The Supreme Court of Nevada recently overruled a lower court’s decision to deny the NFL’s motion to compel arbitration of claims brought against the League and Commissioner Roger Goodell by former Las Vegas Raiders head coach Jon Gruden. The state Supreme Court held that Gruden’s employment contract with the Raiders incorporated the NFL Constitution by reference, and that he agreed to arbitrate his claims under a valid arbitration clause contained in the NFL Constitution. Additionally, the court held that the district court erred in finding that the agreement to arbitrate was procedurally unconscionable.
The majority opinion highlights three legal issues relevant to the NFL’s current arbitration system: procedural unconscionability, substantive unconscionability, and illusory promises. Because these issues are hotly contested in disputes about the enforceability of arbitration agreements, a closer inspection of the Nevada Supreme Court’s analysis is worthwhile. As explained below, courts often reach different results on these issues depending on the factual circumstances and the governing state contract law.
Unconscionability
Generally, a contract is unenforceable for unconscionability only if it is both procedurally and substantively unconscionable. Procedural unconscionability focuses on the circumstances of negotiation (such as a significant disparity between the parties in bargaining power or whether the contract is a “take it or leave it” proposition). Substantive conscionability, by contrast, pertains to the fairness of the agreement’s actual terms—and specifically, whether the terms are so one-sided that they are unenforceable as a matter of public policy. Courts often analyze these two components of unconscionability on a sliding-scale, such that a lesser showing of procedural unconscionability may be compensated by a greater showing of substantive unconscionability, and vice versa. While most states (including California) require at least a nominal showing of procedural unconscionability in order to render an agreement unenforceable for unconscionability, others (like Missouri) do not require a separate showing of each type of unconscionability. See, e.g., Brewer v. Missouri Title Loans, 364 S.W.3d 486, 492 n.3 (Mo. 2012).[1]
i. Procedural Unconscionability
In Gruden, the Nevada Supreme Court, applying California contract law, held that Gruden’s employment contract with the Raiders was not procedurally unconscionable for two reasons. First, Gruden’s status as a “sophisticated party” meant the Raiders lacked superior bargaining power. Second, the employment contract was not a “take it or leave it” offer because although Gruden could not negotiate the terms of the NFL Constitution (including the arbitration agreement contained therein), he was free to negotiate other terms of the employment contract, such as compensation.
The majority’s reasoning seemingly leaves open the possibility that the same agreement would be procedurally unconscionable if challenged by an NFL employee who is not “sophisticated.” However, given the U.S. Supreme Court’s pronouncement that “[m]ere inequality in bargaining power . . . is not a sufficient reason to hold that arbitration agreements are never enforceable in the employment context,” an unsophisticated party would likely need to show more than unequal bargaining power in order to convince a court that the agreement is unenforceable. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33 (1991). For example, in 2012 a former equipment manager for the Rams brought a wrongful termination claim against his former employer. State ex rel. Hewitt v. Kerr, 461 S.W.3d 798, 804 (Mo. 2015). When the Rams moved to compel arbitration, the equipment manager argued that the arbitration agreement he signed was procedurally unconscionable (and therefore unenforceable) in part because of his unequal bargaining power. Id. at 809. Although the equipment manager would likely be considered an “unsophisticated party,” the Missouri Supreme Court, relying in part on Gilmer, held that the equipment manager’s unequal bargaining power was not sufficient to render the arbitration agreement procedurally unconscionable. Id. at 809-10.[2]
ii. Substantive Unconscionability
With respect to substantive unconscionability, the Nevada Supreme Court clearly indicated (but did not hold) that Gruden’s arbitration agreement was substantively unconscionable because it authorized Goodell, a defendant, to designate himself as arbitrator of Gruden’s claims. As the majority recognized, this is not the first time a court has found the NFL’s arbitration structure—by which Goodell retains discretion to appoint himself arbitrator—substantively unconscionable. For example, in Hewitt, although the Missouri Supreme Court refused to find procedural unconscionability, the Court held that a provision designating the Commissioner as arbitrator in a dispute between the Rams and the team’s former equipment manager was enough to make the contract substantively unconscionable. Hewitt, 461 S.W.3d at 813.[3] However, rather than invalidate the entire agreement, the Missouri Supreme Court severed the clause appointing the Commissioner as arbitrator and replaced it with a provision of the Missouri Uniform Arbitration Act, which provides for substitution of a new arbitrator when the designated arbitrator is disqualified. Id.
To be sure, not all courts are of the opinion that an arbitration agreement designating Goodell as the arbitrator of claims against the League renders that agreement substantively unconscionable. In a recent lawsuit filed by Brian Flores against the NFL, for example, a court for the Southern District of New York rejected this very argument on the basis that courts should not interfere with parties’ freedom to select their arbitrator by rewriting the parties’ agreement to reflect what the court deems appropriate. See Flores v. Nat’l Football League, 658 F. Supp. 3d 198, 215-17 (S.D.N.Y. 2023) (citing Nat’l Football League Mgmt. Council v. Nat’l Football League Players Ass’n, 820 F.3d 527 (2d Cir. 2016)). Additionally, the court in Flores noted that parties have recourse against any improper bias on behalf of the Commissioner through § 10(a)(2) of the FAA, which grants courts the authority to review the Commissioner’s arbitration decision and to vacate the Commissioner’s award. Id. at 215. These cases demonstrate the different conclusions courts can and often do reach regarding the enforceability of arbitration agreements designating Commissioner Goodell as the arbitrator of disputes against the NFL.
Illusory Promises
Finally, the majority in Gruden rejected Gruden’s argument that the arbitration agreement was an illusory promise (and thus unenforceable) because the NFL could unilaterally modify it without notice. An illusory promise exists where a party’s obligation is purely optional. Typically, a contract containing an illusory promise fails for lack of consideration, though if a party’s unilateral-modification right is so one-sided, a court could also find the agreement substantively unconscionable. See Michael L. DeMichele & Richard A. Bales, Unilateral-Modification Provisions in Employment Arbitration Agreements, 24 Hofstra Lab. & Emp. L.J. 63, 76 (2006). A unilateral-modification right is more likely to be deemed an illusory promise that renders an agreement unenforceable where the unilateral modification right is unrestricted, meaning it grants one party the ability to modify arbitration at any time, without notice.
In Flores, the federal district court concluded that the arbitration provision included in the NFL Constitution was unenforceable because it gave the NFL and its member clubs unilateral authority to modify the terms of the NFL Constitution without notice to the plaintiff. Flores, 2023 WL 2301575, at *1. But the majority in Gruden took a different view, holding that the NFL’s unilateral authority to amend the NFL Constitution without notice was not an illusory promise because the Raiders did not have the power to unilaterally modify any part of Gruden’s employment agreement. Rather, only the NFL—a non-party to Gruden’s employment contract—had the ability to do so.[4] And even if the Raiders could unilaterally modify the employment agreement, the majority reasoned, the duty of good faith and fair dealing would protect Gruden against any attempt by the Raiders to modify the contract in a manner that would frustrate its purpose or deprive Gruden of fair and reasonable notice. Thus, the fact that the NFL could modify its constitution without providing Gruden notice did not make the arbitration clause contained therein illusory.
Takeaways
The FAA requires courts to apply state contract law to analyze the enforceability of arbitration agreements. And because contract law varies by state, so too will decisions from courts about the enforceability of arbitration agreements, as demonstrated above by the different outcomes regarding whether a particular arbitration agreement is unconscionable or lacks consideration because of an illusory promise.
Given the likelihood of such variance and the increasing frequency of attacks on the legitimacy of the NFL’s arbitration system, the NFL might consider revising its bylaws to protect its arbitration system against existing legal vulnerabilities. For example, the League could protect against the potential finding of substantive unconscionability by removing Goodell’s authority to arbitrate disputes and instead appointing a third-party arbitrator in every case.[5] Additionally, the NFL could amend its Constitution to require the NFL to provide employees of the NFL and its member clubs with 30 days' notice of any changes to the NFL Constitution. Doing so could shield the NFL from assertions by future litigants that their arbitration agreement with the League is illusory and therefore unenforceable for lack of consideration of substantive unconscionability.
Alec McNiff (Twitter: @Alec_McNiff), an attorney licensed in California, earned his J.D. from University of Michigan Law School and holds a business degree from University of Southern California. All opinions are his own.
Footnotes:
[1] In Brewer, the Missouri Supreme Court rejected the notion that courts must find both procedural and substantive unconscionability and instead directed courts to limit their analysis of the defense of unconscionability “to the context of its relevance to contract formation.” Brewer, 364 S.W.3d at 492 n.3.
[2] As discussed below, the majority in Hewitt ultimately found the agreement unconscionable on the basis of substantive unconscionability. And, as explained above, under Missouri contract law, a finding of procedural unconscionability is not required to render a contract unenforceable for unconscionability.
[3] The majority in Gruden acknowledged the contrary holding in Hewitt, but distinguished Hewitt on grounds that Missouri law, unlike California law, does not require at least a minimal showing of procedural unconscionability to render a contract unenforceable for unconscionability.
[4] Notably, the NFL may modify its Constitution only through the votes of its member teams—including, of course, the Raiders. NFL Const. & Bylaws Art. 25 (setting forth the procedures for amendment of the NFL Constitution).
[5] Under the NFL’s current bylaws, Goodell has discretion to appoint a third-party arbitrator to hear disputes falling within his jurisdiction, but may (and often does) choose to hear those disputes himself.