Recent Developments Affect the Enforceability of Mandatory Arbitration Agreements
In the past week, the Supreme Court and the National Labor Relations Board's General Counsel issued important decisions affecting the enforcement of mandatory arbitration agreements. These independent developments are discussed separately below:
I. Supreme Court Holds Arbitrator Must Rule on Challenge To Mandatory Arbitration Agreement
On June 21, 2010, the Supreme Court held that an employee subject to a mandatory arbitration agreement could not pursue a discrimination claim against his former employer in federal court despite alleging the agreement, as a whole, was unconscionable, where the agreement contained a provision delegating enforceability disputes to the arbitrator. In Rent-A-Center, West, Inc. v. Jackson, 2010 WL 2471058 (2010), the Court held that absent a specific challenge to the provision delegating enforceability disputes to the arbitrator, the provision was enforceable under the Federal Arbitration Act (FAA) and the employee's general challenge to the agreement as a whole was for the arbitrator.
After receiving a federal discrimination complaint from a former employee Antonio Jackson, Rent-A-Center, West, Inc., filed a motion under the FAA to dismiss or stay the proceedings and to compel arbitration pursuant to an arbitration agreement Jackson had signed approximately four years earlier as a condition to his employment. Jackson opposed Rent-A-Center's motion on the ground that the arbitration agreement was "clearly unenforceable in that it [wa]s unconscionable."
The Agreement included two notable provisions: the first provision required arbitration of all disputes arising out of Jackson's employment, including discrimination claims; and the second provision, known as the "delegation provision," gave the arbitrator "exclusive authority to resolve any dispute relating to the [Agreement's] enforceability … including … any claim that all or any part of th[e] Agreement is void or voidable."
In its analysis, the Supreme Court noted that Section 2 of the FAA recognizes only two types of validity challenges: (1) challenges specifically to the validity of the agreement to arbitrate; and, (2) challenges to the contract as a whole. Because federal law renders arbitration provisions severable from their surrounding contracts, "only the first type of challenge is relevant to a court's determination of whether the arbitration agreement at issue is enforceable." Under this framework, the Court determined that because Jackson did not challenge the delegation provision specifically, the delegation provision must be treated as valid under Section 2 and enforced. This left "any challenge to the validity of the Agreement as a whole for the arbitrator."
The Rent-A-Center decision underscores the importance of having an arbitration agreement expressly state that disputes over its validity shall be resolved by the arbitrator.
II. Mandatory Arbitration Agreements Must Make Way For NLRA Section 7 Rights
In a guideline memorandum issued on June 16, 2010, NLRB General Counsel Ronald Meisburg advised that employers may not lawfully require employees to sign mandatory arbitration agreements waiving their right to concertedly file class action lawsuits.
According to the memorandum, the concerted filing of a class action lawsuit or arbitral claim is protected activity under Section 7 of the National Labor Relations Act (NLRA). Concerted filing refers to class action lawsuits brought by employees for their mutual aid and protection. In contrast, a class action filed by an individual employee for "purely personal reasons" is not protected by Section 7 merely because of the incidental involvement of other employees as a result of normal class action procedures.
The memorandum acknowledges that employers may condition employment on mandatory arbitration of individual non-NLRA employment claims pursuant to the Supreme Court's decision in Gilmer v. Interstate/Johnson Lane Corp. It advises, however, that "[e]ven if an employee is covered by an arrangement lawful under Gilmer, the employee is still protected by Section 7 of the act if he or she concertedly files an employment-related class action lawsuit in the face of that agreement and may not be threatened or disciplined for doing so." The employer's recourse is to seek dismissal of the class action based on each purported class member's individual mandatory arbitration agreement.
Accordingly, mandatory arbitration agreements that can be reasonably read as prohibiting employees from joining with other employees to file a class action will be deemed overly-broad and unlawful under the NLRA. The memorandum, however, suggests that overly-broad mandatory arbitration agreements can be remedied by inserting language assuring employees:
At this point, the NLRB has not yet issued any decision endorsing the General Counsel's position. Nonetheless, the memorandum makes clear that Regional NLRB offices will pursue complaints against employers who fail to adhere to the General Counsel's position on these issues.
I. Supreme Court Holds Arbitrator Must Rule on Challenge To Mandatory Arbitration Agreement
On June 21, 2010, the Supreme Court held that an employee subject to a mandatory arbitration agreement could not pursue a discrimination claim against his former employer in federal court despite alleging the agreement, as a whole, was unconscionable, where the agreement contained a provision delegating enforceability disputes to the arbitrator. In Rent-A-Center, West, Inc. v. Jackson, 2010 WL 2471058 (2010), the Court held that absent a specific challenge to the provision delegating enforceability disputes to the arbitrator, the provision was enforceable under the Federal Arbitration Act (FAA) and the employee's general challenge to the agreement as a whole was for the arbitrator.
After receiving a federal discrimination complaint from a former employee Antonio Jackson, Rent-A-Center, West, Inc., filed a motion under the FAA to dismiss or stay the proceedings and to compel arbitration pursuant to an arbitration agreement Jackson had signed approximately four years earlier as a condition to his employment. Jackson opposed Rent-A-Center's motion on the ground that the arbitration agreement was "clearly unenforceable in that it [wa]s unconscionable."
The Agreement included two notable provisions: the first provision required arbitration of all disputes arising out of Jackson's employment, including discrimination claims; and the second provision, known as the "delegation provision," gave the arbitrator "exclusive authority to resolve any dispute relating to the [Agreement's] enforceability … including … any claim that all or any part of th[e] Agreement is void or voidable."
In its analysis, the Supreme Court noted that Section 2 of the FAA recognizes only two types of validity challenges: (1) challenges specifically to the validity of the agreement to arbitrate; and, (2) challenges to the contract as a whole. Because federal law renders arbitration provisions severable from their surrounding contracts, "only the first type of challenge is relevant to a court's determination of whether the arbitration agreement at issue is enforceable." Under this framework, the Court determined that because Jackson did not challenge the delegation provision specifically, the delegation provision must be treated as valid under Section 2 and enforced. This left "any challenge to the validity of the Agreement as a whole for the arbitrator."
The Rent-A-Center decision underscores the importance of having an arbitration agreement expressly state that disputes over its validity shall be resolved by the arbitrator.
II. Mandatory Arbitration Agreements Must Make Way For NLRA Section 7 Rights
In a guideline memorandum issued on June 16, 2010, NLRB General Counsel Ronald Meisburg advised that employers may not lawfully require employees to sign mandatory arbitration agreements waiving their right to concertedly file class action lawsuits.
According to the memorandum, the concerted filing of a class action lawsuit or arbitral claim is protected activity under Section 7 of the National Labor Relations Act (NLRA). Concerted filing refers to class action lawsuits brought by employees for their mutual aid and protection. In contrast, a class action filed by an individual employee for "purely personal reasons" is not protected by Section 7 merely because of the incidental involvement of other employees as a result of normal class action procedures.
The memorandum acknowledges that employers may condition employment on mandatory arbitration of individual non-NLRA employment claims pursuant to the Supreme Court's decision in Gilmer v. Interstate/Johnson Lane Corp. It advises, however, that "[e]ven if an employee is covered by an arrangement lawful under Gilmer, the employee is still protected by Section 7 of the act if he or she concertedly files an employment-related class action lawsuit in the face of that agreement and may not be threatened or disciplined for doing so." The employer's recourse is to seek dismissal of the class action based on each purported class member's individual mandatory arbitration agreement.
Accordingly, mandatory arbitration agreements that can be reasonably read as prohibiting employees from joining with other employees to file a class action will be deemed overly-broad and unlawful under the NLRA. The memorandum, however, suggests that overly-broad mandatory arbitration agreements can be remedied by inserting language assuring employees:
(i) that the employer's arbitration agreement does not constitute a waiver of employees' collective rights under Section 7, including the employees' right concertedly to pursue any covered claim before a state or federal court on a class, collective, or joint action basis;
(ii) that the employer recognizes the employees' right concertedly to challenge the validity of the forum waiver agreement upon such grounds as may exist at law or in equity; and
(iii) that no employee will be disciplined, discharged, or otherwise retaliated against for exercising their rights under Section 7.
At this point, the NLRB has not yet issued any decision endorsing the General Counsel's position. Nonetheless, the memorandum makes clear that Regional NLRB offices will pursue complaints against employers who fail to adhere to the General Counsel's position on these issues.
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