The U.S. Supreme Court has issued a ruling that strengthens employer arbitration rights.
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U.S. Supreme Court Strengthens
Employer Arbitration Rights
Meanwhile, Congress Seeks To Prohibit
Such Agreements
By Christopher W. Olmsted
Some employers enter into arbitration agreements with employees as an alternative to dispute resolution in a court of law. In the event of a legal dispute, the matter is submitted to an arbitrator (often a retired judge) rather than to a judge or jury in state or federal court. However, over the years courts have scrutinized the terms of arbitration agreements, sometimes finding certain terms to be too unfair to the employee. Formulating enforceable terms of an employer-employee arbitration agreement—that is, an agreement that the courts will agree to uphold—has been very challenging.
One question courts have grappled with is who gets to decide whether the arbitration agreement is enforceable? Is the court? Or does the arbitrator decide without any court intervention? The U.S. Supreme Court recently addressed that question in a case titled Rent-A-Center, West, Inc. v. Jackson.
Employee Argues Agreement Is Unenforceable
Antonio Jackson filed a lawsuit against his former employer, Rent-A-Center, alleging unlawful discrimination. He filed his lawsuit in a federal district court. The company filed a motion to dismiss the action. It argued that Mr. Jackson had signed an arbitration agreement wherein he had promised to bring any employment claims before an arbitrator rather than the court.
Mr. Jackson argued that the arbitration agreement was flawed and that the court should not enforce it. The company responded that the question of whether or not the agreement is flawed should be answered by an arbitrator, not the court. The agreement included a “delegation clause,” meaning that it specifically delegated to the arbitrator (rather than the court) any questions regarding enforceability of the agreement.
The district court agreed with the company, ruling that the matter must be sent to an arbitrator. Mr. Jackson appealed this ruling.
On Appeal: Splitting Hairs
On appeal from a Ninth Circuit ruling, the U.S. Supreme Court considered the question of whether the arbitrator or a court decides whether an arbitration agreement is enforceable.
The Court began by reviewing a federal law, the Federal Arbitration Act (FAA). This law sets forth rules and procedures for arbitration of legal disputes. The court noted that generally the FAA permits parties to an agreement to dictate “gateway” issues. That is, the parties can agree how to address preliminary issues such as whether a particular dispute is even subject to arbitration, or whether the agreement itself is somehow too flawed to impose on the suing employee.
In order to reach a conclusion in this particular case, the Court had to split hairs. The answer depends on the type of the employee’s validity challenge. The Court noted that there are two types of validity challenges under the FAA “One type challenges specifically the validity of the agreement to arbitrate,” and “the other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid.”
On the one hand, an employee might be tricked into signing an employment contract—perhaps by a false promise. Or the employee may claim that the agreement includes unfair legal procedures or improper allocations of fees. In such cases, the employee would challenge the validity of the contract as a whole. These are the sort of issues that the arbitrator should decide if the agreement delegates those decisions to him. On the other hand an employee might challenge the arbitration delegation clause itself. If the employee challenges the propriety of delegating powers to the arbitrator, then the court should make the ruling, not the arbitrator.
In this case, Mr. Jackson challenged the validity of the agreement as a whole; he did not focus his challenge to the specific delegation clause giving the arbitrator the power to determine the validity of the agreement. He challenged issues such as the fee allocation, the types of disputes subject to arbitration, and the amount of discovery parties could conduct before the hearing.
Because Mr. Jackson challenged the agreement as a whole, and because the arbitration agreement delegated such challenges to the arbitrator to decide, Mr. Jackson had no right to seek court intervention. He was required to submit his claim to the arbitrator.
Significance of The Case:
The U.S. Supreme Court has issued decision favoring arbitration. Employees often challenge the enforceability of the entire employment agreement rather than the specific arbitration provision. As a result, such challenges will be considered in arbitration rather than in court, if the arbitration agreement delegates such decision to the arbitrator.
One can certainly expect, however, that attorneys representing employees may change the way they challenge arbitration agreements in order to gain an audience with a judge rather than an arbitrator. They will seek to challenge the enforceability of specific provisions of arbitration agreements rather than attacking the agreement as a whole.
Employers should review arbitration agreements and revise them if necessary. The agreements should include a clause that delegates to the arbitrator the decision regarding whether the agreemen is valid and enforceable.
Congress May Outlaw Employment Arbitration.
Congress is currently considering legislation called the Arbitration Fairness Act (S. 931, H.R. 1020). If passed, the law would ban mandatory arbitration between employers and employees. Essentially, the law would invalidate every arbitration agreement currently in place in the employment context. No employment law cases would be decided in arbitration unless the employee agreed to do so at the time the employee made a legal claim.
Senator Russ Feingold sponsored the bill. Senator Feingold believes that arbitration should be banned unless the parties agree to participate after the dispute arises. In a press release, he states: “The Arbitration Fairness Act reflects the FAA’s original intent by requiring that agreements to arbitrate employment, consumer, franchise, or civil rights disputes be made after the dispute has arisen. The Act does not prohibit arbitration, but it will prevent a party with greater bargaining power from forcing individuals into arbitration through a contractual provision. It will ensure that citizens have a true choice between arbitration and the traditional civil court system. The Act does not apply to collective bargaining agreements.”
More information:
Text of Bill
Senator Feingold’s Statement
Related Articles:
Arbitration Update: California Court Trashes Waste Disposal Company’s Arbitration Agreement
Download entire July 2010 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2010 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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