Labor and Employment Law Alert

3/1/2001

What's in This Alert? In this month's Labor & Employment Law Alert, we look at a significant decision issued by the U.S. Supreme Court last week regarding arbitration agreements in employment contracts, and an additional development this week from the U.S. Supreme Court concerning arbitration agreements. We also discuss the Ninth Circuit's decision last week extending the psychotherapist-patient privilege to employee assistance programs. Next, we examine a recent decision from the Oregon Court of Appeals which held that an employee who is fired for refusing to sign an unenforceable noncompetition agreement may bring a wrongful discharge claim.

U.S. Supreme Court Gives Boost to Arbitration Agreements. Last week the U.S. Supreme Court ruled in Circuit City Stores, Inc. v. Adams, No. 99-1379, 2001 WL 273205 (U.S. Mar. 21, 2001), that the Federal Arbitration Act (the "FAA") applies to employment contracts, except those involving transportation workers. The FAA is a 1925 law that was intended to encourage arbitration of disputes; however, it has long been debated whether the Act extends to employment contracts. The U.S. Supreme Court's decision represents a significant victory for employers as it makes it more likely that arbitration agreements that are presented as a condition of employment (so-called "mandatory" arbitration agreements) will be enforced in courts.

It is important to note, however, that the U.S. Supreme Court's opinion does not resolve many of the issues surrounding arbitration agreements in the employment context. Most notably, the Ninth Circuit (the federal appellate court for most of the Western United States) ruled in 1998 in Duffield v. Robertson Stephens & Co., 144 F.3d 1182 (9th Cir. 1998), cert. den. 119 S. Ct. 465 (1998), that an employee cannot be required as a condition of employment to agree to arbitrate discrimination claims arising under Title VII of the Civil Rights Act of 1964 (the statute under which the largest number of discrimination claims are brought). The Ninth Circuit's decision in Duffield is not directly affected by the Supreme Court's ruling last week. However, the Supreme Court's decision in Circuit City seems to signal that the Ninth Circuit's decidedly negative view of mandatory arbitration agreements is not likely to ultimately prevail in the federal courts. Notably, the Ninth Circuit is the only circuit that has ruled that Title VII claims may not be subject to such arbitration agreements. (So, while our clients in Washington, Oregon, Idaho, California, Alaska and certain other Western states need to be mindful of the decision in Duffield, our Utah clients, who are in the Tenth Circuit, do not need to have the same concern.)

What Does This Mean for You? While the enforceability of mandatory arbitration agreements is likely to continue to be litigated, the tide appears to be turning in favor of their enforceability. Employers may wish to consider whether to require such agreements in order to increase the likelihood that their employment litigation will occur in a more rational and efficient forum than a jury trial. However, the decision as to whether to require arbitration agreements is a complex one that probably is best evaluated with counsel. Employers that choose to require arbitration agreements should be careful to use only well-drafted and balanced agreements. It is, of course, the overreaching agreements that are most likely to be held unenforceable. In general, arbitration agreements should, at a minimum:

• provide for a neutral arbitrator;
• provide for the same damages and other relief that the employee could obtain in court;
• allow for the parties to conduct adequate discovery;
• provide for the issuance of a written decision by the arbitrator;
• not impose costs on the employee beyond those the employee would pay to file in court; and
• require that claims that may be asserted by the employer against the employee also be subject to arbitration.

If you would like to review a sample arbitration agreement that we have prepared, send us a reply to this Alert.

Additional Legal Details on Arbitration.

• The U.S. Supreme Court's decision in Circuit City builds on the momentum created last summer by the California Supreme Court's decision in Armendariz v. Foundation Health Psychare Services, Inc., 24 Cal. 4th 83, 6 P.3d 669 (2000) where the court concluded that a properly drafted mandatory arbitration agreement may be enforceable even as to state law discrimination claims.

• On Monday of this week, the U.S. Supreme Court took another step toward clarifying this muddled but important area of employment law by agreeing to review a Fourth Circuit decision that held that the existence of an arbitration agreement may preclude the Equal Employment Opportunity Commission ("EEOC") from seeking damages on behalf of the employee who has entered into the agreement. Not surprisingly, the EEOC has long been firmly opposed to mandatory arbitration agreements.

Ninth Circuit Extends the Psychotherapist-Patient Privilege to Employee Assistance Program Providers. Last week the Ninth Circuit ruled that the privilege that has long been recognized for communications between doctor and patient or psychotherapist and patient is fully applicable to communications between an employee and an Employee Assistance Program ("EAP") provider. The issue arose in Oleszko v. State Comp. Ins. Fund, No. 99-15207, 2001 WL 267027 (9th Cir. Mar. 20, 2001), a sexual harassment case in which the plaintiff sought to compel the defendant employer to turn over an EAP counselor's records. The court ruled that the records were privileged and immune from discovery. The court stated:

"EAPs work to address serious national problems, from substance abuse and depression to workplace and domestic violence. Given the importance of the public and private interests EAPs serve, the necessity of confidentiality in order for EAPs to function effectively, and the importance of protecting this gateway to mental health treatment by licensed psychiatrists, psychologists, and social workers, we hold that the psychotherapist-patient privilege . . . extends to communications with EAP personnel."

What Does This Mean for You? At least within the Ninth Circuit, employers and employees should have confidence that communications between employees and EAP counselors are protected from disclosure.

Oregon Court of Appeals Recognizes Wrongful Discharge Claim for Employee Fired for Refusing to Enter into Invalid Noncompete Agreement. In Dymock v. Norwest Safety Protective Equipment, 172 Or. App. 399 (Feb. 14, 2001), the Oregon Court of Appeals considered a wrongful discharge claim brought by an employee who was fired when he refused to sign an agreement intended to preclude him, for a period of five years following termination of his employment, from soliciting the business of any entity that had been a customer of the company during the plaintiff's employment or that was a target of the company's marketing. The agreement also sought to prevent him from hiring any employees of the company for a five-year period following his termination. The plaintiff, who had been an employee of the company for 17 years at the time he was presented with the agreement, was discharged when he refused to sign.

The plaintiff asserted a wrongful discharge claim arguing that the agreement constituted a noncompetition agreement under ORS 653.295(1), a state statute that provides that noncompetition agreements are void unless entered into upon the "[i]nitial employment of the employee with the employer" or upon the "[s]ubsequent bona fide advancement of the employee with the employer." The plaintiff argued that because the agreement was void under that statute, his discharge for refusing to enter into a void agreement was wrongful. The Oregon Court of Appeals agreed.

The Oregon Court of Appeals rejected the defendant's argument that the agreement presented to the employee was not a noncompetition agreement. And the court held that a wrongful discharge tort remedy was appropriate because the noncompetition agreement statute provides no remedy for an employee who is terminated for refusing to enter into an agreement that is void under the statute.

What Does This Mean for You? Remember that regardless of what name you give an agreement, if it significantly restrains the employee's ability to effectively compete with your company following the employee's termination, it probably is a noncompetition agreement under Oregon law. Consequently, it may be entered into only when the employee is initially hired or when the employee receives a bona fide advancement. If you are presenting a current employee with a noncompete agreement and the employee refuses to sign, contact legal counsel before taking any further steps.

Confused? Have a Question? If you have questions about the developments described in this Alert, please feel free to call any of the attorneys in our Labor and Employment Practice Group. For a complete list of attorneys in Washington, Oregon, Idaho and Utah, please click on www.stoel.com. Kathryn Wagner Keith was the principal author of this Alert. She can be reached at (206) 386-7548 or by e-mail at kwkeith@stoel.com.

This is a periodic publication of the Labor and Employment Law Department of Stoel Rives LLP for the benefit and information of its clients and friends. This Alert should not be construed as legal advice or a legal opinion on specific facts or circumstances. The contents are intended for general informational purposes only. You are urged to consult your own lawyer concerning your own circumstances and any specific legal questions you may have.

Copyright 2001, STOEL RIVES LLP

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