareholders have supported proposals from the Nathan Cummings Foundation and Nia Impact Capital at The Goldman Sachs Group and rooftop solar company Sunrun to report on the use of mandatory arbitration by their employees and workplace culture. A similar initiative from Nia Impact at Tesla failed to pass during its annual general meeting in October, although support for the resolution increased to 45 percent from 27 percent the previous year.
“Anytime you have a majority-supported shareholder proposal, it is an incredibly strong message to a company that their investors care about the issue,” said Laura Campos, the Nathan Cummings Foundation’s director of corporate and political accountability.
Campos leads the foundation’s shareholder activities and was in charge of the arbitration reporting proposal at Goldman Sachs. She said the organization is working on similar initiatives related to arbitration practices at other companies and will file shareholder proposals for the upcoming proxy season, which will largely take place during companies’ annual meetings in the spring and summer.
“I think that they need to really put some time into examining whether or not their current stance on it is the correct one for the company and its shareholders,” Campos said in an interview. “Goldman got the message loud and clear when they saw a majority of shares voted supported our request for an evaluation of the continued use of mandatory arbitration.”
Despite the financial services firm publicly stating it would undertake an evaluation of its use of forced arbitration, Campos said Goldman Sachs has been “extremely stingy” as far as sharing updates on the process and refused to say whether it has started the evaluation.
A spokesperson for Goldman Sachs did not immediately respond to a request for comment.
Mandatory arbitration has grabbed the attention of lawmakers as well. Rep. Hank Johnson, D-Ga., in February introduced a bill that would prohibit a predispute arbitration agreement from being valid or enforceable if it requires arbitration of an employment, consumer, antitrust or civil rights dispute.
Sen. Kirsten Gillibrand, D-N.Y., introduced a bill in July with Sens. Marsha Blackburn, R-Tenn., Richard Blumenthal, D-Conn., Richard J. Durbin, D-Ill., Lindsey Graham, R-S.C., and Sheldon Whitehouse, D-R.I., as co-sponsors. Gillibrand’s bill would end forced arbitration clauses on sexual assault and harassment.
The House Judiciary Committee on Wednesday approved Johnson’s legislation, while the Senate Judiciary Committee is scheduled to consider Gillibrand’s bill on Thursday.
“Forced arbitration was created as a for-profit business, by business, for business, and it works well for big business because studies prove that in forced arbitration, the business just about always wins,” Johnson said prior to voting on the bill. “Over the past several decades, forced arbitration clauses in consumer and employment agreements have become so widespread that you can’t purchase anything or even take a job without being forced to agree to forced arbitration.”
Campos said the interest from lawmakers is helpful and adds to investors’ arguments for companies to address the issue. Regardless of what happens with Congress or state legislatures, shareholders will carry on to advocate for better human capital management.
“While there is clearly interest in addressing at the state and federal level, for many years on a whole host of issues, investors have made progress through private ordering when progress at the state and federal level has been stalled,” she said. “Even if we’re not moving forward on that front, investors will continue to try to push for this issue, company by company.”