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Last month I described the new statutory provisions relating to arbitration provisions in employment agreements. Specifically, the new Oregon law requires employers to give potential employees at least 14 days’ notice of the need to enter into an arbitration agreement in connection with an offer of employment in order to be able to later enforce that arbitration agreement.

After the article was published, I received a few inquiries from my colleagues regarding the enforceability of the new statute itself. Their question was, basically, doesn’t the new Oregon statute impermissibly contradict the Federal Arbitration Act, which favors arbitration agreements, and is therefore unenforceable?

For the reasons below, my response is: Probably, but does your client want to pay the legal fees to find out?

The Federal Arbitration Act declares written provisions for arbitration “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In other words, Congress precluded states from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed upon the same footing as other contracts.

This issue came to the forefront after Montana mandated that notice a contract is subject to arbitration be typed in underlined capital letters on the first page of the contract. In the course of a dispute between a Montana Subway franchisee and the franchisor, the question of the enforceability of the arbitration agreement, which did not meet Montana’s requirement, became the central issue in the case, which went to the Montana Supreme Court and then the U.S. Supreme Court.

The U.S. Supreme Court held that the Montana statute was preempted by the Federal Arbitration Act – therefore, the statute was unenforceable and the arbitration provision in the contract was valid. The court reasoned that, although states are free to enact statutes that govern contracts generally, they are not permitted to single out arbitration agreements for more stringent requirements than other contracts. The court noted the Montana requirement applied only to arbitration agreements and no other types of contracts.

Let’s jump back to Oregon’s statute. Presumably, Oregon’s lawmakers were at least familiar with the U.S. Supreme Court’s position on adding conditions to arbitration agreements that are not applicable to other types of contracts. The question then becomes, why does Oregon think its statute is different from Montana’s?

The only answer I see, which is not a very good one, is that the Montana requirement applied only to arbitration agreements, whereas Oregon’s requirement applies to arbitration and noncompetition agreements. In invalidating the Montana statute, the U.S. Supreme Court used terminology such as “specifically and solely” arbitration agreements, and proclaimed that states were not allowed to “invalidate arbitration agreements under state laws applicable only to arbitration provisions.” Taken too literally, one might conclude that, because the Oregon statute does not apply “only” or “solely” to arbitration agreements, the Supreme Court’s analysis can be distinguished.

This seems to be a disingenuous approach. The court’s intention was clearly to prevent arbitration agreements from being treated more harshly than contracts in general. The fact that one other, traditionally disfavored, type of contract is also affected does not seem to warrant the Oregon statute being treated any differently than the Montana statute.

In the end, what does this mean to employers? It means some employer is likely going to appeal an Oregon court’s decision not to enforce an arbitration agreement based upon the new statute. It also means that employer will likely win in the end. However, the fight will likely be long and expensive. Arbitration generally is quicker and cheaper than litigation. That benefit will be negated if the employer is forced to spend years in appellate courts just fighting for the right to eventually arbitrate the matter.

However, in the interest of full disclosure, I’m not recommending that my clients get rid of their current arbitration agreements in their contracts, regardless of whether they can actually provide the 14 days’ notice. If the arbitration agreements are left in, the employer can always choose later whether it wishes to try and enforce the provision. Also, if and when someone does challenge the new law and it is thrown out, it will be nice for those employers who kept their arbitration agreements intact to now be able to start using them again. The alternative – removing arbitration agreements from employment contracts – will leave the employer without such provisions in the event the new statute is found unenforceable.