The mandatory arbitration agreement is one tactic large companies use to limit their liability and control an employee or customer’s access to the court system. A mandatory arbitration agreement requires the signing parties – which can be a consumer or an employee, though this post will focus on employment contracts – to surrender their rights to file a lawsuit if the organization has wronged them in some way.
Instead, employees who believe they have been wrongfully injured, discriminated against or retaliated against as a result of whistle-blowing (to use three common examples) are forced to go to binding arbitration. These arbitration hearings are often friendlier to large employers than the court system.
In Epic Systems Corp v. Lewis, decided in early 2018, the United States Supreme Court ruled that such agreements were legitimate.
However, the Kentucky Supreme Court threw in a complication later in the year, when it held that employers in the state could not condition employment on an employee’s willingness to agree to mandatory arbitration. The Kentucky Supreme Court made clear it doesn’t believe the ruling conflicts with existing precedent. Whether the ruling continues for long will depend on the state legislature and the United States Supreme Court.
The Kentucky Case
The case in question, Northern Kentucky Area Development District v. Snyder, involves (as you might expect) the Northern Kentucky Area Development District, which is a government entity comprising local leaders and planning and developmental organizations. Its role is to provide important government services and solutions for individuals and organizations.
An NKADD employee, Danielle Snyder, signed a mandatory arbitration agreement as a condition of her employment. She was later fired. Then she sued under the Kentucky Whistleblower Act and the state’s Wage and Hours Act. The District moved to prevent Snyder’s lawsuit from moving forward in court, arguing that the mandatory arbitration agreement Snyder signed should stay any legal action.
A trial court and appellate court both ruled against the NKADD. The case then went to the state Supreme Court.
How the Kentucky Supreme Court Ruled
While the Kentucky Supreme Court did not mention the Epic Systems ruling in the NKADD case, it took pains to position its ruling within the context of existing law on mandatory arbitration agreements.
The court did not ban mandatory arbitration agreements in Kentucky. As noted above, the court instead ruled that mandatory arbitration agreements that serve as a condition for employment are not protected by the Federal Arbitration Act.
The court’s ruling hinged on two points. First, the Kentucky Revised Statutes explicitly prohibit employers from conditioning employment based on a potential employee’s willingness to “waive, arbitrate or otherwise diminish any existing or future claim, right or benefit to which the employee or person seeking employment would otherwise be entitled.”
Second, the court ruled that the Federal Arbitration Act – which protects the legitimacy of arbitration agreements – does not preempt the Kentucky Revised Statutes. While the FAA prevents states from “discriminating” against arbitration, the court wrote, the Kentucky law does not do that. The Kentucky law doesn’t prohibit arbitration agreements or otherwise inhibit the effectiveness of these agreements.
Instead, the Kentucky Revised Statutes simply prevent employers from using a mandatory arbitration agreement as a condition of employment. Employers and employees are not prevented from freely entering into an arbitration agreement, minus that employment condition.
A Tenuous Ruling
The NKADD ruling applies only to the state of Kentucky and is not binding on any federal court. That doesn’t mean it’s an unimportant case, however. And the continued power of the ruling is in question.
The Kentucky legislature – controlled by Republicans, as is the governor’s mansion – could return to the Kentucky Revised Statutes and amend the applicable provision to allow employers to use a mandatory arbitration agreement as a condition of employment.
The US Supreme Court could also step in. The Kentucky case revolved around an issue that wasn’t explicitly addressed by the Epic Systems ruling. With a conservative majority on the US Supreme Court committed to protecting the rights of large employers and limiting the rights of employees, an appeal would likely result in the NKADD ruling being overturned.
Should the NKADD ruling stay in effect, however, it might provide a blueprint for legislators across the country who are looking for ways to restrain arbitration agreements that won’t be struck down by the courts. These agreements lose much of their power if employees cannot be made to sign them as a condition of employment.