Department of Defense Announces Defense Contract Provisions Prohibiting Contractors’ Use of Arbitration Agreements for Certain Employee Disputes

February 24, 2010

Last week, the Department of Defense issued a memorandum implementing the Franken Amendment, a provision of the Defense Appropriations Act for Fiscal Year 2010 restricting the use of certain pre-dispute arbitration provisions by defense contractors.

The memorandum prohibits the use of Department of Defense funds appropriated for FY 2010 for any contract awarded after February 17, 2010 in excess of $1 million unless the contractor agrees not to have mandatory pre-dispute arbitration agreements with its employees for disputes under Title VII of the Civil Rights Act of 1964 or claims related to sexual assault or harassment.  In addition to agreeing not to include mandatory arbitration clauses on these subjects in new employment contracts, the memorandum requires a contractor to refrain from taking any action to enforce such a clause in existing contracts. 

The memorandum further requires that by June 17 contractors certify that each subcontractor with a contract in excess of $1 million that uses FY 2010 funds does not enter into or enforce mandatory arbitration clauses regarding Title VII or sexual assault or harassment claims.

None of the above requirements applies to contracts or subcontracts for commercial items or commercially available off-the-shelf items.  However, bilateral modifications and task or delivery orders in excess of $1 million that will be paid by FY 2010 dollars are covered.  The Secretary of Defense may also waive the requirements if national security interests so require.

The memorandum reflects a broader debate regarding mandatory arbitration provisions in the employment context.  In recent years the courts have allowed binding arbitration provisions regarding employment disputes.  See, for example, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 32 (1991) (age discrimination claims can be subject to mandatory arbitration).  In the Supreme Court’s most recent pronouncement on the subject, it found that a union and employer could enter an enforceable agreement that employees would submit statutory discrimination claims to arbitration, rather than proceeding to court.  14 Penn Plaza LLC v. Pyett, 129 S. Ct. 1456, 1474 (2009).

At the same time, there have been legislative proposals to limit the use of arbitration for employment and other disputes.  The proposed Arbitration Fairness Act, for example, would declare invalid any mandatory arbitration provision for an employment, consumer, or franchise dispute or a dispute arising under a statute intended to protect civil rights.

In many cases, both employers and employees have found arbitration to be a useful, cost-effective, and expeditious way to resolve employment disputes and the memorandum prevents defense contractors using Department of Defense funds from entering into or enforcing certain pre-dispute arbitration agreements.  (The memorandum is silent as to whether an employee is prohibited from invoking such pre-dispute mandatory arbitration provisions.)

Comments received by the Department of Defense on or before March 3 will be considered in formulating the interim rule regarding the contract provisions, and comments received after that date will be considered in formulating the final rule.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher’s Government Contracts Practice Group and Labor and Employment Practice Group have extensive experience in counseling and litigation regarding federal contractors’ obligations in the employment area.  Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work, or any of the following attorneys:

Government Contracts Practice Group
Karen L. Manos – Practice Co-Chair, Washington, D.C. (202-955-8536, [email protected])
Joseph D. West – Practice Co-Chair, Washington, D.C. (202-955-8658, [email protected])

Labor and Employment Practice Group
William D. Claster – Practice Co-Chair, Orange County (949-451-3804, [email protected])
Eugene Scalia – Practice Co-Chair, Washington, D.C. (202-955-8206, [email protected])
William J. Kilberg P.C. – Washington, D.C. (202-955-8573, [email protected])
Christopher J. Martin – Palo Alto (650-849-5305, [email protected])
Jason C. Schwartz – Washington, D.C. (202-955-8242, [email protected])

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