Legislature may curtail arbitrability of contract claims

The United States Supreme Court (SCOTUS) has been striking down numerous state laws, as well as state court decisions that attempt to restrict the enforceability of arbitration agreements specifically relating to employment and consumer litigation areas. SCOTUS has found that the Federal Arbitration Act (FAA) preempts many of these laws and decisions.

The recent ruling by the United States Supreme Court in Viking River Cruises, Inc. v. Moriana, 142 S.Ct. 1906 (2022) (Viking River), which dealt a significant blow to California's PAGA (Private Attorney General Act) law, has employers and their counsel jumping for joy. Viking River requires arbitration of PAGA claims under certain circumstances where the representative employee has entered into an enforceable arbitration agreement with the employer.

In Viking River, SCOTUS overturned portions of the seminal California Supreme Court case, Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal.4th 348 (2014) (Iskanian), which held that PAGA was not subject to arbitration, nor could arbitration be split between individual claims and representative claims.

However, SCOTUS found that the FAA preempts the Iskanian decision insofar as it precludes the division of PAGA actions into individual and non-individual claims. The Court stated that Viking River may compel arbitration of Moriana's individual PAGA claim, but the remaining non-individual PAGA claims must be dismissed because, without her having an individual claim in the action, Moriana lacks statutory standing under PAGA. The FAA, however, does not preempt Iskanian's prohibition on wholesale waivers of PAGA claims.

[It is important to note that the California Supreme Court has agreed to take up a case, Adolph v. Uber Technologies, Inc., to decide the narrow issue of whether an aggrieved employee who has been compelled to arbitrate claims under [PAGA] maintains statutory standing to pursue PAGA claims arising out of events involving other employees in court or in any other forum the parties agree is suitable.]

Nonetheless, it seems that Congress and various state legislatures are looking at curtailing this expansion of arbitrability, specifically in the employment and consumer arena.

On March 3, 2022, Congress passed a law called the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 that amended the FAA. This law gives individuals asserting sexual assault or sexual harassment claims under federal, state, or tribal law the option to bring those claims to court even if they had previously agreed to arbitrate such disputes. In addition, those individuals or a named representative, bringing sexual assault or sexual harassment claims may choose to proceed via a class or collective action even if they had waived the right to proceed collectively before the claims arose.

It seems this amendment is not going to be the only alteration to the FAA that Congress is contemplating. A few months ago, the House of Representatives passed the Forced Arbitration Injustice Repeal (FAIR) Act of 2022 (H.R. 963), which puts the future of many, if not all, arbitration agreements in jeopardy. The FAIR Act, if passed by the Senate and signed into law, would invalidate predispute arbitration agreements in employment, consumer, antitrust and civil rights disputes. It would also prohibit agreements and practices that prevent individuals from participating in a class or collective action in such matters. As a result, arbitration agreements and class action waivers would be prohibited in a wide variety of agreements, implicating anything from an employment contract to a credit card agreement.

Numerous states have also attempted to restrict the enforceability of arbitration agreements. In 2019, the California legislature passed a law which took effect on Jan. 2, 2020, making it unlawful to condition employment, continued employment, or the receipt of any employment related benefit on the employee signing a mandatory arbitration agreement for alleged violations of the Fair Employment and Housing Act and/or the California Labor Code (codified as Labor Code § 432.6). This law was challenged almost immediately, and the Ninth Circuit court held that the FAA preempted the portions of the law that imposed criminal and civil penalties on employers because they had arbitration agreements. However, the court held that the penalties were not preempted insofar as they apply only to pre-agreement behavior. Chamber of Commerce of the US v. Bonta, 13 F.4th 766 (9th Cir. 2021). In essence, California employers cannot be penalized after an employee signs a consensual arbitration agreement, but they may be penalized for having a policy mandating an arbitration agreement as a condition of employment. Unless SCOTUS decides to hear the case and reverse, Labor Code 432.6 is still law in California, and likely to be adopted in other states.

Vermont passed a law in 2019 that became effective Oct. 1, 2020, adding Vt. Stat. Ann. tit. 9, § 6055, that encourages courts to throw out unconscionable arbitration clauses and adds penalties for their inclusion in consumer agreements. The law has three important provisions. First it creates a rebuttable presumption that certain terms are substantively unconscionable when included in a standard form contract that the individual does not have a meaningful opportunity to negotiate, such as venue in a state outside Vermont, jury trial waiver, waiver of right to bring a class action, waiver of punitive damages, shortening the time to bring an action, and fees and costs greater than what would be incurred in a court proceeding.

Second, it encourages courts to throw out contracts with unconscionable terms as opposed to simply severing the one unconscionable provision and enforcing the rest of the contract. The Vermont law instructs courts when deciding whether to throw out a contract or only sever one term to consider the actual purposes of the parties and whether severing of a term would create an incentive for contract drafters to include similar illegal or unconscionable terms.

Third, the statute provides that if a party seeks to enforce a provision that is found to be unconscionable, that party violates the state deceptive practices statute and is liable for $1,000 per violation and attorney fees. The impact of the Vermont statute is sharply reduced because it exempts from its provisions any agreements entered into by financial institutions and regulated creditors, motor vehicle installment sales contracts, and contracts involving recreational activities. The law would still apply, however, to telemarketing contracts, contracts involving unregulated creditors, and other contracts covering consumer goods and services.

Given these attempts by Congress and state legislatures to curtail the applicability and enforceability of arbitration agreements, and the basis of SCOTUS' arbitration agreement decisions is the FAA - a federal statute -it is possible in the next few years for the FAA to be significantly reduced in applicability or scope, rendering many of the highest court's decisions on the subject obsolete.