The Court holds that, absent a countervailing federal statute, states may protect their workers by prohibiting the enforceability of arbitration provisions in employment contracts as a matter of public policy.

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Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Ware, 414 U.S. 117 (1973)
 

Relevant Facts: A broker for the firm, Merrill Lynch, Pierce, Fenner, & Smith, Inc. (“Merrill Lynch”) was hired to sell securities. To get the job, the broker signed a NYSE broker-dealer contract that contained an arbitration clause. Upon quitting the firm to work for a competitor, Merrill Lynch refused to pay the broker vested monies due under the profit-sharing plan included in his compensation package. The broker sued under relevant state labor law, which guaranteed workers’ access to a judicial forum. Merrill Lynch moved to stay the proceedings and compel arbitration under the FAA based on the NYSE application’s arbitration clause. In particular, Merrill Lynch argued that its fiduciary obligations to investors under the Securities and Exchange Act justified the enforcement of the forced arbitration clause. The state court didn’t buy it, and held the arbitration provision was unenforceable as a matter of public policy.

 

Question Before The Court: Whether a state law precluding compulsory arbitration of an employment claim applied by a state court is preempted under federal law.

 

The Opinion: The Court held that arbitration could not be compelled because there was no evidence that the state’s policy interfered with any federal regulatory scheme. The Court reasoned, “It is unclear why muffling a grievance in the cloakroom of arbitration would prevent lessoning of confidence of the market,” as the defense had argued. In standing up for the state’s right to enforce its labor laws through judicial proceedings, the Court explained “there is nothing in the [Federal Arbitration] Act . . . that specifies arbitration as the favored means of resolving employer disputes.”

 

Instead, the Court recognized the state legislature’s right “to protect the worker from the exploitative employer who would demand that a prospective employee sign away in advance his right to resort to the judicial system for redress of an employment grievance.” This view is the polar opposite of where workers and states’ stand today. Ironically, the Court here describes forced arbitration in the workplace exactly as millions of workers now experience it.

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