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).)

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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.]

Arbitration is having its 15 minutes of fame.  Thanks to a series in the New York Times, my inbox is full of links to the articles, questions about the information, and fascinating commentary.  [Next time I am in Oakland, I am totally having the “Scalia” cocktail at Italian Colors.]  With the far-reaching audience of the NYT, the policy questions surrounding waivers of class arbitration are no longer just a conversation among in-house counsel, advocates, and law professors, but reached the general water cooler set.  For anyone passionate about arbitration law, it’s like Christmas morning.  Jumping past the merits of the policy questions for a moment, what could happen if the public demands that its representatives take action?

One possibility is that there may be more cases like McLeod v. General Mills, Inc., Case No. 15-494 (D. Minn., October 23, 2015).  In that case, the Chief Judge of the District of Minnesota found that an employee collective action could go forward in court, despite a valid arbitration agreement that demanded individual actions.  Why?  Because language in the Older Workers Benefit Protection Act of 1990 (OWBPA) provides that any worker challenging the validity of a waiver of ADEA (Age Discrimination in Employment Act) rights “shall have the burden of proving in a court of competent jurisdiction that a waiver was knowing and voluntary.”  The court found that the statute’s use of “shall” along with “court” was sufficient to trump the earlier and more general requirement that courts enforce arbitration agreements (in the FAA).  [Some of the workers in the case are just 42, and 44 years old.  Could I really be that close to the definition of an “older worker”??]

Unless there is a wholesale rewriting of the FAA, which seems unlikely, any action to ensure the availability of class and collective actions in court will likely take place one industry or one specific statute at a time.   The CFPB may require that consumers of financial products can bring class actions in court.  And members of Congress may start inserting language like the text of the OWBPA into other statutes designed to protect certain classes of employees and consumers.  Although, in my experience, the most likely outcome is that arbitration’s 15 minutes will pass, and it will go back to something talked about only by lawyers, judges and professors, and nothing will change until the current SCOTUS majority becomes the minority.

The Third Circuit recently found that the Federal Arbitration Act preempts a Pennsylvania statute that restricts corporate plaintiffs in state and federal court in Pennsylvania to those companies that are registered to do business in Pennsylvania.  Generational Equity, LLC v. Schomaker, 2015 WL 708481 (3d Cir. Feb. 19, 2015).  In other words, a company that was not a Pennsylvania business could still confirm its arbitration award in a Pennsylvania court.

The Pennsylvania law at issue states that a “nonqualified foreign limited partnership doing business in this Commonwealth may not maintain any action or proceeding in any court of this Commonwealth until it has registered.”  After Generational Equity prevailed in its arbitration, it sought to confirm the arbitration award in the Western District of Pennsylvania.  The other side moved to dismiss on the basis of subject matter jurisdiction, citing the Pennsylvania statute.  The district court confirmed the award and refused to address the jurisdiction argument.

The Third Circuit, however, took up the question of jurisdiction.  It noted that the FAA allows a federal court in “the district within which” the award was made to confirm the award.  It also noted that the AAA rules, which the parties had incorporated, provided that judgment on the award could take place in any federal or state court with jurisdiction.  Therefore, the Court reasoned that both Congress and the parties had conferred jurisdiction on the Pennsylvania federal court (among others).  Therefore, the Pennsylvania statute at issue “stands as an obstacle” to the execution of the FAA and is preempted.

The Court noted that state laws are usually preempted when they stand in the way of enforcing an arbitration agreement, and here the state law was standing in the way of enforcing an arbitration award.  But, the Court found, “that is a distinction without a difference.”