GT Alert

Arizona Supreme Court Decision Calls into Question Private Arbitration Agreements in the Employment Setting

July 2004
By John A. Doran and John F. Lomax, Greenberg Traurig, Phoenix Office

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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 might assert.

The Case

"The argument before the Arizona Supreme Court focused exclusively on the meaning of certain language in the Arizona Arbitration Act that excluded from the Act’s coverage 'arbitration agreements between employers and employees or their respective representatives.'"

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 appeal.

The argument before the Arizona Supreme Court focused exclusively on the meaning of certain language in the Arizona Arbitration Act that excluded from the Act’s coverage “arbitration agreements between employers and employees or their respective representatives.” 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 Act’s 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 Arizona’s public policy favoring arbitration would be seriously undermined if the Court concluded that all employment arbitration agreements are excluded from the Arbitration Act’s coverage.

The Arizona Supreme Court sided with North Valley and the former employees. The Court read the Arbitration Act’s 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.

The Ramifications

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 Court’s decision in North Valley should be limited to the narrow scope of its holding – that parties to an arbitration agreement in the employment setting will not be able to use the Arizona Arbitration Act’s 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 arena.

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 agreements.

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 Arizona’s 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.

Our Advice

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 Court’s 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

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