Arbitration Agreements - New Supreme Court Decision Concludes State Laws May Not Undercut FAA

Robin Foret
March 31, 2008 — 2,397 views  
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For over a decade, employers have increasingly sought arbitration as the forum of choice for the resolution of employment disputes. Arbitration is relied upon to direct employment-related, as well as other disputes, away from the courtroom and into the arbitration forum for a variety of reasons. These reasons include the belief that arbitration is less likely to result in large damage awards and can be less costly than the traditional arbitration process. Employers often ask employees to sign employment agreements that provide for the arbitration of all disputes that arise from the employment relationship. Although employers have enjoyed a large degree of success enforcing arbitration clauses in the face of various challenges to arbitration, this success is not without its limits. This article addresses arbitration under the Federal Arbitration Act (“FAA”), which is one of the most common arbitration arrangements, as opposed to arbitration under other statutes or state arbitration schemes. A. The Ruling in Preston v. Ferrer, ___ U.S. ___, 128 S. Ct. 978 (2008): The United States Supreme Court in Preston v. Ferrer concluded that the FAA takes precedence over state laws that conflict with contractual arbitration arrangements governed by the federal statute. The decision affirmed that state laws may not override the FAA to prevent the arbitration of disputes on subjects that the parties have agreed to arbitrate. Section 2 of the FAA provides that a written contract evidencing any transaction involving interstate commerce (which is broadly defined) to settle a controversy by arbitration is valid and enforceable. See 9 U.S.C. §2. This section has been interpreted to mean that when a valid arbitration agreement exits, the courts shall enforce that provision and order the parties to arbitration. The Ferrer case involved a fee dispute between a Fox television personality, Judge Alex (Alex Ferrer), and Arnold Preston, an entertainment lawyer. The contract between the parties contained an arbitration clause that provided for disputes to be brought before the American Arbitration Association (“AAA”), and; therefore, was governed by the FAA. Ferrer attempted to avoid arbitration by invoking a California statute mandating that the Labor Commissioner had exclusive jurisdiction to resolve the dispute, as well as listing numerous administrative procedures. Preston responded by contending that he acted as a personal manager rather than an unlicensed talent agent; thus, his services were not governed by the California statute, which meant that arbitration was proper. The arbitration clause itself, however, was not challenged. Without resolving the specific issues raised by the parties, the Court held that arbitration before the AAA was appropriate, and that state legislative attempts to undercut the enforceability of arbitration agreements will not be tolerated. More specifically, the Court concluded that the California statutory scheme was in conflict with the FAA: (1) by granting the Labor Commissioner exclusive jurisdiction to decide a dispute that the parties had agreed to arbitrate; and, (2) by imposing other prerequisites to the enforcement of the arbitration process, i.e., that various administrative remedies had to be exhausted in the California state forum. Thus, the California statute could not override the FAA and arbitration of the dispute before the AAA was appropriate. Although this was not an actual employer-employee dispute, the analysis of arbitration clauses in employment agreements is much the same. B. Limitations on the Enforcement of Arbitration Agreements To be sure, arbitration agreements are favored by the courts. Nevertheless, there are limitations on enforcement of these arrangements, particularly in the employment context. Some important limitations are: 1. Agencies not bound – An agreement to arbitrate a dispute does not prevent an agency, such as the Equal Employment Opportunity Commission (“EEOC”) from accepting employee complaints, investigating such complaints or even bringing enforcement actions against employers. Moreover, employees subject to arbitration clauses may still be able to file a charge of discrimination or other agency complaint, even if they are prohibited from seeking monetary relief at the agency level or in the courts. See EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S. Ct. 754 (2002); Gilmer v. Interstate Johnson Lane Corp., 500 U.S. 20, 111 S. Ct. 1647 (1991). 2. Valid agreement between the parties – A party cannot be required to arbitrate a dispute unless he or she has agreed to do so. The agreement to arbitrate must be clear and unequivocal, and the burden is on the party seeking arbitration to establish an enforceable agreement exists, and that the claims asserted fall within the scope of that agreement. A party who is not a signatory to an arbitration agreement may not be bound by the agreement absent the application of some contractual or agency principle. See, e.g., E.I. Dupont De Nemours and Co., v. Rhone Poulenc Fiber and Resin Intermediates, S.A.S., 269 F.3d 187, 194 (3d Cir. 2001) (non-signatory corporation could not be compelled to arbitrate claim). This principle may be applied to prevent a successor company who was not a party to an agreement from enforcing an arbitration clause against an employee. See e.g., Mohamed v. Auto Nation USA Corp., 89 S.W.3d 830, 835 (Tex.App. – Houston [1st Dist.] 2002, no pet.) (when an entity that is not a signatory to an employment agreement claims to be the successor in interest to that agreement, it must present evidence to support the corporate successor assertion). 3. Limits on ability to appeal – It is also important to understand that arbitration decisions are very difficult to overturn. There is no right to appeal akin to that which exists in the judicial system. Challenges to an arbitration award are governed by the FAA. 9 U.S.C. §10. There must be fraud, corruption, misconduct or a manifest disregard of the law, all of which are difficult standards to meet. See Polin v. Kellwood Co., 103 F. Supp.2d 238 (S.D. N.Y. 2000). This means that employer and employee are often stuck with the arbitrator’s decision, even in cases where the law has not been interpreted correctly. C. Other Tips for Enforcement 1. Writing – make sure that all arbitration agreements with employees are contained in a written instrument signed by the employee. Such agreements should not simply be contained in handbooks; the better practice is to have separate written instruments for each employee to sign. 2. Successor Liability – make sure that arbitration agreements provide for the transfer of rights and obligations of the contract to a successor company. Review employment agreements periodically to make sure that they remain enforceable, if not, depending on the state at issue, employers may be able to have employees sign new agreements during the course of employment. 3. Discovery – The AAA, as well as other arbitration forums, have their own procedures to conduct discovery. In some instances, employers may wish to alter these rules. For example, the agreement could provide for discovery to be conducted pursuant to the Federal Rules of Civil Procedure instead of the AAA. 4. Choice of Forum – Arbitration agreements should contain a choice of forum clause, which indicates the state, and/or even the county, in which the arbitration will take place. 5. One Size Does Not Fit All – Finally, it is important to recognized that one size does not fit all. The arbitration forum may not be right for every employer, depending on the state in which the employer is located, the type of industry, etc. Employers should seek advice of their counsel when making the decision to use arbitration as the chosen forum for employment disputes. The information contained in this article is not designed to address specific situations, and does not include rules and regulations that apply to all states. If you have questions concerning this topic, you should consult with legal counsel of your choice to obtain advice on various fact specific matters.

Robin Foret

The Foret Law Firm

Robin Foret practices in the areas of employment law, commercial litigation and specialty insurance defense claims. She handles a variety of employment matters such as theft of trade secrets, breach of employment agreements, non-competition agreements, wage and hour issues under the Fair Labor Standards Act (FLSA), discrimination and harassment issues under Title VII of the Civil Rights Act of 1964 (Title VII) and the Texas Commission on Human Rights Act (TCHRA), the Americans with Disabilities Act (ADA), Family Medical Leave Act (FMLA) issues, and the Sarbanes-Oxley Act (SOX). Robin has handled a wide variety of employment law matters for employers, as well as for executive-level employees, before agencies, and state and federal courts.