Alaska Employment Law

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Introduction

The Alaska Supreme Court issued an opinion on Friday, April 3rd, addressing whether and when certain cost-shifting arbitration terms and other provisions are enforceable. The case is Gibson v. Nye Ford, Slip Op. No. 6355 (Alaska Apr. 3, 2009). This summary briefly reviews the opinion and its significance.

The Case

Larry Gibson worked at Nye Ford. He filed a state wage and hour claim alleging he was owed over $100,000 in overtime. Nye Ford argued that the claim was subject to an arbitration agreement in its employee handbook. Gibson contended that the arbitration agreement was unconscionable (and therefore unenforceable) because it was subject to unilateral change by Nye Ford, it included a $50,000 appellate threshold that favored Nye Ford, and it required Gibson to pay arbitration costs that he would not have to pay if he prosecuted his claim in superior court.

The provision giving Nye Ford the right to unilaterally change policies was not in the arbitration agreement itself, but was in a separate disclaimer in the employee handbook. Nye Ford argued that, as a question of contract law principles that apply to employee handbooks, the disclaimer did not establish that it applied to the arbitration agreement with sufficient clarity and therefore was not effective. The $50,000 appellate threshold provided that, if the initial arbitration awarded anything more than $50,000, either party could appeal to a second arbitrator who would have the right to reverse or modify the award. The arbitration agreement did not actually address cost-splitting. Neither does the FAA nor state law (state law simply provides that the arbitrator shall allocate costs if the agreement does not do so). However, the parties both agreed that arbitration would require them to share costs 50/50.

The superior court rejected Gibson’s arguments and ordered him to arbitrate his dispute. Gibson filed a petition for review with the Alaska Supreme Court. The Court accepted review.

Review of Some Basic Principles

State and federal law favors arbitration of disputes. However, in order to preclude prosecuting statutory rights in court, the arbitration provision must include a clear and unmistakable waiver of the right to prosecute those claims in court. What constitutes a “clear and unmistakable” waiver is subject to some interpretation. Under Alaska law, an effective waiver does not have to specifically reference statutory citations or the legislative name for an Act. See Hammond v. State, 107 P.3d 871, 877-78 (Alaska 2005). Instead, an effective waiver needs only a “provision whereby employees specifically agree to submit all federal [and state] causes of action arising out of their employment to arbitration” or a provision containing “an explicit incorporation of the statutory anti-discrimination requirements in addition to a broad and general arbitration clause.” Id. (adopting test applied in the U.S. Courts of Appeals for the Second and Fourth Circuits).

However, under Ninth Circuit precedent it appears as if something slightly more may be required—at least by specifically citing statutes and federal or state rights that are being waived. See Doyle v. Raley’s Inc., 158 F.3d 1012, 1015 (9th Cir. 1998); Renteria v. Prudential Ins. Co. of America, 113 F.3d 1104, 1108 (9th Cir. 1997). Given the somewhat uncertain guidance from the courts in this respect, many Alaskan employers who wish to have employment disputes arbitrated tend to err on the side of caution and build in more comprehensive and detailed waivers with specific references to claims and statutory citations. Significantly, the United States Supreme Court recently confirmed that arbitration provisions waiving the right to prosecute federal statutory claims in court were enforceable so long as they clearly and unmistakably waived the right to file suit in court, but the Court did not clarify the “clear and unmistakable” standard. See 14 Penn Plaza LLC v. Pyett, ___ U.S. ___ (2009).

Beyond the clear and unmistakable waiver requirement, arbitration provisions must be procedurally and substantively conscionable. See Ingle v. Circuit City Stores, 328 F.3d 1165, 1175-76 (9th Cir. 2003). Stated generally, this means that the terms must be reasonable and fair, and not oppressive or one-sided, and not be the product of a gross disparity of bargaining power. Furthermore, substantive rights protected by state or federal law may not be sacrificed. The concept behind arbitration is that the employee should be entitled to the same (or substantially similar) basic rights and remedies that she or he would have if the case were litigated in court. Arbitration is intended to be nothing more than a change in the forum where the dispute is resolved.

If an arbitration agreement undermines substantive rights, it runs the risk of being declared unconscionable and thereby unenforceable. However, courts may, if they are so-inclined, apply the “blue pencil” doctrine to redact or excise offending provisions for purposes of preserving the remainder of an arbitration agreement (or any contract, for that matter). Courts are generally more included to do so if an agreement includes what is called a severability clause. However, in the absence of a severability clause, courts may still “blue pencil” offending provisions if there is some other basis to support the exercise of such powers (such as a public policy basis).

The Court’s opinion

The Alaska Supreme Court affirmed in part and reversed in part. The Court concluded that the clause giving Nye Ford unilateral right to change policies did not render the arbitration provision unconscionable because it was in a different provision from the arbitration provision. In reaching this conclusion, the court accepted Nye Ford’s argument that the disclaimer that Nye Ford itself had drafted was ineffective because it did not establish that it applied to the arbitration provision with sufficient clarity.

The Court agreed with Gibson that the $50,000 appellate threshold was unconscionable because if an employee was awarded less than $50,000 but had a claim potentially valued more than $50,000, he or she would have no right to appeal. However, the Court concluded that this clause was severable from the remaining arbitration provision and should be struck to uphold arbitration in light of the general principle that arbitration provisions should be interpreted in light of the strong public policy favoring arbitration. The Court left open the possibility that it could strike down an entire arbitration agreement in the future if it included a similar provision.

On the last issue, cost-shifting, the Court concluded that the arbitration provision would be unconscionable if it actually required Gibson to shoulder 50 % of the arbitrator’s costs. The Court reasoned that a state wage and hour claim prosecuted in state court would not require a plaintiff to pay anything more than the court filing fee of $150. Splitting arbitration costs 50 % could leave Gibson or others liable for thousands of dollars in costs. The Court determined that this would frustrate one of the underlying purposes of state wage and hour law –to encourage plaintiffs to remedy violations. However, the Court did not strike down the entire arbitration provision. Instead, it remanded to give Nye Ford the option of being responsible for all arbitration costs. If Nye Ford was willing to do so, the case could be referred to arbitration.

Significance

Many courts will not bother blue-penciling offending arbitration agreements. If there are terms or provisions that are unconscionable, these courts will strike down the entire arbitration agreement. Here, however, the Alaska Supreme Court liberally applied blue pencil principles to preserve the arbitration agreement. The Court did so based on the general principles that public policy favors arbitration and that arbitration agreements should be interpreted in light of this public policy to uphold arbitration.

On the cost-shifting issue, one might question whether the same result would apply to all statutory claims. State wage and hour law is especially protective of plaintiffs’ rights. However, the underlying reasoning would seem to relate to most other statutory claims too. Consequently, one would think that any arbitration provision purporting to shift a significant percentage of costs to a plaintiff-employee would be suspect.

Lessons learned

There are a number of important lessons here for public and private employers:

· Employers should have counsel check their arbitration provisions (whether found in employment contracts or manuals) to ensure that the provisions include clear and unmistakable waivers of statutory rights, and that the provisions are substantively and procedurally conscionable. Recognizing that different standards are applied depending upon whether one is in federal or state court (and depending upon which federal court), employers would be prudent to consider adopting the most stringent waiver terms that include general and particular waivers with statutory citations.

· Employers should also consider including severability clauses in arbitration agreements, thereby allowing courts greater latitude in terms of blue pencil powers.

· Employers should have counsel evaluate any cost-shifting or cost-splitting provisions, especially to the extent that such provisions affect anything that could be construed as a substantive right.

· If Employers intend that disclaimers in employee handbooks apply to arbitration provisions, they should be careful to link those up with specificity.

Other developments on the horizon

Congress is now considering the Arbitration Fairness Act of 2009, H.R. 1020, introduced on February 12, 2009. If passed, the AFA would preclude any pre-dispute agreement to arbitrate employment, civil rights, or consumer disputes (except for such provisions in collective bargaining agreements). The reasoning underlying the AFA is that 1) employees and consumers often have no real understanding that they are waiving rights to file suit in court, 2) arbitrators and private arbitration companies have institutional reasons to develop rules that favor employers and businesses, 3) there is little effective judicial review of arbitration decisions because of the standard of review, and 4) the federal policy favoring arbitration should not subvert individuals’ constitutional rights. Whether one agrees or disagrees with the AFA’s rationale, there is no denying that it would dramatically change arbitration agreements used in Labor and Employment law. It is also probably fair to state that the AFA will probably gain at least some traction in Congress given its current composition. How much traction it gains remains to be seen.