IN MY OPINION ... Federal Preemption Limits Arizona Ruling on State Arbitration Law

Article excerpt

Author Bruce Meyerson argues that, for most employment disputes, the recent Arizona Supreme Court ruling that employment disputes are not covered by the state arbitration law will not apply due to preemption by the FAA.

For almost 80 years, the Arizona Arbitration Act has contained an exclusion for employment agreements "between employers and employees or their respective representatives."1 Last year, Arizona's highest court was called upon to determine whether that exclusion applied to all arbitration agreements between employers and employees, or just to arbitration agreements found in collective bargaining contracts. The court's holding in North Valley Emergency Specialists, L.L.C. v. Santana2 is straightforward. The court held that the exclusion exempts from the arbitration act "all arbitration agreements between employers and employees."

Much has been made of this decision. Indeed, the headline about this case ("Employment Arbitration Dealt a Blow in Arizona") in the previous issue of this Journal suggested that employment arbitration agreements may no longer be enforceable in Arizona. However, that is not likely to be the result of the court's decision. The reason is that the court was not called upon to consider the relationship between the Arizona Arbitration Act and the Federal Arbitration Act (FAA), which applies to any "contract evidencing a transaction involving commerce." I believe that U.S. Supreme Court decisions have made the FAA applicable to virtually every employment relationship. Thus, the ruling in North Valley Emergency Specialists should have an extremely limited impact because the Arizona exclusion for employment agreements will be preempted to the extent the agreement at issue is covered by the FAA.

The Federal Arbitration Act

The FAA is not only a procedural statute that may be invoked in federal and state court, it is also a substantive statute prohibiting state laws that single out arbitration agreements as unenforceable. The Supreme Court stated in Southland Corp. v. Keating,3 that in "enacting § 2 of the [FAA], Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." In subsequent decisions, the Supreme Court ruled that the FAA preempts state laws that interfere with or limit the ability of parties to enter into arbitration agreements. Although parties may challenge arbitration agreements on the same grounds applicable to all contracts, states may not impose barriers to arbitration that are unique to those agreements.

In Doctor's Associates v. Casarotto, the Supreme Court addressed the enforceability of a Montana statute. The statute provided that for an arbitration agreement to be valid, the contract in which it was contained must have a "notice" of arbitration typed on the first page of the contract in underlined capital letters. Because this requirement was not applicable to contracts generally, the High Court held that the Montana statute was preempted by the FAA. The Court stated unequivocally: "Courts may not ... invalidate arbitration agreements under state laws applicable only to arbitration provisions. [W]e have several times said, Congress precluded States from singling out arbitration provisions for suspect status."4

As interpreted by the Arizona Supreme Court, the exclusion for employment agreements in the Arizona Arbitration Act applies to all employment contracts, not just collective bargaining agreements (which are not covered by the FAA). Accordingly, in my view, the exclusion in A.R.S. § 12-1517 constitutes a state law restricting arbitration on a ground not applicable to contracts generally. Thus, for agreements evidencing a transaction "involving commerce," the FAA would govern and the Arizona Arbitration Act would be preempted. The important question that must be answered next is what effect would the FAA have? …