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The Federal Arbitration Act Trumps State Law Again

By Jennifer R. Growcock

Employers routinely include arbitration provisions in employment agreements in an effort to manage risks associated with costly litigation.  Specifically, class arbitration waivers have become increasingly popular.  As every savvy employer knows, each state in which an employer operates may have very different state laws regarding arbitration and waiver provisions in employment contracts.  In years past, the United States Supreme Court has dealt with mandatory arbitration provisions and class and collective action waivers and affirmed their validity in various contexts.  The latest Supreme Court decision on topic, DirecTV, Inc. v. Imburgia, does not arise in the employment context, but its ruling is far reaching and beneficial for employers. 

In DirecTV, the Court, in a 6-3 decision, reversed a California appellate court and held that the Federal Arbitration Act (FAA) preempts state law even when the contract in question expressly provided that the enforceability of the class action waiver shall be determined under the “law of your state.”  Specifically, the contract at issue stated if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision “is unenforceable.”  The contract also provided that the arbitration provision “shall be governed by the Federal Arbitration Act.” 

Under the law of the State of California, waiver provisions of class arbitrations were in fact unenforceable, in apparent conflict with the Supreme Court’s ruling in AT&T Mobility LLC v. Concepcion that the Federal Arbitration Act preempts and invalidates that rule.   The California trial court and Court of Appeals hung their hats on the fact that, under California law—as applied pursuant to the contract—the wavier of class arbitration was unenforceable, and therefore, the arbitration provision was entirely unenforceable.  The state courts reasoned that the parties were free to choose what law would govern the arbitration provision, including California law, as if it had not been preempted. 

While parties to a contract, generally, are still free to determine which state’s law applies, that applicable state law must be valid law and not otherwise in conflict with relevant federal law, or here, the FAA.  The Supreme Court ultimately held the California courts’ interpretation of “law of your state” and ruling showed a hostility toward arbitration that was inconsistent with the FAA.

Legally, employers should continue to review the language of their employment agreements, which commonly contain class arbitration waivers, and ensure that it is consistent with the FAA, and that it does not otherwise invoke state law which may be inconsistent with the FAA.  Employers can take some comfort in the policy favoring arbitration, including class action waivers, evidenced by the Supreme Court in the DirecTV opinion.