Morgan Stanley in the US is fighting to stop a race-discrimination suit from going to trial by using a controversial tactic that keeps employee complaints secret

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  • Morgan Stanley is fighting to keep a race-discrimination complaint from a former wealth manager out of the courts and force it into arbitration.
  • Plaintiff John Lockette and his lawyer, Linda Friedman, who are trying to stay in court, say Morgan Stanley is using mandatory arbitration to mask ongoing race discrimination at the bank.
  • Morgan Stanley denies it discriminated against Lockette.
  • Mandatory arbitration clauses bar workers from filing lawsuits against their employers for a variety of civil-rights and labour complaints. Instead, employees must have their complaint heard in a private and secret forum. The clauses are increasingly being used across corporate America.
  • Business Insider spoke with lawyers, arbitrators, and judges about the expansion of mandatory arbitration in the US and its effects on civil and labour rights.

John Lockette, a 64-year old former Morgan Stanley wealth manager who is suing the brokerage over race discrimination, is fighting for his day in court.

Lockette, who claimed in a complaint filed in February that he was fired in retaliation for raising concerns about race discrimination at the bank, is in an ongoing legal battle for the right to have his suit heard in a US federal court rather than through a process called mandatory arbitration, whereby complaints are heard in a private forum.

Lockette told Business Insider that despite bringing the region under his control from 12th place out of 12 to No.1 on training performance, he was given negative work reviews, denied raises and bonuses, nicknamed “Johnny” because he was black, and fired in August 2016 after raising concerns over race discrimination.

Lockette said a superior told him: “Well, it’s a cultural thing. Blacks aren’t exposed to finance at this level, so they don’t do well in this environment.”

Lockette said, “It just became very dark at the time.”

But Lockette might not have the right to have the complaint heard in court, thanks to a 2015 email.

Morgan Stanley updated its employee arbitration contracts to ban racial-discrimination claims and class actions that year by sending out blanket emails to over 20,000 employees, including Lockette, records show. Employees who didn’t opt-out of the new terms and conditions in the email, or just didn’t read it, were automatically enrolled in the new arbitration agreement.

The strategy is being used to strip employees of their rights by “stealth” in companies across the US, said Linda Friedman, Lockette’s lawyer at Chicago civil-rights firm Stowell & Friedman, who is challenging the legality of the move in a separate case.

Morgan Stanley has become like “a lawless institution, without fear of being held accountable for their prejudice.” Friedman said, adding, “They do believe … that money is white. It’s not green.”

A Morgan Stanley spokeswoman denied the allegations in the complaint, saying in a statement, “The Firm is strongly committed to nondiscrimination, and looks forward to addressing this former employee’s claims on the merits.”

The case highlights that even amid heightened awareness for racial- and sexual-discrimination in the #MeToo era, it remains difficult for employees to seek legal justice in the court system.

Where Wall Street leads, corporate America follows

Mandatory arbitration bars workers from filing lawsuits against their employers for a variety of civil-rights and labour complaints, and is written into an increasing number of employee contracts across corporate America. It is a legally binding agreement that says that disputes that fall under certain categories will not be heard in court but put in front of private arbitrators in cases that are kept confidential.

Wall Street has been a leader in the implementation of mandatory arbitration contracts, which are now spreading into the wider economy.

Proponents of arbitration say it’s cheaper, faster, and quieter than the courts, benefiting all parties; critics of the practice say it favours companies over workers, restricts access to open justice, and conceals employer abuses because resolution takes place in isolation behind closed doors.

In all, 60 million American employees are now barred from using the courts for an array of claims against their employers, including race discrimination, short pay, workplace safety, and class-action litigation.

The number of US employees covered by mandatory arbitration agreements now exceeds 55%, up from 2% in 1992, and 80% of Fortune 100 companies have used arbitration since 2010, including Amazon, Nike and Exxon Mobil.

In July, the US Court of Appeals for the second circuit ruled that David Weiss, a disabled former employee of Macy’s who claimed that his manager harassed and terminated him because of his disability, could not go to court.

It was ruled that he was bound by a mandatory arbitration agreement, despite claims he was never aware of it.

Private justice

Justice blind scaleLukasz Siekierski/Shutterstock

Business Insider spoke with employment lawyers, corporate lawyers, arbitrators, academics, and judges about the expansion of mandatory arbitration in the US, and its impact on discrimination and civil liberties across corporate America.

“Privacy is where good claims go to die,” said Cliff Palefsky, a leading US employment lawyer and partner at McGuinn, Hillsman & Palefsky.

He raised concerns about private justice wherein employee win rates were lower than in jury trials and powerful “repeat players” such as big banks that regularly use arbitrators have a greater chance of winning cases.

Employee win rates can drop as low as 12% in arbitration when a company uses the same arbitrators often, compared with 33% and 36% employee win rates in federal court, research by professor Alexander Colvin of Cornell University has shown, and the complaints are heard in secret with the outcome sealed to the public.

Lockette and his lawyer are fighting to remain in the courts, but if the case is sent to arbitration his complaint will be adjudicated by a private for-profit arbitration firm called the Judicial Arbitration and Mediation Services, or JAMS, whose fees of between $US500 per hour and $US10,000 a day are paid for by the bank, according to both Friedman and Richard Chernick, the vice president and managing director of JAMS’ arbitration practice.

According to Friedman, Morgan Stanley’s frequent use of JAMS – which describes itself as the world’s largest alternative dispute resolution company – gives it a “repeat player” advantage, and the bank’s payment of the fees introduces the appearance of potential bias in proceedings, which should be impartial.

Victoria Pynchon, a corporate lawyer who formerly worked as an arbitrator with the American Arbitration Association, said that, in her experience, there could be bias toward companies who used arbitrators frequently because they were repeat players paying the bills – and there was fear from arbitrators of not getting picked to settle claims in the future.

“The word among arbitrators when I first started arbitrating was, you never want to award punitive damages against a corporate entity because you will never get rehired,” Pynchon said. “That was something lots of people said.”

She added that she was given that advice by at least a dozen arbitrators, including two who worked for JAMS.

Proponents of mandatory arbitration said the process was valuable for employees, too, because courts are expensive and difficult to access for the average worker. The clauses give them a free or inexpensive forum to have their dispute heard.

Professor Colvin’s research showing that lower employee win rates in arbitration has also been contested by University of Michigan professor Theodore Antoine, who has argued that the actual win rate for arbitration has been more comparable to the courts.

Louis DiLorenzo, a corporate lawyer at Bond, Schoeneck & King, who has represented companies and banks, told Business Insider that arbitration could be a fair way to resolve disputes that sees both employer and employee benefit, with the advantage of privacy that protects the reputation of both parties which can be “sullied” in a court case.

A JAMS spokesperson issued the following statement:

“We want to stress that JAMS is committed to providing neutrality, integrity, efficiency and mutual respect in all of our interactions. JAMS arbitrators are retired judges and attorneys who have a reputation for providing a fair, neutral and ethical process. They make decisions without regard to whether one party or the other will retain them in the future and our experience does not support the validity of the repeat player argument. “

“JAMS arbitrators do not get involved in the payment of fees; JAMS handles this administratively.”

Apart from a $US400 initial charge, the arbitration fee is paid by the company involved in the dispute, but employees are allowed to pay if they want to, the JAMS spokesperson added.

Legal and political battle

William Young, a federal district court judge for Massachusetts and critic of mandatory arbitration, told Business Insider that arbitration contracts mean Americans are becoming separated from the belief that they can get justice.

“Arbitration clauses are ever more pervasive, squeezing people out of the courthouse and closing the courthouse doors to people,” he said. “In the short term it seems clear to me that large aggregations of economic power favour the exclusionary benefits that they get from arbitration clauses, that bind their employees and those who challenge them.”

In fact, one public trial can do more to deter discrimination than a hundred arbitrations can, regardless of who wins, said employment lawyer Palefsky.

A former judge and a current arbitrator, who said they wished to remain anonymous, agreed and told Business Insider the secrecy of the process can be damaging. “Sunshine is the best disinfectant,” the arbitrator said.

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