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March 27, 2013 Articles

Just Arbitrate Already

By Jeffrey Krausman and John Lande

Two recent decisions from the U.S. Court of Appeals for the Eighth Circuit show how hard it is for parties to invalidate arbitration agreements. The decisions in M.A. Mortenson Co. v. Saunders Concrete Co., Inc. and Owen v. Bristol Care demonstrate that it will either take an obvious defect in an arbitration clause or a special command from Congress before courts will limit the enforceability of arbitration agreements.

Arbitration Clause Enforceable Despite Invalid Contract Term
In Mortenson, a general contractor sought to compel a subcontractor to arbitrate a dispute pursuant to the contract between them. The subcontractor, however, argued that the arbitration provisions of the contract were unenforceable under New York law. The relevant paragraph in the contract provided that if the general contractor demanded arbitration then disputes would be resolved by arbitration in Minneapolis, Minnesota. When the general contractor made a demand for arbitration, the subcontractor filed a lawsuit in New York state court seeking a stay of arbitration and recovery for other claims. The general contractor then filed suit in federal district court in Minnesota to compel arbitration.

The subcontractor argued that the contract's "Disputes" section contained a "pay-if-paid" clause that was invalid under New York state law. The Minnesota court concluded that the arbitration paragraph was severable from the "Disputes" section, so it was irrelevant that another provision of the contract might be invalid. Relying on the U.S. Supreme Court decision in Rent-A-Center, West, Inc. v. Jackson, the Eighth Circuit upheld the district court and enforced the arbitration agreement, noting language from Rent-A-Center that "[a]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract." Therefore it would be up to the arbitrator rather than a court to decide whether the other provisions of the agreement were enforceable.

No Congressional Intent to Override FAA in FLSA
Eight months after Mortenson, the Eighth Circuit decided Owen v. Bristol Care. The Eighth Circuit enforced an arbitration agreement that waived an employee's right to bring a class action under the Fair Labor Standards Act (FLSA) despite language in the FLSA providing for class action lawsuits. The court relied on three grounds for enforcing the class action waiver and arbitration agreement.

Because Section 2 of the Federal Arbitration Act (FAA) requires courts to enforce arbitration agreements according to their terms unless there is a "congressional command" for another statute to override the FAA's mandate, the court first examined whether the legislative history of the FLSA indicated a congressional intent to bar employees from agreeing to arbitrate FLSA claims. The court found no such congressional intent and further concluded that since the FLSA required parties to opt-in to class action suits, it necessarily followed that a party could waive the right to participate in a class action.

Second, the court examined the timing of the enactment of the FLSA and other labor laws to see if the legislative history supported the argument by Owen that the public policy of the United States was to protect employees' rights to engage in concerted activity. The court noted that while Congress enacted both the FLSA and the National Labor Relations Act (NLRA) after the FAA, Congress reenacted the FAA after both of them, demonstrating the intent to retain the FAA's arbitration protections even in light of these labor laws.

Finally, the Eighth Circuit rejected the attempt by Owen to rely on the NLRB's decision in D.R. Horton, Inc. and Michael Cuda (12-CA-25764), in which the National Labor Relations Board had found that an agreement waiving all rights to proceed as a class violated an employee's right to engage in "concerted activity" protected by Section 7 of the NLRA. The court noted that the ruling in Horton was limited to "arbitration agreements barring all protected concerted actions." The waiver in Owen, being more limited, was not controlled by the Horton decision. The court further noted that it was not required to defer to the NLRB's interpretation of the FAA, which had been rejected by most all of the district courts who had considered it. Finally, the court noted its conclusion was consistent with all other circuit courts to address the issue of FSLA class action waivers.

Mortenson and Owen reaffirm that any party who wants to invalidate an arbitration agreement will face substantial hurdles. Following the Supreme Court's clear guidance on the issue, federal courts are prepared to enforce an arbitration agreement absent a showing of contrary congressional intent or an obvious defect in the arbitration clause. For example, it has been held that where a choice of forum is "integral" to the arbitration clause and the forum is unavailable then the agreement is unenforceable. See Kahn v. Dell Inc., 669 F.3d 350, 357 (3d Cir. 2012) (requiring proof that absent availability of designated forum parties would not have agreed to arbitrate); In re Salomon Inc. Shareholders' Derivative Litigation, 68 F.3d 554, 555-56 (2d Cir. 1995). (Arbitration clause was not enforced where chosen forum was unavailable.) Whether a choice of forum or arbitrator is "integral" will depend on the specific facts of a particular case.

Keywords: ADR, litigation, arbitration, class action, severability, congressional intent, FLSA, FAA