Arizona Supreme Court Decision Calls into Question Private Arbitration
Agreements in the Employment Setting
By John A. Doran and
John F. Lomax, Greenberg
Traurig, Phoenix Office
View or download the PDF version of this Alert.
In a decision that appears, at first blush, to address a purely procedural
issue with respect to employment arbitration agreements, the Arizona Supreme
Court has cast a shadow over such agreements in a very recent opinion. The
Arizona Supreme Court published its decision in North Valley Emergency
Specialists v. Santana on July 14, 2004. The decision raises numerous
questions about the ability of Arizona employers to enforce arbitration
agreements with their employees with respect to many legal claims employees
|"The argument before the Arizona
Supreme Court focused exclusively on the meaning of certain language
in the Arizona Arbitration Act that excluded from the Actís coverage
'arbitration agreements between employers and employees or their
Team Physicians and its employees entered into employment agreements
that required both sides to arbitrate any and all disputes that might arise
between them. When several Team Physicians employees resigned to start a
competing enterprise, Team Physicians brought a lawsuit against its former
employees and the new competitor, North Valley Emergency Specialists, seeking
damages and injunctive relief. In the course of that lawsuit, Team Physicians
asked the trial court to compel arbitration of the dispute in light of the
arbitration clauses in the employment contracts of each of the former Team
Physicians employees. The trial court ordered the parties to arbitration
and North Valley appealed. The Arizona Court of Appeals refused to hear
the appeal, but the Arizona Supreme Court subsequently agreed to hear the
The argument before the Arizona Supreme Court focused exclusively on
the meaning of certain language in the Arizona Arbitration Act that excluded
from the Actís coverage ďarbitration agreements between employers and employees
or their respective representatives.Ē North Valley and the former employees
argued that the Arizona Arbitration Act establishes the method by which
a court can order parties to abide by the terms of an arbitration agreement.
North Valley argued that because the Act does not cover arbitration agreements
between employers and employees, the trial court did not have authority
to order the parties to arbitrate their disputes.
Team Physicians responded that the Arbitration Actís exclusion of employment
arbitration agreements was intended to cover only collective bargaining
agreements. Team Physicians also argued that the purpose of the Arbitration
Act and Arizonaís public policy favoring arbitration would be seriously
undermined if the Court concluded that all employment arbitration agreements
are excluded from the Arbitration Actís coverage.
The Arizona Supreme Court sided with North Valley and the former employees.
The Court read the Arbitration Actís exclusion of employment arbitration
agreements broadly, and concluded that the exclusion went beyond collective
bargaining agreements and included all arbitration agreements in the employment
setting. The Court concluded that, because the Arbitration Act does not
cover such agreements, the trial court did not have the authority to enforce
the arbitration agreements between Team Physicians and its former employees.
Read in its broadest sense, this decision could be read to invalidate
all arbitration agreements in the employment setting in Arizona. A unanimous
Supreme Court has concluded that our state courts do not have the authority
under the Arizona Arbitration Act to force employees and employers into
arbitration when there are otherwise valid and enforceable arbitration agreements
between the parties.
The North Valley opinion should not be read so broadly, however.
The parties in this case failed to address two critical issues that could
preserve the enforceability of Arizona arbitration agreements in the employment
setting. Because the parties failed to raise these critical issues in a
timely fashion, the Supreme Court declined to address them, and these issues
remain wide open.
First, the Supreme Court did not address what effect, if any, the Federal
Arbitration Act might have on arbitration agreements in the employment setting.
While the Federal Arbitration Act also excludes from its coverage certain
employment arbitration agreements, the United States Supreme Court has ruled
that the exclusion applies only to employees involved in certain transportation
industries such as seamen and railroad employees. Thus, the Federal Arbitration
Act should apply to a large number of Arizona arbitration agreements even
in the employment setting regardless of the Arizona Arbitration Act. In
a footnote in North Valley, the Supreme Court recognized that employment
arbitration agreements in Arizona could be independently enforceable under
the Federal Arbitration Act.
Second, the Arizona Supreme Court also elected not to address what effect,
if any, the common law of contracts might have on Arizona arbitration agreements
in the employment setting. Because the Arizona Arbitration Act is essentially
a procedural vehicle to enforce arbitration agreements, the Courtís decision
in North Valley should be limited to the narrow scope of its holding
Ė that parties to an arbitration agreement in the employment setting will
not be able to use the Arizona Arbitration Actís procedural rules to enforce
such agreements. As the Supreme Court made clear in another footnote in
North Valley, the holding of the case does not address whether, as
a matter of private contract, Arizona employers and employees are free to
enter into enforceable arbitration agreements outside the collective bargaining
In addition to these two questions that remain unanswered, the North
Valley decision is further limited by the overlap of federal and state
law. The claims in North Valley arose under Arizona law. When claims
are asserted under federal law, such as Title VII, the ADA, the ADEA and
the like, the Federal Arbitration Act will govern those claims. As previously
mentioned, the U.S. Supreme Court has already concluded that the Federal
Arbitration Act allows for enforcement of most private employment arbitration
It is clear from the North Valley decision that the Arizona Supreme
Court has not spoken for the final time on this issue. At some point, the
Court will have to address the arguments under the Federal Arbitration Act
and the common law that the parties failed to present in this case. Of course,
in light of Arizonaís strong affection for arbitration as a private method
of dispute resolution, the Legislature might also step in to amend the Arizona
Arbitration Act and undo the North Valley decision.
For those employers who currently utilize arbitration agreements with
their employees, it is far too early to start thinking about scrapping your
arbitration programs. However, employers with current arbitration programs
and those who are contemplating such programs should give serious consideration
to formulating those programs to best fit within the two possible openings
the Arizona Supreme Court did not address in North Valley.
First, arbitration agreements should include language that tracks the
Federal Arbitration Act, which requires at a minimum that these contracts
have some effect on interstate commerce. Second, arbitration agreements
should include recitals that recognize the contractual nature of the agreements
under the common law, and they should establish independent enforcement
mechanisms to compel parties to arbitrate, now that the Arizona Arbitration
Act does not provide that mechanism.
While the Supreme Courtís decision comes as a great surprise to most
Arizona employers, its true impact cannot be fully understood until either
the Court answers the two critical questions it declined to address in
North Valley, or until the Arizona Legislature passes legislation
to undo the effects of the decision.
© 2004 Greenberg Traurig
For more information, please review our Labor and Employment Practice
description, or feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clientsí
individual legal needs.