In Brennan v. Opus Bank (9th Cir. 13-35580), published August 11, 2015, the Ninth Circuit ruled on the issue of whether a court versus an arbitrator has jurisdiction over determining the enforceability of a mandatory arbitration clause in an employment agreement. Plaintiff, a former Bank executive with a written contract containing a mandatory arbitration clause, argued that the arbitrator only had the right to hear the parties’ substantive claims, and that the district court had jurisdiction to decide whether the clause itself was enforceable. Defendant Opus Bank (the “Bank”) argued that under American Arbitration Association (“AAA”) rules, the arbitrator had the power to decide the substantive claim and to determine whether the arbitration clause was valid. The 9th Circuit agreed with the Bank, concluding the parties “agreed to arbitrate arbitrability” and that the arbitrator, and not the district court, could determine whether the arbitration clause was, as Plaintiff argued, unconscionable and unenforceable.
The Plaintiff, Carey Brennan, was hired by the Bank in 2010 to be its Executive Vice President and Director for Strategy and Corporate Development. Plaintiff signed an employment agreement with a mandatory arbitration clause which provided in relevant part: “Except with respect to any claim for equitable relief . . . any controversy or claim arising out of the [Employment] Agreement or [Plaintiff’s] employment with the Bank or the termination thereof . . . shall be settled by binding arbitration in accordance with the Rules of the American Arbitration Association.” The parties’ agreement also contained a provision under which the Plaintiff would be entitled to a substantial severance payment if he had good cause to terminate his employment. “Good cause” was defined to include a “material change” in the Plaintiff’s job responsibility.
In March 2012, Plaintiff contended he was constructively demoted, which he claimed provided good cause to terminate his agreement and seek contractual severance benefits. The Bank denied Plaintiff’s claim contending Plaintiff voluntarily resigned without “good cause” and therefore was not entitled to the contractual severance payment.
Plaintiff subsequently sued the Bank in federal district court for breach of the parties’ employment agreement. The Bank moved to strike Plaintiff’s complaint arguing that under AAA arbitration rules, Plaintiff’s wrongful termination claim and the question of the enforceability of the mandatory arbitration clause had to be decided by arbitration and not the court. The Bank pointed to AAA rule 6(a) which provides: “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the . . . validity of the arbitration agreement” as evidence that the parties intended to have an arbitrator decide the question of whether the arbitration clause was enforceable.
Plaintiff acknowledged his employment agreement contained an arbitration clause, but argued that the clause only covered his substantive claims for wrongful termination. According to Plaintiff, the issue of whether the actual clause was enforceable, was an issue for the district court. The district court disagreed and dismissed Plaintiff’s complaint, which the Ninth Circuit affirmed.
The Ninth Circuit held that parties to an agreement can contract to permit arbitrators to decide the fundamental issue of whether an arbitration clause is enforceable. The court held that because the “parties clearly and unmistakably” agreed to delegate the issue of whether the arbitration clause was enforceable to an arbitrator, the district court properly dismissed Plaintiff’s claims for lack of jurisdiction. Importantly, the 9th Circuit expressly held that its ruling was not limited to “sophisticated” parties or “commercial” contracts.
The holding in Brennan has broad implication for employers as it confirms that a well drafted arbitration clause which clearly and unmistakably reflects the parties’ intent should not be subject to challenge in the courts. Where the parties agree to allow an arbitrator to determine all issues, including the validity of the arbitration clause itself, the courts will not interfere and rule on whether the clause is enforceable. Based on the 9th Circuit’s dicta, the ruling should apply to employees of all levels, not just senior management.
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