Monday, December 17, 2012

Arbitration of statutory claims in Michigan

In an order with three justices dissenting, the Michigan Supreme Court reversed a decision of the Michigan Court of Appeals concerning an arbitration provision in a law firm shareholders' agreement and its coverage of claims of age discrimination.  The court of appeal's decision was discussed in an earlier post.

On April 4, 2012, the Court issued an order granting leave to appeal and directing the parties to address two issues.  The issues were:  whether the shareholders' agreement arbitration clause encompasses claims arising under the Michigan Civil Rights Act and whether the plaintiffs, as shareholders of the firm, have a legally cognizable claim against the defendants under the civil rights act.

In the Court's Order, the majority stated that the issue in the case concerns the motive of the shareholders in invoking the separation provisions of the agreement.  This issue is a "dispute regarding interpretation or enforcement of...the parties' rights or obligations" under the agreement and is subject to binding arbitration under the agreement.  Since the dispute is subject to binding arbitration, the majority stated it is unnecessary to reach the standing issue and vacated that part of the court of appeals decision.

Justice Kelly stated in her dissent that the only "rights or agreements" in the shareholders' agreement address entitlement to stock ownership and restrictions on transfer.  There is a significant difference between challenging the motives for divesting plaintiffs of their stock and the mechanics by which divestiture occurs.  The agreement is silent of the issue of motives.

Justice Cavanagh joined Justice Kelly's dissent and noted that even if the dispute fell within the scope of the arbitration clause is not enforceable.  Under the Court's decision in Heurbetise v. Reliable Business Products, Inc., 452 Mich 405 (1996), an employee's prospective waiver of the constitutional right to litigate civil rights claim in a judicial forum is contrary to legislative intent.  The majority abuses this right by enforcing a prospective waiver of the right to a judicial forum.

The Order and dissent are less than three pages in length.  As a result, guidance as to the scope of this decision will not be found in an in depth discussion of the issue of coverage. A rationale for the majority's Order may be found in the dissent to the court of appeals decision.  In his dissent, Judge Kelly reviewed the three part test for determining arbitrability used by the courts. The three parts are:  is there an arbitration agreement between the parties; is the disputed issue on its face or arguably within the contract's clause; and is the dispute expressly exempt from arbitration by the terms of the contract.  Applying the three part test, Judge Kelly stated that the first and third elements are met, and that the civil rights claims are covered.  The arbitration agreement clearly applies because Michigan law prohibits age discrimination and the agreement is "subject to" and "governed by" the laws of Michigan.

Employers who have arbitration agreements with their employees will want to make sure that the agreements are in fact contracts.  The inclusion of an agreement or procedure in an employee handbook that states it is not a contract will likely not be held to be binding.  The scope of coverage needs to be reviewed to satisfy the second requirement of coverage.  In addition, employers need to make sure their agreements will within scrutiny of procedural fairness in order to binding.

In light of the Court's order, employers will be revisiting the issue of arbitration as a key component of their personnel policies.  Employers should make sure that they understand the risks of arbitration and difficulty of overturning unfavorable decisions.

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