Jun 28, 2010

Arbitration Agreements in Employment Context Remain in Good Stead

The matter of Rent-a-Center, West, Inc. v. Jackson had been heavily watched in employment circles given the implications of the United States Supreme Court’s potential ruling on the enforceability of required arbitration agreements in the employment context. By way of background, Plaintiff Jackson filed a race discrimination lawsuit in federal court. Rent-A-Center moved to dismiss the case on the grounds that Jackson had a contractual obligation to submit his employment-related disputes to an arbitrator for resolution. Jackson then alleged that the arbitration provision was unconscionable and, accordingly, he should not be subjected to its terms.

At issue before the Supreme Court was which body gets to decide whether a mandatory arbitration provision is fundamentally unfair – an arbitrator or the court. On June 21, 2010, the high Court ruled on that question. Siding with employers, the Court ruled that if an agreement delegates authority to an arbitrator to determine the enforceability of the agreement as a whole, then that question of enforceability should be decided by the arbitrator and not a court of law. The implications of Rent-a-Center are multi-fold.

The Rent-a-Center decision tells us that delegation provisions in arbitration agreements are not subject to any heightened review simply because they appear in the employment context. The Supreme Court noted that the Federal Arbitration Act provides two grounds for challenging the validity of an arbitration provision: (1) whether the “delegation” provision is enforceable (that is, whether language which exclusively delegates or assigns to an arbitrator and not a judge the threshold question of whether the arbitration agreement as a whole is fair or conscionable); and (2) whether terms within the agreement itself are enforceable. The high Court found that of those two grounds for challenge, a court’s involvement should be limited to the first issue – whether the delegation provision itself is enforceable. Thus, other than determining whether a provision which puts enforceability questions in the hands of an arbitrator is valid, all other disputed issues regarding an arbitration agreement should be left in the hands of the arbitrator and not the courts.

Rent-A-Center further bolsters prior Supreme Court rulings allowing for the use of mandatory arbitration provisions in the employment context – despite claims they are heavily weighted against employees. Historically, the enforceability of mandatory arbitration provisions in employment agreements has been hotly contested. In 2001, however, the Supreme Court in Circuit City v. Adams firmly endorsed the use of arbitration provisions in the employment context. Subject to certain procedural safeguards, the Court specifically noted that “arbitration agreements allow parties to avoid costs of litigation, a benefit that may be of particular importance in employment litigation.” The Court further explained that under the Federal Arbitration Act, although arbitration may change the forum for disputed claims, it does not alter the substantive rights of the parties. Following Circuit City, the use of arbitration provisions in the employment context increased dramatically with many employers touting cost savings, efficiency, increasing employer/defense determinations, and fewer runaway jury verdicts.

In the end, though ostensibly a gift for employers, the long-term implications of the Rent-a-Center decision likely will fuel efforts to enact Congress’s proposed Arbitration Fairness Act of 2009 – pro-employee legislation intended to invalidate pre-dispute mandatory arbitration provisions. We can expect proponents of the bill to vociferously argue that Rent-a-Center placed even further limits on employee rights and, accordingly, Congress is now required to step in. We will see if and how quickly Congress responds. In the meantime, employers with mandatory arbitration provisions should contact your employment counsel at Smith, Gambrell & Russell, LLP to ensure their agreements meet the requirements of this latest Supreme Court pronouncement.

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