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New 4th Circuit Opinion Upholds Arbitrator Ruling that an Employee’s “At-Will” Status May be Altered by Arbitration Requirement

March 8, 2022

There have always been reasons for an employer to think very carefully before including a binding arbitration clause in its employment agreements, and a Fourth Circuit Opinion decided last week – Warfield v. ICON Advisors, Inc. – highlights an alarming risk such a clause could pose – the loss of an employee’s “at-will” employment status.  

 

For those that do not know, Maryland is an at-will employment State.  Employment at-will simply means that a person’s employment can be terminated at any time, for any reason (except a reason that is unlawful) by either the employer or the employee.  An employer and employee may agree to a relationship that is not at-will (most commonly by a written employment agreement that defines the employment as being for a specific period of time).  There are, however, other circumstances in which an at-will relationship can be changed, sometimes without the employer intending to do so.  The Warfield case illustrates one such situation, where the issue is in the hands of an arbitrator whose ruling is extremely difficult to challenge.

 

The primary issue in Warfield dealt with the very high bar that must be met in order for a court to disturb an arbitration award.[i] The Fourth Circuit held that the employer failed to meet this high bar of showing that the arbitrator’s decision “manifestly disregarded” established law.  This ruling, in and of itself, does not break new legal ground.  Rather, the case highlights the damage that can be caused by an arbitrator’s seemingly clearly erroneous application of the law, which serves as a reminder that an arbitration agreement in an employment contract, or any contract, is not without its risks.[ii]

 

Mr. Warfield’s argued to the arbitrators that he was wrongfully terminated “without just cause” in violation of North Carolina law.  After receiving a substantial award, the employer asked the court to vacate the award, arguing that North Carolina is an at-will state that does not require that a termination be for cause and, therefore, the arbitrator blatantly disregarded established law. 

 

Citing prior cases from two other Circuit Courts that he claimed supported his position, Warfield argued that the mere fact that employment disputes were required to be arbitrated implicitly altered his at-will status.  The Court very clearly chose not to adopt or reject Warfield’s argument or the cases he cited.  Instead, the Court focused on the difficult burden that the employer was required meet in order to provide a court with the authority to overturn an arbitration award, holding that the burden was not met in this case. Because caselaw existed that arguably supported Warfield’s position and because the employer did not identify any binding North Carolina authority that expressly rejected the position, the Fourth Circuit ruled that a court could not second-guess the arbitrator’s decision: “We have previously explained that in the absence of clearly on-point and controlling precedent, the fact that courts disagree on a particular legal question weighs against second-guessing an arbitrator’s award.”[iii]

 

What does this mean for a Maryland employer?  Possibly nothing; potentially, though, an arbitrator could make a similar ruling that altered an employee’s at-will status in a similar situation under Maryland law, and a court might not be permitted to disturb that ruling if there is the slightest authority somewhere that would support it.[iv]  The Warfield case related to an arbitration requirement, but the same logic could be used to argue that a mediation requirement alters the at-will status and, possibly, even further may lead to claims that a jury trial waiver or class action waiver alters at-will status.  This may not be a significant risk if the argument is brought before a Maryland judge, and even if a judge were to make a perplexing ruling, appellate review would be available.  In the hands of an arbitrator, whose ruling is much harder to appeal, the risk is heightened.

 

There is ample reason to believe that arbitration is not preferable to litigation.  Despite the intent that arbitration more streamlined and less expensive than litigation, this is often not the case.  Arbitrator costs and administrative fees can easily make an arbitration more expensive than litigation, particularly to an employer, who may be required to incur most of those costs.  The scenario depicted in Warfield, where a rogue arbitrator ruling is upheld with only the slightest of legal support – presents yet another reason to think twice before putting an arbitration clause in your employment contracts.

 

[i] The high bar required is intentional.  Arbitration, in theory, is intended to create a more streamlined, informal proceeding without court involvement.  Allowing an arbitrator’s ruling to be freely second-guessed by the courts undermines the primary purpose of arbitration.

[ii] In the Warfield opinion, no formal employment contract or arbitration agreement was identified.  Rather, it was noted that because the employee’s profession fell within the purview of the Financial Industry Regulatory Authority (FINRA), the parties had agreed that their dispute needed to be arbitrated.  The apparent lack of a formal contract in this case should not affect its impact on situations where the agreement to arbitrate appears in a contract.

[iii] The Court further stated: “Even if we agree with [the employer] that it had the better of the argument before the arbitrators, the point remains that there is still an argument.  Because the issue is subject to reasonable debate, the arbitrators could not have manifestly disregarded the law by determining that Warfield could pursue a wrongful termination claim.”

[iv] Indeed, both cases cited by Warfield are at least 25 years old and have not been widely discussed by Courts throughout the country.  We did not find a Maryland court that has substantively cited either case. 

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