I would understand if not every state supreme court got the memo from last year’s SCOTUS decision on FAA preemption, Kindred, which reminded state courts that the FAA prevents state courts from imposing additional requirements on arbitration agreements that are not required for other types of contracts. But Kentucky definitely got the memo. The memo was addressed to Kentucky. Yet, last week the Supreme Court of Kentucky released a new decision that continues to convey hostility to arbitration and SCOTUS’s decisions interpreting the FAA.
The legal issue in Northern Ky. Area Development District v. Snyder, 2018 WL 4628143 (Ky. Sept. 27, 2018) is straightforward: Does the FAA preempt a Kentucky statute that prohibits employers from conditioning employment on an employee’s agreement to arbitrate claims. The statute prohibits an employer from requiring an employee to “waive, arbitrate, or otherwise diminish any existing or future claim, right, or benefit to which the employee or person seeking employment would otherwise be entitled.” In this case, the plaintiff was required to sign an arbitration agreement in order to work for the governmental entity. When she sued over her termination, the employer moved to compel arbitration.
The trial court refused to compel arbitration. Then the court of appeals affirmed, finding that the employer never had authority to enter into the arbitration in the first place (due to the statute), so the arbitration agreement did not technically exist. (Too cute by half. Plus, Justice Kagan specifically said that formation issues could also be preempted.)
The Kentucky Supreme Court affirmed. It also concluded that the employer, a state agency, was covered by the anti-arbitration statute. And therefore, when it conditioned employment on an agreement to arbitrate, in violation of the statute, its action was “ultra vires,” and the resulting arbitration agreement was void. (See parenthetical above.)
The court went on to find the anti-arbitration statute at issue was not preempted by the FAA. The decision states with an apparently straight face that the statute “does not actually attack, single out, or specifically discriminate against arbitration agreements” and did not “evidenc[e] hostility to arbitration”. The statute “simply prevents [the employer] from conditioning employment” on the arbitration agreement. Furthermore, it notes that the statute does not just preclude arbitration agreements, but also any agreement that waives or limits an employee’s rights.
BUT HERE’S THE PROBLEM. Kentucky’s reasoning only makes sense if we agree that arbitration is a limitation or a diminishment of the employee’s rights. If, instead, you assume that arbitration is simply an alternative forum for resolving the employee’s full set of rights, the logic falls apart. But, will SCOTUS really want to hear another Kentucky decision? Kentucky is betting that it won’t. Maybe this should not surprise anyone; Kentucky did not exactly bend to SCOTUS’s will when Kindred was remanded. And btw, the nursing home is seeking certiorari from the remand decision, and SCOTUS just relisted it, meaning it still has a chance. (For good measure, Kentucky’s high court issued a decision compelling arbitration on the same day, overruling an objection that the arbitration clause was not fully mutual. Grimes v. GHSW Enterprises, 2018 WL 4628160 (Ky. Sept. 27, 2018).)
Speaking of SCOTUS, Monday it denied cert in at least four arbitration cases. Two were companion cases (from Cal. and Neb.) that sought guidance on what types of challenges can invalidate a delegation clause. (My blog post here, SCOTUSblog here and here.) Another presented issues regarding binding non-signatories to arbitration through equitable estoppel. The fourth involved a question of whether an employer waived its right to arbitration (Cash Biz). (My post here, filings here.)
And – this morning, SCOTUS hears arguments in New Prime, addressing the exemption in FAA Section One.
[Thanks to @PerryCooper for alerting me to a few of these cert denials.]