Businesses seek certainty so they may manage their workforces and liability risks. These goals continue to be elusive when it comes to arbitration of employment disputes. Employers frequently must revise arbitration programs to comply with new laws and court decisions, which are mainly designed to thwart arbitration.

In particular, the tug-of-war between the U.S. Supreme Court and the Federal Arbitration Act (FAA) on one side, and lower federal and state courts and agencies on the other, continues apace. The U.S. Supreme Court consistently has ruled the FAA preempts state legislatures’ and courts’ efforts invalidate arbitration agreements. The Court has declared that states cannot use “public policy” to justify laws disfavoring arbitration.

The Supreme Court’s decision last term in Kindred Nursing Centers L.P. v. Clark, is a consistent application of the Court’s arbitration jurisprudence. Nursing home residents granted “powers of attorney” to relatives, allowing management of the residents’ affairs. After signing arbitration agreements on behalf of the residents, the relatives claimed they were void.

The Kentucky Supreme Court held that the broad powers-of-attorney certainly included agreements to arbitrate. But Kentucky’s public policy precluded enforcement of the arbitration agreements, the court held, because the powers of attorney did not expressly list the power to waive jury trial – a constitutional right.
The U.S. Supreme Court viewed Kentucky’s “clear statement rule” as inappropriately singling out arbitration agreements for disfavored treatment. Therefore, Kindred’s arbitration agreement was enforceable under the FAA.

California’s Public Policy Exceptions

Although not an employment law case, Kindred’s reliance on the FAA is relevant to California employers. The California legislature and courts actively seek to invalidate arbitration agreements based on “public policy.”

For example, in 2014, the legislature enacted AB 2617, which makes it illegal to mandate arbitration of claims based on Civil Codes 51.7, 52, and 52.1. These “hate crime” laws apply to employers in certain cases. The new law provides, among other things, that pre-dispute agreements to arbitrate are void against public policy. However, the law expressly states it does not preclude enforcement of the contract apart from the arbitration provisions.

The courts have not yet considered whether the FAA preempts AB 2617. But the parallels to the Kentucky Supreme Court’s “clear statement rule” are obvious. The U.S. Supreme Court commented in Kindred that Kentucky “did exactly what [ATT Mobility v.] Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.”

Until courts decide whether the FAA preempts AB 2617, employers face another arbitration dilemma. Employees suing under the California Fair Employment and Housing Act, for example, may try to “creatively plead” claims under the above Civil Code sections to avoid arbitration, or to divide a case into two. So, employers risk courts’ invalidation of their arbitration agreements if they do not follow AB 2617’s provisions, and risk undermining their arbitration agreements if they do.

AB 2617 aside, California case law also bases in public policy a list of requirements for arbitration agreements that simply do not apply to any other type of contract. For example, the California Supreme Court relied on public policy in its Armendariz case to hold that employers must bear all costs of arbitration, remedies may not be limited, etc., at least when arbitrating statutory claims. It remains to be seen whether the U.S. Supreme Court will directly address the Armendariz decision, which has been on the books since 2000.

Enforceable Public Policy

The California Supreme Court’s decision in McGill v. Citibank, is a lesson to those who draft arbitration agreements. Properly understood, arbitration is a change in the forum for disputes, from a public court to a private arbitration. However, one cannot use an arbitration agreement to eliminate claims or remedies that are available under law.

Citibank’s arbitration agreement was broad; it required all claims to be brought in arbitration. At the same time, the arbitration agreement prohibited arbitrators from awarding injunctive relief that benefited the public generally in addition to the individual plaintiff. Such public injunctive relief is available under certain consumer protection laws.

The problem with Citibank’s arbitration agreement, then, is not that it barred the arbitrator from awarding the relief. Rather, it prevented the consumer from bringing a claim for public injunctive relief in court and barred the arbitrator from issuing the injunction as well.

The California Supreme Court invalidated the waiver because it removed the availability of a remedy. But the California high court did not hold that these claims for public injunctive relief are exempt from pre-dispute arbitration agreements, which is what AB 2617 does.

Unfortunately, the California Supreme Court declined to re-visit prior decisions holding that claims for public injunctive relief are not arbitrable. After Kindred, it is hard to see how such a rule will survive. For now, however, the rule remains on the books.

Class Action Clarity

One uncertainty caused by a federal law will remain unresolved until 2018. Employers seeking to arbitrate disputes one-on-one must wait to find out whether “class action waivers” in arbitration violate the federal National Labor Relations Act.

Both the U.S. Supreme Court and California Supreme Court previously held that class action waivers are enforceable. But then the National Labor Relations Board decided such waivers violate the NLRA by precluding “concerted activity.” The U.S. Supreme Court will decide this issue during its next term, which begins in October 2017.

Tips for Employers

Those employers who choose to require arbitration of employment disputes should frequently review agreements in light of changes in the law. Along the same lines, employers should ensure their agreements are as easy to modify as possible, which will reduce administrative headaches and improve enforceability.

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