THE GOOD & THE BAD: WHAT CONGRESS’ “FAIR PAY” AND “MANDATORY ARBITRATION” BILLS MEAN FOR FRANCHISEES
What Congress’s “Fair Pay” and “Mandatory Arbitration” Bills Mean for Franchisees
by David G. Ross

As small business owners and franchisees, you should be aware of two very different sets of bills now being considered by Congress. One, if successful, might make it much easier for your employees to successfully sue you for discrimination, and the other would forbid franchisors to impose mandatory arbitration requirements on franchisees. The former is potentially very dangerous to your businesses, whereas the latter is quite promising.

Though neither set of bills is likely to become law anytime soon, versions of them might pass eventually.

The Ledbetter Fair Pay Act and the Fair Pay Restoration Act

The Ledbetter Fair Pay Act and the Fair Pay Restoration Act are Congressional bills that, if successful, could dramatically impact the rights of employees vis-à-vis their employers. Currently, an employee loses the right to sue for an employer’s allegedly discriminatory pay-related decision unless he/she files a formal administrative complaint shortly after the decision was made. These bills, however, would allow employees, under some circumstances, to sue for employer decisions that were made many years earlier.

I. Background

During the past several decades, Congress passed laws that prohibit certain types of discrimination in employment. For example, Title VII of the Civil Rights Act of 1964 (“Title VII”) prohibits any business with fifteen or more employees from discriminating against employees and job applicants based on race, sex, national origin, and ethnicity. Similarly, the federal Age Discrimination in Employment Act (“ADEA”) prohibits businesses with 20 or more employees from discriminating against individuals over 40 years old. An employer that violates one of these statutes is subject to, among other things, lawsuits from aggrieved employees who can recover lost pay and other monetary and non-monetary damages. (Although most of you probably have too few employees to be covered by these statutes, be aware that many states have adopted their own versions of these federal laws and apply them to all employers – regardless of size.)

When an employee wishes to sue under Title VII or the ADEA (or under certain other laws), he or she must first file a timely complaint with the Equal Employment Opportunity Commission, or “EEOC”. (In some states, a "timely" complaint is one that is filed within 180 days of the employer's allegedly discriminatory act. In other states, the employee has 300 days.) An employee who fails to file a timely EEOC complaint is deemed barred by the “statute of limitations” from later filing suit.

II. The Ledbetter Case and Its Fallout

This past May, the United States Supreme Court issued an important, binding opinion interpreting this timeliness requirement. In Ledbetter v. Goodyear Tire & Rubber Co., 127 S. Ct. 2162 (2007), the employee-plaintiff argued that sexually discriminatory decisions made years prior to her 180-day filing period were leading to new acts of discrimination within the filing period. According to the plaintiff, each of the paychecks that she had recently received would have been higher if not for her employer’s earlier sexist policies. Thus, she claimed, each new paycheck was, in effect, a new “act” of discrimination – thereby beginning a brand new 180-day “statute of limitations” period. The Supreme Court rejected this argument, holding that the employer’s original decision was the only possible “act” of discrimination – and that the EEOC charge should have been filed within 180 days of the decision date.

Members of the two chambers of Congress – the House of Representatives and the Senate – quickly responded to Ledbetter by proposing identical bills that, if successful, would effectively overrule the Supreme Court’s determination. That is, the new law would change the wording of Title VII and the ADEA to require courts to adopt the “timeliness” interpretation advocated by the Ledbetter plaintiff. This result would be a major victory for employees and create an enormous danger to employers.

The Ledbetter Fair Pay Act, the bill introduced in the House, was passed by majority vote in that chamber on July 31, 2007. However, the bill won’t become a binding statute unless and until additional events occur. First, the House and Senate must be in complete agreement with regard to the proposed law’s language. This would occur if the Senate passed the Fair Pay Restoration Act, an identical bill introduced by Senator Edward M. Kennedy, or if the two chambers were to agree on a revised version of the House’s bill. Second, any draft approved by both the House and Senate would have to go to the President for approval. If accepted by the President, the bill would become law. If the President vetoed the bill, however, then the initiative would fail unless two-thirds of the members of each chamber voted to "override" the veto and pass the law anyway.

Despite the early victory in the House, proponents of the new legislation face an uphill battle – at least in the short term. The Fair Pay Restoration Act is still being considered by the Senate Committee on Health, Education, Labor, and Pensions, which has the power to either “kill” the bill or send it - with or without modifications - to the general floor of the chamber for Senate-wide debate and possible approval. Even if that occurs, however, creation of new law during the current Presidency is extremely unlikely. The Bush Administration announced as early as last July that the President would veto such a bill, and it appears extremely unlikely that enough Congressional support exists to override a veto.

Nonetheless, the outlook for the “fair pay” law could change dramatically if the nation elects both a Democratic President and a Democratic Congress in 2008. And if some version of the bills eventually do become law, it is quite possible that states will pass “copycat” versions that would apply to large and small businesses alike.

The Arbitration Fairness Act of 2007

Much more favorable to franchisees is a recent initiative to limit enforcement of mandatory arbitration clauses in Franchise Agreements and certain other contracts. As currently written, the Federal Arbitration Act (“FAA”) requires courts to uphold most contractual agreements to arbitrate legal disputes. Unfortunately, although arbitration agreements effectively ease the burden on the judicial system and sometimes benefit the parties, this near-blanket enforcement can be oppressive and unfair. In short, weaker parties like franchisees are usually the ones that most need access to the courts. Accordingly, stronger parties like franchisors often use their disparate bargaining power to impose mandatory arbitration and deny them such access.

A pair of identical bills introduced in the House of Representatives and the Senate, respectively, seek to even the playing field by making important amendments to the FAA. Although immediate passage is unlikely, the bills’ long-term prospects are promising.

I. The Problem With Mandatory Arbitration

Proponents of arbitration sometimes argue that it is less costly, more “streamlined,” and more efficient than court litigation. In truth, however, these arguments are misleading, and proponents omit to mention some of the clear detriments to weaker parties. First, arbitration is often just as costly as litigation. When one factors in the administrative fees charged by arbitration associations and the hourly fees charged by the arbitrators, the seeming “cost advantage” of arbitration can prove illusory.

Second, while proponents might be correct that arbitration is more “streamlined” and “efficient,” these qualities are not necessarily good things for franchisees in need of justice. In short, arbitration proceedings usually cut corners by limiting the use of “discovery” – the pre-hearing fact-finding process involving depositions, interrogatories (written questions that are answered under oath), and the exchange of documents. Franchisees often need discovery to establish important claims and defenses such as fraud, whereas the franchisor usually would rather see the case decided on little other than the “plain language” of the Franchise Agreement. Of course, the franchisor’s attorneys are the people who wrote the Franchise Agreement – a typically one-sided contract that usually puts numerous, stringent burdens on the franchisee while obligating the franchisor to quite little. (In some cases, the franchisor even forces the franchisee, through its mandatory arbitration provision, to agree that no discovery will be exchanged. Amazingly, arbitrators tend to enforce such agreements!)

Third, the pool of potential arbitrators is not always as balanced one would like. A disproportionate number of the arbitrators used by organizations such as the American Arbitration Association come from the types of large law firms that typically represent enormous companies and therefore have a conscious or subconscious pro-franchisor, “strict-reading-of-the-contract” bias.

Clearly, mandatory arbitration is not in the franchisee’s best interest.

II. The New Bills

In July 2007, identical bills, each entitled the Arbitration Fairness Act of 2007, were introduced in the House and Senate, respectively. Each bill states in relevant part that “No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of . . . [a] franchise dispute.” This language, which obviously would invalidate franchisor-imposed mandatory arbitration disputes, would represent a major victory – but franchisees must be patient.

First, the bills must get out of committee. The House bill is currently before the House Committee on the Judiciary’s Subcommittee on Commercial and Administrative Law. The Subcommittee held hearings on the initiative on October 27, 2007. The Senate version is before the Senate Committee on the Judiciary’s Subcommittee on the Constitution. In December 2007, the Subcommittee has begun hearings of its own. Although there is growing support for the bills, passage by both chambers is by no means guaranteed.

Second, even if the bills are passed, a Presidential veto is quite likely. As with the “fair pay” legislation, the arbitration bills might stand a much greater chance of success in the future than they do now.

Conclusion

Although neither set of bills is likely to be passed in the near future, you need to be aware of them. Discuss them with your associations and learn what you can do to influence your Congressional representatives and Senators to obtain the results that are best for you.

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Originally published in The Franchisee Voice, Vol. 13, Issue 4, Spring 2008.