Alaska Employment Law

Introduction

With the 2009 Term reaching its concluding week, the United States Supreme Court issued an opinion on June 21, 2010, addressing circumstances when an arbitrator or court should determine whether a dispute is subject to arbitration.  The case is Rent-A-Center West, Inc. v. Jackson.  This summary briefly reviews the case and discusses its significance.

The Case

Antonio Jackson filed an employment discrimination suit against his former employer Rent-A-Center West.  Rent-A-Center moved to dismiss or stay and to refer the matter to arbitration because Jackson had executed an arbitration agreement as a condition of employment that compelled arbitration of all employment disputes, including employment discrimination claims.  The district court granted Rent-A-Center’s motion.  Jackson appealed.  The Ninth Circuit reversed, holding that the agreement was procedurally and substantively unconscionable.  Rent-A-Center sought and obtained review with the United States Supreme Court.

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 only needs 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.  However, under federal law (at least as applied in the Ninth Circuit), 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 Ingle v. Circuit City Stores, 328 F.3d 1165, 1175-76 (9th Cir. 2003).

In addition, the arbitration provisions must be procedurally and substantively conscionable.  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 Opinion

In a sharp 5-4 split, the Court reversed the Ninth Circuit.  Justice Scalia authored the majority opinion, joined by Justices Kennedy, Thomas, Alito and Chief Justice Roberts.  The Court concluded that this was not a fraud in the inducement type of claim that would raise questions concerning whether or not an agreement had ever been executed.  Instead, “unconscionable” arguments implicate severable provisions.  Put somewhat differently, an agreement to arbitrate was executed.  Some parts of the agreement may or may not be unconscionable (for example, provisions requiring employers and employees to split arbitration fees), but that would not mean that an agreement had not been executed.  Consequently, having determined that an agreement had been executed, its enforceability was for the arbitrator (and not the court) to determine.

Justice Stevens dissented, joined by Justices Ginsburg, Breyer, and Sotomayor.  The dissent reasoned that, if an employee challenged an arbitration agreement on the grounds that it was unconscionable, the core of an employee’s argument was that he or she could not meaningfully assent to the agreement.  Consequently, such arguments implicated whether or not an agreement had even been properly executed and should be, under normal principles, for the court to decide.  Moreover Section 2 of the FAA provides that arbitration agreements are enforceable except upon such terms as exist in law or equity for revoking a contract.  Unconscionable contracts had usually been thought to fit within this definition.

Significance

As practitioners and human resource managers know, courts in the Ninth Circuit (led by Judge Pregerson) have struck down several arbitration agreements in the employment context on the grounds that the agreements are procedurally or substantively unconscionable.  This will have a significant impact on claims that arbitration agreements are unconscionable.  In most if not all instances, such issues will now be referred to arbitrators and not the courts (at least under the FAA).

It is possible that the result here may push Congress into taking action on the long-pending Arbitration Fairness Act.  In its most recent version that gained any momentum, the Arbitration Fairness Act of 2009, H.R. 1020 (introduced on February 12, 2009), the proposed Act precluded 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 (a) employees and consumers often have no real understanding that they are waiving rights to file suit in court, (b) arbitrators and private arbitration companies have institutional reasons to develop rules that favor employers and businesses, (c) there is little effective judicial review of arbitration decisions because of the standard of review, and (d) the federal policy favoring arbitration should not subvert individuals’ constitutional rights.

For practitioners, Justice Stevens’ dissent includes a useful review of existing precedent.