Whistleblower Trapped in Arbitration

Cross-posted from The Watchdog Blog

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.