On The Case

When corporations silence employees via arbitration, shareholders lose

(Reuters) - Sometime in the next few months, the U.S. Supreme Court will decide whether corporations can force employees not just to give up their right to sue in class actions but even to surrender their power to arbitrate alongside other employees raising similar allegations. In a trio of cases argued back in October, Epic Systems v. Lewis, Ernst & Young v. Morris, and National Labor Relations Board v. Murphy Oil, the justices are weighing the legality of employment contracts that require workers to arbitrate their disputes individually. Given the Supreme Court’s recent history of unwavering deference to arbitration, as well as its conservative majority, it’s likely the justices will uphold the validity of these contracts.

Tens of millions of American workers have already signed contracts agreeing to arbitrate their claims on their own. If the Supreme Court endorses employers’ right to impose mandatory individual arbitration, millions more will undoubtedly be forced to sign or else lose their jobs.

When employees lose the power to act in concert, corporations are less likely to be held accountable for mistreating workers. As New York University law professor Cynthia Estlund explained in a forthcoming article for the North Carolina Law Review, workers almost never bring individual arbitration claims against their corporate bosses. The problem isn’t just that employment arbitration, unlike litigation, takes place in secret, Estlund said. It’s that employment arbitration doesn’t take place at all. Estlund’s paper estimates that workers who are subject to mandatory arbitration provisions have shrugged off hundreds of thousands of claims – as many as 722,000 – instead of bringing individual arbitration cases. Estlund compared mandatory employment arbitration to a black hole, in which workers’ prospective claims simply vanish without even a flash of light.

That’s bad for employees, obviously. But you know who else loses when corporations get away with mistreating workers? Shareholders.

A few events over the last week prove my point. On Sunday, an investor group headed by a former Obama official backed away from a $500 million deal to acquire The Weinstein Company after the New York attorney general filed a complaint in New York State Supreme Court asserting grotesque allegations about the company’s treatment of men and women who worked there. (Harvey Weinstein lawyer Benjamin Brafman told Reuters there was “zero discrimination” at the company and that a fair investigation by the New York AG would show many of the allegations to be meritless.)

The Weinstein company is not publicly traded so only private investors have been hurt from its loss of value. But 21st Century Fox is a public corporation. In 2017, amid reports of sexual harassment allegations against several Fox executives, its share price continually declined (although the price has since surged from its Nov. 2017 low on rumors of an asset sale). Meanwhile, Fox officers and directors are on the hook for $90 million, after Chancellor Andre Bouchard of Delaware Chancery Court this week approved the settlement of shareholder derivative claims arising from the board’s handling of the harassment allegations.

The share price of Steve Wynn’s company, Wynn Resorts, fell by about 18 percent in the aftermath of the Wall Street Journal’s stunning report on sexual allegations against the casino mogul. Wynn has denied harassment, calling the claims “preposterous.” This week, Wynn shareholders sued board members for failing to investigate the CEO’s conduct. My Reuters colleague Tom Hals reported earlier this month that the #MeToo movement is pressuring companies to disclose sexual harassment allegations for fear that shareholders will cry fraud if the claims leak out.

It’s encouraging that companies are beginning to consider sexual harassment allegations to be material to shareholders. I’d like to think the stock market’s reaction would be swift and punitive if dozens of employees recounted allegations of a top executive’s rampant racism or religious discrimination – or even board members’ condoning corporate policies that cheat workers.

Institutional shareholders, in particular, frequently proclaim that they care about corporate governance and want the money placed in their trust to be invested in companies with good corporate cultures. If institutional investors are truly putting their money where their mouths are – and I hope they are – the market should already be rewarding companies that follow the rules and punishing those that allow employees to be abused.

But that’s true only if the market knows about the mistreatment. And if employees working under mandatory arbitration clauses truly aren’t bothering to raise allegations, as Estlund’s paper argues convincingly, the market isn’t operating with the information it needs to operate efficiently.

Now you may argue that even in the era of mandatory arbitration, workers can still bring allegations of discrimination and abuse to state and federal regulators. I’d bet those regulators would all tell you that they simply don’t have enough resources to police employers on their own. You might also argue that shareholders benefit when mandatory arbitration provisions curb unjustified employee class actions. And proponents of arbitration generally argue that it’s faster and cheaper than litigation, which would presumably benefit employees looking for a quick, fair resolution of their disputes with their companies. It may be that some corporations have instituted arbitration systems that function more efficiently than litigation.

On Monday, the attorneys general of every state in the U.S., plus the AGs of the District of Columbia and U.S. territories, sent an extraordinary letter to House and Senate leaders, calling for Congress to enact legislation to exempt sexual harassment victims from mandatory arbitration clauses in employment contracts. “The secrecy requirements of arbitration clauses ... disserve the public interest by keeping both the harassment complaints and any settlements confidential,” the letter said. “This veil of secrecy may then prevent other persons similarly situated from learning of the harassment claims so that they, too, might pursue relief.”

Sexual harassment, as the letter says, is a scourge and a disgrace. Corporations that countenance sexual abuse of employees, men or women, should be exposed to the market’s disapproval. It would be a great start if Congress were to pass a law mandating a right to sue for employees alleging sexual harassment.

But it would be only a start. Employees know what’s happening at their workplaces. When they’re silenced through mandatory arbitration provisions, investors lose a crucial source of information. In the end, that hurts shareholders.