CITE AS
23 Energy & Min. L. Inst. ch. 1 (2003)
Chapter 1
Mandatory Arbitration of Employment
Claims after Circuit City v. Adams
and EECO v. Waffle House:
When Is an Arbitration Agreement
Valid and Enforceable?
By David J. Laurent
Brandon D. Coneby
Babst, Calland, Clements and Zomnir
Pittsburgh, Pennsylvania
Synopsis
§ 1.01. Introduction .................................................................................... 2
§ 1.02. Recent Supreme Court Decisions ................................................. 2
§ 1.03. Reasons to Use Mandatory Pre-Dispute
Arbitration Agreements ................................................................ 4
§ 1.04. Common Issues that Arise with Respect to the Validity
of Mandatory Pre-Dispute Arbitration Agreements .................. 5
[1] — Form of the Agreement to Arbitrate ................................... 6
[a] — Employment Applications and Related
Documents..................................................................6
[b] — Handbooks and Related Documents ..........................7
[c] — Signed Handbook Acknowledgement Forms...........10
[2] — Consideration for the Agreement to Arbitrate ...................12
[3] — Claims to be Arbitrated......................................................15
[4] — Collective Bargaining Agreements....................................17
[5] — Statute of Limitations ........................................................19
[6] — Fees and Expenses .............................................................21
[7] — Limiting Relief...................................................................24
[8] — Unconscionable Agreements .............................................25
[9] — Severing Invalid Provisions...............................................29
[10] — Parties to the Agreement..................................................31
§ 1.05. Conclusion .................................................................................... 31
§ 1.01
§ 1.01.
ENERGY & MINERAL LAW INSTITUTE
Introduction.
In an effort to reduce the high cost of litigating claims for wrongful
discharge, discrimination, defamation and other employment-related
matters, and to limit potential exposure, many employers have begun to
require their employees to agree, in advance, to arbitrate all such claims.
The increased use of pre-dispute mandatory arbitration agreements in the
employment context, however, has generated substantial litigation related
to the validity of such agreements and the means by which they can be
enforced. Twice the United States Supreme Court has resolved issues
related to the use and scope of mandatory arbitration agreements in the
employment context, and the lower courts are issuing new decisions
weekly.
In general, courts endorse the concept of pre-dispute mandatory
arbitration agreements in the employment context; however, the Equal
Employment Opportunity Commission (EEOC) can “trump” an arbitration
agreement and pursue a claim in court on an employee’s behalf for victimspecific relief. In addition, many arbitration agreements have been found
to be unenforceable because they were invalid under state law contract
principles.
This chapter will discuss the current state of federal case law regarding
the use and enforceability of pre-dispute mandatory arbitration agreements
in the employment context.1 More specifically, this chapter will focus on
the issues most frequently raised when considering the contractual validity
of mandatory arbitration agreements, and will offer drafting and
implementation suggestions for achieving an enforceable pre-dispute
mandatory arbitration program.
§ 1.02.
Recent Supreme Court Decisions.
In Circuit City v. Adams,2 the United States Supreme Court held that
the Federal Arbitration Act (FAA) 3 provides federal court jurisdiction
1
Although many of the issues discussed concern state law-contract principles, and
many state courts also are issuing decisions concerning the validity of arbitration
agreements, for the sake of brevity, this chapter will discuss only federal court decisions.
2
Circuit City v. Adams, 532 U.S. 105 (2001).
3
9 U.S.C. § 1 et seq.
2
§ 1.02
ARBITRATION AGREEMENTS
over claims to enforce arbitration agreements in most employment
contracts, even if they require arbitration of statutory claims. Justice
Kennedy, writing for the majority, concluded that the FAA applied to all
employment contracts (oral and written) other than those involving
transportation workers. Accordingly, employers can now use the FAA to
enforce their rights under arbitration agreements in federal court.
While the Circuit City decision marked a victory for the use of
arbitration agreements in the employment context, the Supreme Court
narrowed the scope of that broad ruling in EEOC v. Waffle House.4 In
Waffle House, a minimum wage grill operator at a Waffle House restaurant
in South Carolina signed an employment application that contained a
provision requiring him to submit any dispute concerning his employment
to binding arbitration.5 Upon his termination 16 days after he began work,
Baker filed a charge with the EEOC alleging that he had been discriminated
against due to his disability (Baker suffered a seizure while operating the
grill). After accepting Baker’s case and attempting unsuccessfully to
resolve the dispute with Waffle House, the EEOC filed suit in federal
court under the Americans With Disabilities Act 6 reinstatement. The
United States Supreme Court, however, reversed the Fourth Circuit. Justice
Stevens, writing for a majority of the Court, reasoned that because the
4
EEOC v. Waffle House, 122 S. Ct. 754 (2002).
The arbitration provision stated as follows:
The parties agree that any dispute or claim concerning Applicant’s
employment with Waffle House, Inc., or any subsidiary or Franchisee of
Waffle House, Inc., or the terms, conditions or benefits of such employment,
including whether such dispute or claim is arbitrable, will be settled by
binding arbitration. The arbitration proceedings shall be conducted under
the Commercial Arbitration Rules of the American Arbitration Association
in effect at the time a demand for arbitration is made. A decision and award
of the arbitrator made under the said rules shall be exclusive, final and
binding on both parties, their heirs, executors, administrators, successors
and assigns. The costs and expenses of the arbitration shall be borne evenly
by the parties.
Waffle House, 122 S. Ct. at 758.
6
29 C.F.R. § 1630 et seq.
5
3
§ 1.03
ENERGY & MINERAL LAW INSTITUTE
EEOC was not a party to the agreement between Baker and Waffle House,
the EEOC remained free to seek “victim-specific” relief for Baker and
hence could seek legal relief, such as reinstatement, back wages and
damages (including punitive damages) on Baker’s behalf.
Accordingly, with the exception of transportation workers, it is now
well settled that the FAA can be used to enforce mandatory arbitration
agreements in federal court, including those that require arbitration of
statutory employment claims. Nonetheless, the EEOC remains free to
ignore such agreements in particular cases and to purse “victim-specific”
relief even if an employee has agreed to arbitrate such disputes.
§ 1.03.
Reasons to Use Mandatory Pre-Dispute
Arbitration Agreements.
Notwithstanding the EEOC’s right to “trump” arbitration agreements
under Waffle House, employers should continue to use mandatory predispute arbitration agreements. Although Waffle House undermines an
employer’s ability to achieve the full benefit of a mandatory arbitration
program, its actual impact is likely to be rather limited given the relatively
few cases the EEOC actually litigates. For example, in fiscal year 2001,
the EEOC received 80,840 charges of employment discrimination. Despite
finding reasonable cause to believe that discrimination occurred in 8,924
charges, the EEOC only filed 386 lawsuits and intervened in 67 others.7
In short, the EEOC actually litigated less than one percent of the cases
filed in fiscal year 2001. Thus, although the EEOC can “trump” an
arbitration agreement, the odds are that it will not. Therefore, Waffle House
should not be a significant impediment to the use of mandatory pre-dispute
arbitration agreements in the employment context.
Moreover, arbitration offers the following benefits over the traditional
litigation of employment claims:
(1) Arbitration awards generally are smaller than damages
awarded in traditional litigation;
7
See EEOC, Enforcement Statistics and Litigation, http://www.eeoc.gov/stats/
enforcement.html (as visited August 20, 2002).
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(2) Arbitration is somewhat easier for both sides given the relaxed
rules of evidence and the control the parties can exert over the
process;
(3) Arbitration generally involves little or no publicity;
(4) The parties can select an arbitrator who is knowledgeable in
the field of employment law;
(5) The scope of review of arbitration awards is quite limited,
meaning that disputes generally end with the arbitration decision;
and
(6) Arbitration generally is less expensive in terms of attorney’s
fees and company time.
Nonetheless, to successfully implement an enforceable arbitration
program, an employer must be careful to comply with state law contract
principles. In many cases, arbitration agreements have been rejected
because the employers sought to do more than require employees to
arbitrate claims; they sought to tilt the playing field in their favor. In other
cases, arbitration agreements have been rejected because the employers
simply failed to comply with basic contract law principles. As a result,
while federal courts will enforce binding arbitration agreements under
the FAA, they will closely scrutinize arbitration agreements to ensure
that they are enforceable under traditional state law contract principles.
§ 1.04.
Common Issues that Arise with Respect to the
Validity of Mandatory Pre-Dispute Arbitration
Agreements.
A court will begin its analysis by looking to whether the parties have
executed a valid arbitration agreement and, if so, whether the dispute
falls within the scope of that agreement.8 Although the FAA provides
federal jurisdiction over claims to enforce arbitration agreements, courts
8
See generally, Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001);
Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306, 311-12 (6th Cir. 2000).
5
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ENERGY & MINERAL LAW INSTITUTE
generally look to state contract law principles to determine the validity of
the agreement to arbitrate, such as whether both parties manifested an
intent to be bound; whether the agreement is supported by adequate
consideration; whether the terms are sufficiently definite to be enforced;
and whether there are grounds for revoking or otherwise refusing to enforce
the agreement. 9
Consequently, an employer will be able to reap the benefits of a
mandatory pre-dispute arbitration program only if the arbitration
agreement itself passes judicial scrutiny. The following is a survey of the
most common issues that arise with respect to the validity of mandatory
pre-dispute arbitration agreements in the employment context.
[1] — Form of the Agreement to Arbitrate.
Pre-dispute arbitration agreements take many forms. For example,
employers have sought to obtain a binding arbitration agreement by adding
language to that effect to employment applications, to employee handbooks
(for which the employee may or may not sign an acknowledgement), and
to separate documents signed by employees. The method that the employer
selects, however, may impact the validity of the agreement to arbitrate.
[a] — Employment Applications and Related
Documents.
Statements in signed employment applications and offer letters, which
provide that the employee must arbitrate all claims, generally create a
binding agreement to arbitrate. For example, in McWilliams v. Logicon,
Inc.,10 the Court of Appeals for the Fourth Circuit found that a signed
acceptance of employment letter, which provided that the employee agreed
to submit all claims arising from his employment to arbitration, established
a binding agreement to arbitrate.11
9
See generally, Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002); Hooters of
America, Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999).
10 McWilliams v. Logicon, Inc., 143 F.3d 573 (10th Cir. 1998).
11 In the employment letter, the employee agreed that “any controversies, claims, and/
or disputes arising out of the termination of [his] employment with [Logicon] shall be
6
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The Court of Appeals for the Third Circuit reached a similar conclusion
in Great Western Mortgage Corp. v. Peacock12 where, at the time of her
application, but before employment, the plaintiff signed a certification
agreeing to submit any dispute related to her employment (or the
termination of her employment) to final and binding arbitration.13
The District Court for the Southern District of New York also reached
a similar conclusion in Starwood Hotels and Resorts Worldwide, Inc.,14
where the plaintiff countersigned an offer letter which provided that “any
disputes with respect to your employment by the Company . . . shall be
resolved through binding arbitration. . . .”15
[b] — Handbooks and Related Documents.
Courts disagree as to whether simply informing employees that the
employer intends to use a written arbitration procedure to resolve disputes
is enough to demonstrate mutual assent to an arbitration agreement. Most
courts have held that an employee’s awareness of an employer’s intent to
implement an arbitration program, coupled with continued employment,
creates a binding agreement to arbitrate; however, at least one has found
that such facts are not enough to create a binding agreement to arbitrate.
A good example of the former line of cases is Hightower v. GMRI,
Inc.16 In that case, Hightower began employment in June 1988 as a
settled exclusively through binding arbitration . . . pursuant to the Federal Arbitration
Act.” McWilliams, 143 F.3d at 574. Furthermore, when the employee later accepted a
transfer, he signed a similar acceptance letter containing the same arbitration clause.
McWilliams, 143 F.3d at 574.
12 Great Western Mortgage Corp. v. Peacock, 110 F.3d 222 (3d Cir. 1997).
13 Specifically, by signing the certification she agreed “[t]o submit any dispute related
to my employment, or the termination of my employment, to final and binding arbitration
(thus waiving any right to pursue any other administrative and/or legal proceeding), and,
as a condition of my employment, I agree to sign Great Western’s Arbitration Agreement
upon commencement of my employment, and to abide by the Arbitration Agreement and
Great Western’s Binding Arbitration Policy and Procedures.” Great Western Mortgage
Corp., 110 F.3d at 224.
14 Starwood Hotels and Resorts Worldwide, Inc., 2001 WL 396447 (S.D. N.Y. 2001).
15 Starwood, 2001 WL at *1.
16 Hightower v. GMRI, Inc., 272 F.3d 239 (4th Cir. 2001).
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manager of an Olive Garden restaurant (owned and operated by the
defendant GMRI). In August 1998, at a weekly staff meeting, GMRI
provided Hightower with information regarding a new four-step dispute
resolution policy that GMRI was implementing.17 Hightower signed a
form acknowledging that he attended the meeting and that, as a manager,
he would be responsible for informing employees that by continuing to
work after August 3, 1998 (the effective date of the new policy), they
were accepting the terms of the policy.18 Nearly three months after the
policy went into effect, however, Hightower filed a discrimination suit
against GMRI. In response to GMRI’s motion to compel arbitration, the
Court of Appeals for the Fourth Circuit held that Hightower had to arbitrate
his claim in accordance with the policy. The court reasoned that by
continuing to work for nearly three months after learning of the existence
of the policy, Hightower could be considered to have agreed to the policy.
Similarly, in Tinder v. Pinkerton Security,19 the Court of Appeals for
the Seventh Circuit found that an arbitration program that was announced
to the employees via a brochure that was included with payroll checks
sufficiently established a binding agreement to arbitrate for those
employees who continued to work for the company after having received
the brochure. In response to Tinder’s claim that the arbitration program
did not bind her since she never signed anything acknowledging the
program, the court observed “the FAA requires arbitration agreements to
be written, it does not require them to be signed.”20
Likewise, in Hamilton v. Travelers Property and Casualty Corp.,21
the District Court for the Eastern District of Pennsylvania held that
17
“GMRI’s Dispute Resolution Procedure consists of four steps: (1) open door policy
for informal review of work-related disputes; (2) peer review; (3) mediation; and (4)
binding arbitration.” Hightower, 272 F.3d at 241.
18 The form Hightower signed stated: “I have attended a DRP meeting and have received
the information in regards to the DRP.” Hightower, 272 F.3d at 241.
19 Tinder v. Pinkerton Security, 2002 WL 31056991 (7th Cir. 2002).
20 Tinder, 2002 WL at *7.
21 Hamilton v. Travelers Property and Casualty Corp., 2001 WL 503387 (E.D. Pa.
2001).
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Hamilton was bound by the terms of an arbitration agreement in an
employee handbook. Hamilton had received the handbook upon the
commencement of his employment in February of 1989. The handbook,
entitled “Travelers Property Casualty Highlights Your Work Life: A
Handbook for Employees,” contained an appendix which provided for
compulsory arbitration of all employment disputes (with certain
exceptions).22 In November 1998, Travelers fired Hamilton. Hamilton
later filed suit against Travelers alleging that his termination was racially
motivated. The district court dismissed Hamilton’s claim on the grounds
that he did not seek mandatory arbitration of his claims. The district court
reasoned that an enforceable arbitration agreement existed because
Hamilton had received a copy of the employee handbook, had knowledge
of the implementation of the arbitration policy, and had continued to work
for Travelers after having such knowledge.
In contrast with the foregoing cases, the District Court for the Northern
District of Illinois ruled that an arbitration program discussed as part of a
training session did not establish a binding agreement to arbitrate where
the employer could not prove that the employee also actually received a
copy of the arbitration program. In Owen v. MBPXL Corp.,23 the employer
adopted a dispute resolution plan that outlined an internal grievance
procedure for pursing employment-related claims.24 After Owen was
22
The Handbook Appendix provided that arbitration is
[t]he required, and exclusive, forum for the resolution of all employment
disputes based on legally protected rights (i.e., statutory, contractual or
common law rights) that may arise between an employee or former employee
and the Travelers Group or its affiliates, officers, directors, employees and
agents (and which are not resolved by the internal resolution procedure),
including claims, demands or actions under Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1866, . . . and any other federal, state or
local statute, regulation or common law doctrine, regarding employment
discrimination, conditions of employment or termination of employment.
Hamilton, 2001 WL at *1.
23 Owen v. MBPXL Corp., 173 F. Supp. 2d 905 (N.D. Ill. 2001).
24 The employer presented the dispute resolution program (which the employees were
deemed to have accepted if they continued employment for 30 days after its presentation)
to its employees in October 1999. Owen, 173 F. Supp. 2d. at 905.
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terminated, he filed a discrimination claim in federal district court. In
response, the employer filed a motion to compel arbitration on the grounds
that Owen had agreed to arbitrate all employment-related claims by virtue
of his continued employment with the company for thirty days after a
summary of the dispute resolution plan was presented to the employees.
In addressing the validity of the agreement to arbitrate, however, the district
court was troubled by the fact that the employer could not present any
solid evidence that Owen actually received a full copy of the dispute
resolution plan. Using the basic contract rule that an offer is not effective
until it reaches the offeree, the district court reasoned that Owen could
not possibly have agreed to the terms of the dispute resolution program if
he did not actually receive a copy of it. Consequently, the district court
denied the employer’s motion to compel arbitration on the grounds that
the employer failed to establish the existence of a binding agreement to
arbitrate.
[c] — Signed Handbook Acknowledgement Forms.
Signed handbook acknowledgement forms generally establish a
binding agreement to arbitrate. For example, in O’Neil v. Hilton Head
Hospital,25 O’Neil sued her former employer, Hilton Head Hospital,
alleging that she had been discharged in violation of the Family and
Medical Leave Act (FMLA).26 Hilton Head moved for a stay pending
arbitration, relying upon a form O’Neil had signed acknowledging receipt
of an employee handbook and agreeing to submit all employment disputes
to arbitration. 27 In response, O’Neil argued, in part, that the arbitration
agreement was not binding given that AMI (the successor to Hilton Head)
25
O’Neil v. Hilton Head Hospital, 115 F.3d 272 (4th Cir. 1997).
See generally 42 U.S.C. § 2601 et seq.
27 The relevant arbitration clause stated “I understand that AMI [the successor to Hilton
Head] makes available arbitration for resolution of grievances. I also understand that as a
condition of employment and continued employment, I agree to submit any complaints
to the published process and agree to abide by and accept the final decision of the arbitration
panel as ultimate resolution of my complaints for any and all events that arise out of my
employment or termination of employment.” O’Neil, 115 F.3d at 272.
26
10
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did not agree to be bound by the arbitration agreement. The Court of
Appeals for the Fourth Circuit rejected this argument, noting that it ignored
the “multiple references in the AMI employee handbook indicating the
arbitration process was binding.” 28 As a result, the court ordered O’Neil
to arbitrate her FMLA claim prior to seeking relief in a judicial forum.
In Patterson v. Tenet Healthcare,29 the Court of Appeals for the Eighth
Circuit reached a similar conclusion. Patterson began working in 1989 as
a medical technologist at Columbia Regional Hospital (owned and
operated by Tenet). In March 1993, Patterson received a copy of Tenet’s
employee handbook and signed an arbitration clause set forth on the last
page of the handbook. After Patterson exhausted the internal grievance
procedure, she filed a claim in district court. Believing that a valid
agreement to arbitrate existed, Tenet requested arbitration in accordance
with the terms specified on the final page of the employee handbook that
Patterson had signed. Patterson resisted, arguing that a valid agreement
to arbitrate did not exist because, under Missouri law, employee handbooks
are not considered contracts. The Court of Appeals for the Eighth Circuit,
however, rejected this argument, noting that the arbitration clause, which
was set forth on a separate page of the handbook and introduced by the
heading “IMPORTANT! Acknowledgment Form,” must be viewed as
separate and distinct from the handbook. Consequently, the court found
that a valid arbitration agreement existed between the parties.30
In sum, so long as it is in writing, an agreement to arbitrate can take
many forms. Nevertheless, simply notifying employees of the employer’s
intent to use an arbitration program, without some clear proof that the
employees knew of and agreed to it in one way or another, may not be
enough to create a binding agreement to arbitrate.
28
O’Neil, 115 F.3d at 275. For example, a clause in the handbook read: “As regards to
the Fair Treatment Procedure, AMI is committed to accept the obligation to support and
assure access to the binding arbitration procedure for solving disputes if necessary.”
O’Neil, 115 F.3d at 275. (emphasis added).
29 Patterson v. Tenet Healthcare, 113 F.3d 832 (8th Cir. 1997).
30 Courts also found that signed handbook acknowledgement forms were sufficient to
establish a binding agreement to arbitrate in Circuit City v. Ahmed, 283 F.3d 1198 (9th
Cir. 2002) and Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002).
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[2] — Consideration for the Agreement to Arbitrate.
A preliminary inquiry regarding the validity of an agreement to
arbitrate is whether it is supported by consideration. This inquiry frequently
turns on whether both parties to the agreement had sufficient knowledge
of its terms and are mutually bound by the duty to arbitrate.
For example, consideration may be lacking if the arbitration
agreement’s terms are too vague to enforce. In Penn v. Ryan’s Family
Steak House,31 the Court of Appeals for the Seventh Circuit concluded
that an arbitration agreement was invalid for lack of consideration on
these grounds. The court reasoned that the agreement Penn had signed
when he applied for his job, which provided that he would use a service
selected by Ryan to arbitrate any employment-related disputes in return
for which the service agreed to provide an arbitration forum, rules,
procedures, hearing and decision, was unenforceable given that it
contained an unascertainable, illusory promise on the part of the arbitration
service. 32 In short, the court expressed concern that the arbitration
31
Penn v. Ryan’s Family Steak House, 269 F.3d 754 (7th Cir. 2001).
Penn never actually signed an arbitration agreement with Ryan but instead signed
an agreement agreeing to use an arbitration service with which Ryan had a
relationship.
Before Penn ever arrived on the scene, Ryan’s had entered into a contract
with a company called Employment Dispute Services, Inc. (EDS) to have
EDS provide an arbitration forum for all employment-related disputes
between Ryan’s and its employees. When Penn applied for a job at Ryan’s,
Ryan’s required him to execute a contract with EDS. That contract in turn
expressed Penn’s agreement to use EDS’s services to arbitrate any
employment-related claims he might have against Ryan’s. The document
went on to state explicitly that it was a contract with EDS, not with Ryan’s
although it added that Ryan’s was a third-party beneficiary of the contract.
EDS’s sole business is apparently the provision of arbitration services for
employment disputes according to this model: EDS contracts with employers
to provide an arbitration forum for any claims the company’s employees
bring against it, and the companies that contract with EDS then require
their employees to enter into separate contracts with EDS.
Penn, 269 F.3d at 764.
32
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agreement did not sufficiently define a framework for the arbitration
process.
An arbitration program also may be unenforceable if it is part of a
handbook that contains disclaimers stating that the handbook is not a
contract. In Gourley v. Yellow Transportation, LLC,33 the district court
denied Yellow Cab’s motion to compel arbitration on the grounds that the
arbitration clause in the employee handbook created an illusory contract.
The court reasoned that since the handbook explicitly disclaimed that it
constituted a contract, 34 there was no binding agreement to arbitrate.35
A court also may find an arbitration agreement to be unenforceable
for lack of consideration where an employee signs the agreement after
employment has commenced and no additional consideration is provided
for entering into the agreement. For example, in Gibson v. Neighborhood
Health Clinics,36 the Court of Appeals for the Seventh Circuit denied a
request for an order compelling arbitration of an employee’s discrimination
suit against her former employer because the alleged arbitration agreement
was void for lack of consideration.37 The court noted that the employer
33
Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196 (D. Colo. 2001).
The Yellow Cab Handbook contained the following language:
THE PROVISIONS IN THIS HANDBOOK, INDIVIDUALLY AND
COLLECTIVELY, DO NOT, IN ANY WAY, CONSTITUTE A CONTRACT
OF EMPLOYMENT, A COVENANT, OR AN AGREEMENT, WHETHER
EXPRESS OR IMPLIED. NOTHING CONTAINED IN THIS
HANDBOOK SHOULD BE CONSTRUED AS A GUARANTEE OF
CONTINUED EMPLOYMENT OR A GUARANTEE THAT
EMPLOYEES WILL NOT BE DISCHARGED WITHOUT A HEARING.
ALL EMPLOYEES ARE ‘AT-WILL’ EMPLOYEES UNDER STATE LAW.
THIS MEANS THAT THE EMPLOYMENT RELATIONSHIP MAY BE
TERMINATED AT ANY TIME BY EITHER THE EMPLOYEE OR THE
COMPANY WITH OR WITHOUT CAUSE AND WITH OR WITHOUT
NOTICE.
Gourley, 178 F. Supp. 2d at 1202.
35 See also Snow v. BE and K Construction Co., 126 F. Supp. 2d 5 (D. Me. 2001).
36 Gibson v. Neighborhood Health Clinics, 121 F.3d 1126 (7th Cir. 1997).
37 An employee manual included the following language: “I agree to the grievance and
arbitration provisions set forth in the Associates Policy Manual. I understand that I am
34
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never communicated to the employee that signing the agreement was
required for continued employment or that if the agreement was not signed,
the employee’s status would become uncertain. Thus, according to the
Seventh Circuit, the mere fact of continued employment was not
consideration for an employee’s promise to submit all employment-related
claims to arbitration. 38
In addition, a court may find consideration lacking where an employer
retains an unfettered right to amend an arbitration agreement. For example,
in Floss v. Ryan’s Family Steak Houses, Inc.,39 two employees brought
independent employment-related claims against Ryan. Ryan responded
by filing a motion to compel arbitration with the respective district courts,
alleging that each employee had signed an agreement to arbitrate. After
the district courts issued conflicting decisions, the cases were consolidated
for appeal and the Court of Appeals for the Sixth Circuit denied Ryan’s
motion to compel arbitration. The court reasoned that the agreement to
arbitrate was defective because the rules and procedures governing the
arbitration process permitted Ryan to amend them without providing notice
to the employees covered by the agreement. The court concluded that the
waiving my right to a trial, including a jury trial, in state or federal court of the class of
disputes specifically set forth in the grievance and arbitration provisions on pages 8-10
of the Manual.” Gibson, 121 F.3d at 1132. The opening two paragraphs of the Manual
also included the following language: “Neighborhood Health Clinics reserves the right
at any time to modify, revoke, suspend, terminate or change any or all terms of this
Manual, plans, policies, or procedures, in whole or in part, without having to consult or
reach agreement with anyone, at any time, with or without notice. While Neighborhood
Health Clinics intends to abide by the policies and procedures described in this Manual,
it does not constitute a contract nor promise of any kind. Therefore, employees can be
terminated at any time, with or without notice, and with or without cause.” Gibson, 121
F.3d at 1132.
38 This decision is at odds with the cases discussed above which hold that inserting
arbitration agreements in handbooks, coupled with continued employment after
knowledge of the same, is sufficient to establish a binding agreement. Unfortunately,
this type of inconsistency exists throughout the decisions discussed in this chapter.
39 Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306 (6th Cir. 2000).
14
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ability to amend without notice to the other party demonstrated a lack of
mutuality between the parties which, in turn, rendered them unenforceable.
The Court of Appeals for the Tenth Circuit reached a similar conclusion
in Dumais v. American Golf Corp.40 There, the handbook stated that the
employees agreed to arbitrate all disputes; however, the handbook
acknowledgement form the employee signed stated that the employer could
amend, supplement, or revise everything in the handbook at any time.
The court noted that it was joining other circuits which have held that
“allowing one party the unfettered right to alter the arbitration agreement’s
existence or its scope is illusory.” 41
Nonetheless, the District Court for the Northern District of Ohio has
held that retaining a limited right to amend does not make an agreement
to arbitrate illusory. In Morrison v. Circuit City Stores, Inc.,42 the
agreement to arbitrate provided that the employer could unilaterally modify
or terminate it at a certain time each year by providing thirty days advance
notice to the employees. The court concluded that this narrow right to
modify or terminate was not enough to show a lack of mutuality of
obligation.
In short, consideration can be a troublesome issue, particularly where
the arbitration agreement is found in a handbook that provides it is not a
contract, or the document gives the employer the unilateral right to change
it at any time.
[3] — Claims to Be Arbitrated.
Although employers generally want to have all employmentrelated claims submitted to arbitration, the wording of the agreement may
cause the agreement to fall short of meeting that objective. In general, for
an arbitration agreement to require an employee to arbitrate statutory
claims, it must clearly inform the employee that such claims are included.
In Prudential Insurance Co. of America v. Lai,43 a prospective
employee signed an agreement to arbitrate any dispute, claim, or
40
Dumais v. American Golf Corp., 299 F.3d 1216 (10th Cir. 2002).
Dumais, 299 F.3d at 1219.
42 Morrison v. Circuit City Stores, Inc., 70 F. Supp. 2d 814 (S.D. Ohio 1999).
43 Prudential Ins. Co. of America v. Lai, 42 F.3d 1299 (9th Cir. 1994).
41
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controversy.44 When signing the form, the employee was told to simply
sign on the line, was not told anything about the arbitration agreement,
and was never given an opportunity to fully examine the contents of the
form. After the district court compelled the employee to arbitrate a sexual
harassment claim against Prudential, the employee appealed. The Court
of Appeals for the Fourth Circuit reversed, noting that even if the employee
would have been told about the arbitration agreement and given a chance
to review it, the sexual harassment claim still would not be subject to
arbitration because the agreement did not describe the types of disputes
that were to be subject to arbitration and, therefore, was not broad enough
to encompass a statutory sexual harassment claim. Specifically, the Fourth
Circuit noted that Congress intended that Title VII disputes be arbitrated
only when such a procedure was knowingly accepted, and that since the
arbitration agreement did not specifically state that Title VII claims were
subject to arbitration, Lai could not possibly have agreed to submit such
claims to arbitration.
The Court of Appeals for the Eleventh Circuit reached a similar
conclusion in Paladino v. Avent Computer Technologies, Inc.45 Paladino
had signed a handbook acknowledgement form that included a “consent
to arbitration.” 46 After Paladino was fired, she filed suit in federal court
44
Specifically, the employee signed a form agreeing “to arbitrate any dispute, claim or
controversy that . . . is required to be arbitrated under the rules, constitutions, or bylaws
of the organizations with which I register.” Lai, 42 F.3d at 1301.
45 Paladino v. Avent Computer Technologies, Inc., 134 F.3d 1054 (11th Cir. 1998).
46 The arbitration agreement stated:
I recognize that during the course of my employment differences can arise
between the Company and me. To that end, the Company and I consent to
the settlement by arbitration of any controversy or claim arising out of or
relating to my employment or the termination of my employment. Arbitration
shall be in accordance with the commercial rules of the American Arbitration
Association before a panel of three arbitrators in or near the city where I am
principally employed. The Company and I further consent to the jurisdiction
of the highest court of original jurisdiction of the state where I am principally
employed, and of the United States District Court in the District where the
arbitration takes place, for all purposes in connection with the arbitration,
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alleging violations of Title VII.47 Avent responded with a motion to stay
and to compel arbitration that was denied by the district court. On appeal,
the Court of Appeals for the Eleventh Circuit reversed. First, the Eleventh
Circuit noted that an arbitration agreement must authorize the arbitrator
to resolve federal statutory claims; an agreement that an arbitrator can
resolve contract claims, even if factual issues arising from those claims
overlap with statutory issues, was not enough. Because the agreement
Paladino signed only authorized the arbitrator to award damages for breach
of contract, it could not pass this test. Second, the Eleventh Circuit held
that in order “to fall within the FAA’s ambit, . . . an arbitration agreement
that purports to cover statutory claims must contain terms that generally
and fairly inform the signatories that it covers statutory claims.” 48 Since
the agreement Paladino signed did not generally and fairly inform her of
the statutory claims that would be covered, she could not be possibly be
expected to know which claims were subject to arbitration and which
claims were not. Hence, the Eleventh Circuit concluded that the entire
arbitration agreement was void and that Paladino could pursue her claims
against Avent in federal court without first proceeding through arbitration.
Accordingly, arbitration agreements should specifically identify the
claims to be arbitrated and, in particular, make an explicit reference to all
possible statutory claims an employee could assert, with the exception of
workers’ compensation and unemployment claims, both of which have
their own administrative schemes that most likely would not permit
separate arbitration of claims.
[4] — Collective Bargaining Agreements.
Generally, collective bargaining agreements are subject to the same
standards as individual employer/employee arbitration agreements with
including the entry of judgment on any award. The arbitrator is authorized
to award damages for breach of contract only, and shall have no authority
whatsoever to make an award of other damages.
Paladino, 134 F.3d at 1056.
47 See generally, 42 U.S.C. § 2000e et seq.
48 Paladino, 134 F.3d at 1056.
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respect to claims covered. That is, for a collective bargaining agreement’s
arbitration provisions to require employees to arbitrate statutory claims,
it must expressly state that such claims are covered.
In Wright v. Universal Maritime Service Corp.,49 a longshoreman
filed suit alleging that stevedore companies discriminated against him in
violation of the Americans With Disabilities Act when they refused to
employ him following his settlement of a claim for permanent disability
benefits. The district court dismissed the case on the ground that the
longshoreman had failed to pursue an arbitration procedure provided in
the collective bargaining agreement, and the Court of Appeals for the
Fourth Circuit agreed. The United States Supreme Court, however,
reversed. The majority expressed concern that the collective bargaining
agreement did not clearly and unmistakably waive the longshoreman’s
right to a judicial forum for his claim of employment discrimination under
the ADA.50
Applying the Supreme Court’s rationale in Wright, the Court of
Appeals for the Fourth Circuit recently forced an employee to arbitrate a
Title VII claim because the employee’s collective bargaining agreement
explicitly stated that Title VII claims were subject to binding arbitration.
In Safrit v. Cone Mills Corp.,51 Safrit was subject to a collective bargaining
agreement that gave the union the exclusive option to proceed to arbitration
with certain employment-related disputes. The collective bargaining
agreement, however, also stated that the company and the union agreed
that they will not discriminate against any employee “with regard to race,
color, religion, age, sex, national origin or disability. . . . The parties further
agreed that they will abide by all the requirements of Title VII of the Civil
49
Wright v. Universal Maritime Serv. Corp., 119 S. Ct. 391 (1998).
The Court stated: “The CBA in this case does not meet that standard. Its arbitration
clause is very general, providing for arbitration of ‘matters under dispute,’ … which
could be understood to mean matters in dispute under the contract. And the remainder of
the contract contains no explicit incorporation of statutory anti-discrimination
requirements.” 119 S. Ct. at 391 (1998).
51 Safrit v. Cone Mills Corp., 248 F.3d 306 (4th Cir. 2001).
50
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Rights Act of 1964.”52 Consequently, when Safrit filed suit in federal
district court alleging that Cone Mills had denied her certain job
opportunities due to her sex, Cone Mills responded by urging the district
court to dismiss the case on the grounds that the collective bargaining
agreement clearly and unmistakably required Title VII claims to be
arbitrated. The Fourth Circuit agreed with Cone Mills. The court reasoned
that the collective bargaining agreement showed that the parties agreed
to abide by the requirements of Title VII and that failure to do so would
authorize the aggrieved party to seek redress through arbitration. Thus,
the court found that given the language of the collective bargaining
agreement, the parties clearly and unmistakably agreed to submit all
employment related claims (including Title VII claims) to arbitration.
Consequently, collective bargaining agreements can waive an
employee’s right to file suit to enforce statutory discrimination rights if
they make it clear that they encompass such rights.
[5] — Statute of Limitations.
Courts differ as to whether provisions that shorten the period within
which an employee may bring a claim are enforceable. For example, the
District Court for the District of Minnesota recently held that an arbitration
agreement cannot shorten the statute of limitations for vindicating federal
rights. In Bailey v. Ameriquest Mortgage Co.,53 a group of employees
filed an action under the Fair Labor Standards Act54 against Ameriquest
Mortgage Company to recover unpaid overtime compensation. Ameriquest
moved to dismiss or to stay the proceedings on the grounds that the
employees had signed an agreement to arbitrate any employment-related
claims as a condition of their employment. While the employees admitted
to signing such agreements, they argued that the agreements were invalid,
partly because they provided for a shorter limitations period than that
provided by statute. The district court agreed with the employees,
52
Safrit, 248 F.3d at 306 (4th Cir. 2001).
Bailey v. Ameriquest Mortgage Co., 2002 WL 100391 (D. Minn. 2002).
54 29 U.S.C. § 201 et seq.
53
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concluding that by shortening the limitations period to one year, the
arbitration agreements denied the employees “access to a remedy that
Congress made available to ensure violations of the statute are effectively
remedied and deterred.”55 Nonetheless, an arbitration agreement may be
able to shorten the statute of limitations for non-statutory claims. In Soltani
v. Western and Southern Life Insurance Co.,56 Soltani sold life insurance
for Western-Southern. Soltani’s employment contract consisted of a “Sales
Manager’s Agreement,” which stated that any employment-related claim
had to be brought within six months after the termination of employment.57
In September of 1998, nearly 10 months after his termination, Soltani
filed suit against Western-Southern alleging that he was wrongfully
terminated. Western-Southern responded by moving for summary
judgment on the grounds that Soltani’s suit was time-barred given that it
was not brought within the six-month period required under the Sales
Manager’s Agreement. Soltani argued that the provision in the Sales
Manager’s Agreement shortening the statute of limitations was
unconscionable and hence could not be enforced. The Ninth Circuit
disagreed. Relying upon established precedent in California and other
jurisdictions in commercial cases, the court held that parties can agree to
shorten the statute of limitations for non-statutory claims.
In sum, shortening the statute of limitations is enforceable only insofar
as it applies to common law claims.
55
Bailey, 2002 WL at *5 (D. Minn. 2002)(citing Perez v. Globe Airport Security Serv.,
Inc., 253 F.3d 1280, 1287 (11th Cir. 2001).
56 Soltani v. Western and Southern Life Ins. Co., 258 F.3d 1038 (9th Cir. 2001).
57 Specifically, the Sales Manager’s Agreement stated:
You agree: . . . B. Not to commence any action or suit relating to your
employment with Western-Southern until ten days after services upon the
Chairman, President or Secretary of a written statement of the particulars
and amount of your claim. C. Not to commence any action or suit relating
to your employment with Western-Southern more than six months after the
date of termination of such employment, and to waive any statute of
limitation to the contrary
Soltani, 258 F.3d at 1041.
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[6] — Fees and Expenses.
The American Arbitration Association’s (AAA) Rules for the
Resolution of Employment Disputes (which can be found at the AAA’s
web site, www.adr.org) provide that the initiating party must pay the filing
fee, that the parties shall split the costs and expenses of conducting the
arbitration (unless they agree otherwise or the arbitrator directs otherwise),
and that the parties shall split the arbitrator’s compensation (unless the
parties agree otherwise or the law provides otherwise). The courts,
however, are divided as to the validity of provisions requiring employees
to pay some or all of the arbitrator’s fees and/or all of his or her own
attorneys’ fees.
The United States Supreme Court addressed the validity of costsharing provisions in a commercial context in Green-Tree Financial Corp.
v. Randolph,58 which involved an arbitration agreement entered into
between the purchaser of a mobile home and the lender that financed the
purchase. The plaintiff alleged that the defendant violated the Truth in
Lending Act by failing to identify the insurance requirements as a finance
charge, and violated the Equal Credit Opportunity Act by requiring her to
arbitrate her statutory causes of action. On appeal, the Court of Appeals
for the Eleventh Circuit ruled that the agreement to arbitrate was
unenforceable because it was silent with respect to arbitration expenses,
but the United States Supreme Court reversed. Justice Rehnquist, writing
for a majority of the Court, concluded that an arbitration agreement was
not invalid simply because it was silent with respect to costs and fees.
Justice Rehnquist reasoned that holding otherwise would undermine the
liberal federal policy favoring the use of arbitration agreements.
Following Green-Tree, some courts have held that fee-splitting
provisions in the employment context should be examined on a case-bycase basis and upheld unless the employee can demonstrate that payment
of arbitration costs would prevent a full opportunity for vindication of
employee claims. For example, in Bradford v. Rockwell Semiconductor
58
Green-Tree Financial Corp. v. Randolph, 121 S. Ct. 513 (2000).
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Systems Inc.,59 the Court of Appeals for the Fourth Circuit concluded
that a fee-splitting provision that required an employee to share the costs
of arbitration did not render the arbitration agreement invalid per se.
Instead, the court advocated a case-by-case approach to handling feesplitting arrangements in arbitration agreements. Applying this case-bycase approach, the court concluded that the plaintiff failed to demonstrate
that he was unable to pay the required arbitration fees or that the feesplitting provision deterred him from pursuing his statutory claim (or
would have deterred others similarly situated).
The Court of Appeals for the Third Circuit reached a similar conclusion
in Blair v. Scott Specialty Gases.60 Blair brought suit alleging sexual
harassment and discrimination. In response, Scott filed a motion to dismiss
on the ground that Blair had agreed to submit all employment-related
claims to binding arbitration. While Blair acknowledged signing the
arbitration agreement, she argued that (1) the arbitration agreement was
unenforceable on its face because it contained a fee-sharing provision,
and (2) that even if the arbitration agreement were enforceable, it would
effectively preclude her from pursuing her claims in arbitration given her
financial situation. Applying Green-Tree, the court refused to render the
entire arbitration agreement unenforceable. Instead, the court held that
Blair should be entitled to present evidence that her financial situation
would preclude her from paying half of the arbitration fees (and hence
would deny her a forum to vindicate her statutory rights).61
In contrast, other courts have held that provisions requiring employees
to pay their own attorneys fees and/or costs render the agreement
unenforceable. For example, in Perez v. Globe Airport Security Services,
59
Bradford v. Rockwell Semiconductor Systems Inc., 238 F.3d 549 (4th Cir. 2001).
Blair v. Scott Specialty Gases, 283 F.3d at 595 (3d Cir. 2002).
61 See also Williams v. Cigna Financial Advisors, Inc., 197 F.3d 752 (5th Cir.
1999)(where the Fifth Circuit upheld an arbitrator’s order that an employee pay half the
costs of arbitration on the grounds that the employee failed to present specific evidence
of an inability to pay or evidence that payment of such fees precluded him from obtaining
relief).
60
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Inc.,62 Perez was required to sign a pre-dispute resolution agreement as a
condition of employment with Globe. Perez subsequently sued Globe
under Title VII for gender discrimination. When Globe moved to compel
arbitration under the FAA, Perez argued that the pre-dispute agreement
resolution agreement was unenforceable because it contained an unlawful
fee-splitting provision, which rendered the agreement unenforceable.63
The Court of Appeals for the Eleventh Circuit agreed with Perez.
According to the court, such an arbitration provision would prevent the
arbitrator from granting “effective relief by mandating equal sharing of
fees and costs of arbitration despite the award of fees permitted by a
prevailing party by Title VII.”64
The Courts of Appeal for the Seventh and Second Circuits and a district
court in Minnesota also have issued decisions which indicate that they
agree with the notion that any provisions which limit the possibility that
an employee can recover attorneys fees deprive the employee of federally
protected rights and, therefore, render an arbitration agreement
unenforceable. 65
In short, requiring employees to share the costs of arbitration or pay
his or her own attorneys fees may render any agreement to arbitrate
unenforceable, particularly where the employee can show that, based on
his or her economic situation, such provisions prevent him or her from
vindicating their federally protected rights.
62
Perez v. Globe Airport Security Serv., Inc., 253 F.3d 1280 (11th Cir. 2001).
The arbitration agreement stated: “Despite any rule providing that any one party
must bear the cost of filing and/or the arbitrator’s fees, all costs of the American Arbitration
Association and all fees imposed by any arbitrator hearing the dispute, will be shared
equally between you and the Company.” Perez, 253 F.3d at 1285.
64 Perez, 253 F.3d at 1295. See generally 42 U.S.C. § 2000e-5(k)(providing that a
prevailing party in a Title VII action may be awarded reasonable attorneys’ fees, including
expert fees and costs).
65 McCaskill v. SCI Management Corp., 298 F.3d 677 (7th Cir. 2002); Brooks v.
Travelers Ins. Co., 297 F.3d 167 (2d Cir. 2002); Bailey v. Ameriquest Mortgage Co.,
2002 WL 100391 (D. Minn. 2002).
63
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[7] — Limiting Relief.
Several courts have concluded that arbitration agreements cannot limit
the types of relief that can be awarded to something less than the employee
could recover in a court of law. For example, while the United States
Supreme Court in Circuit City v. Adams66 held that arbitration agreements
generally can be enforced under the FAA, the case was remanded to the
district court to determine whether specific provisions of the arbitration
agreement were enforceable.67 On remand, after the district court upheld
the enforceability of the arbitration agreement, the Court of Appeals for
the Ninth Circuit reversed, in part because the arbitration agreement failed
to provide for all of the types of relief that otherwise would be available.
Specifically, the court expressed concern that, under the arbitration
agreement, remedies for sexual harassment were limited to injunctive
relief, up to one year of back pay, up to two years of front pay,
compensatory damages, and punitive damages in an amount up to the
greater of the amount of back pay and front pay awarded or $5,000. In
contrast, a party pursing a sexual harassment claim under the Fair
Employment and Housing Act would be eligible for all forms of relief
that are generally available to civil litigants, including full punitive
damages and damages for emotional distress.
Similarly, in Paladino v. Avnet Computer Technologies, Inc.,68 the
Court of Appeals for the Eleventh Circuit held that an agreement to
arbitrate was unenforceable because it limited the arbitrator to awarding
damages for breach of contract only. The court observed that the agreement
defeated Title VII’s remedial purposes because it insulated the employer
from the full range of Title VII’s damages and equitable relief.
A federal district court in Ohio reached a similar conclusion in
Trumbull v. Century Marketing Corp.69 There, the court ultimately found
the agreement to arbitrate was unenforceable for lack of consideration;
66
Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).
279 F.3d 889 (9th Cir. 2002).
68 Paladino v. Avnet Computer Technologies, Inc., 134 F.3d 1054, 1060 (11th Cir. 1998).
69 Trumbull v. Century Marketing Corp., 12 F. Supp. 683 (N.D. Ohio 1998).
67
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however, the court noted that even if the agreement contained adequate
consideration, it nonetheless would have been unenforceable given that
the agreement prevented the arbitrator from awarding punitive, exemplary,
or consequential damages. 70
In sum, an agreement to arbitrate must not deprive an employee of
remedies that otherwise would be available in a court of law.
[8] — Unconscionable Agreements.
Numerous courts have refused to enforce arbitration agreements
on the grounds that they are unconscionable. Generally, an agreement
will be considered unconscionable where there is “an absence of
meaningful choice on the part of one of the parties together with contract
terms which are unreasonably favorable to the other party.”71
A leading case in this area is Circuit City Stores, Inc. v. Adams.72
There, the Court of Appeals for the Ninth Circuit refused to enforce an
arbitration agreement because it was both procedurally and substantively
unconscionable. The court found that the agreement was procedurally
unconscionable because it was a contract of adhesion, i.e., it was presented
to all applicants as a condition of employment, in “a standard-form
contract, drafted by the party with superior bargaining power, which
relegate[d] to the other party the option of either adhering to the its terms
without modification or rejecting the contract entirely.”73 The court found
that the agreement was substantively unconscionable because it did not
require the employer to arbitrate its claims against the employee, it limited
the relief available to the employee, it shortened the statute of limitations,
and it required the employee to split the arbitrator’s fees.
The Ninth Circuit more recently struck down an arbitration agreement
on the grounds that it was unconscionable in Ferguson v. Countrywide
70
The employee handbook provides that the “arbitrator shall not have the power to
award punitive, exemplary, or consequential damages.” Trumbull, 12 F. Supp. at 688.
71 Brennan v. Bally Total Fitness, 198 F. Supp. 2d 377, 382 (S.D. N.Y. 2002).
72 Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002).
73 Circuit City, 279 F.3d at 893.
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Credit Industries, Inc.74 There, the court concluded that the agreement
was procedurally unconscionable because it was a contract of adhesion,
and substantively unconscionable because it was too one-sided in favor
of the employer. Among other things, the agreement excluded claims that
the employer was likely to bring against the employee, required the
employee to pay a $125 filing fee and split all costs if the hearing exceeded
one day, and limited the scope of discovery that could be taken against
the employer, with each deposition of a corporate representative being
limited to four designated subjects.
The Court of Appeals for the Fourth Circuit also recently struck down
an arbitration agreement on the grounds that it was unconscionable. In
Murray v. United Food and Commercial Workers International Union,75
the court found that the arbitration agreement was unconscionable because
it permitted the employer to select the panel from which the arbitrator
must be chosen, thereby allowing the employer to devise a list of potential
arbitrators who were biased in its favor. The court reasoned that “[a]lthough
an arbitration agreement will not be invalidated for failure to ‘replicate
the judicial forum . . . we again refuse to enforce an agreement so ‘utterly
lacking in the rudiments of even-handedness.’”76 The court added that
“[b]y agreeing to arbitration in lieu of litigation, the parties agree to ‘trade
the procedures and opportunity for review of the courtroom for the
simplicity, informality, and expedition of arbitration.’ . . . They do not
agree to forego their right to have their dispute fairly resolved by an
impartial third party.”77
Nonetheless, the Court of Appeals for the Fourth Circuit reached an
opposite conclusion with respect to unconscionability in Adkins v. Labor
Ready, Inc.78 In Adkins, a temporary employee brought a state-court class
action alleging that a temporary employment agency violated the Fair
74
Ferguson v. Countrywide Credit Indus., Inc., 289 F.3d 788 (9th Cir. 2002).
Murray v. United Food and Commercial Workers Int’l Union, 289 F.3d 297 (4th Cir.
2002).
76 Murray, 289 F.3d at 299.
77 Id.
78 Adkins v. Labor Ready, Inc., 2002 WL 1997934 (4th Cir. 2002).
75
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Labor Standards Act79 and state law by failing to compensate employees
for waiting time, travel time, training time and overtime. In response to
the agency’s request to arbitrate the claims in accordance with an
arbitration agreement contained within the employment application the
employee signed,80 the employee argued that the arbitration agreement
was unconscionable and hence unenforceable. The employee pointed to
evidence that many of the employees who signed the agreement did not
complete high school, were paid at or near minimum wage by Labor Ready,
were from low-income neighborhoods, and did not know what arbitration
was when they signed the employment application. According to the
employee, this evidence indicated that there was a gross disparity between
the parties to the agreement. While the Fourth Circuit recognized that a
gross disparity in bargaining power existed among the parties, the
agreement was nonetheless upheld because it contained no unfair terms.
According to the court, an arbitration agreement can only be declared
unconscionable when there is a gross disparity in bargaining power among
the parties and the agreement contains terms unreasonably favorable to
the stronger party. Finding no evidence of terms unreasonably favorable
to the stronger party, the Fourth Circuit rejected the unconscionability
argument and ordered arbitration of the claims in question.
79
29 U.S.C. § 201 et seq.
The arbitration agreement was contained within an enclosed box on the employment
application and provided in pertinent part as follows:
I agree that any disputes arising out of my employment, including any claims
of discrimination, harassment or wrongful termination that I believe I have
against Labor Ready and all other employment related issues (excluding
only claims arising under the National Labor Relations Act or otherwise
within the jurisdiction of the National Labor Relations Board) will be
resolved by arbitration as my sole remedy. The arbitration shall be conducted
by the American Arbitration Association under its Commercial Arbitration
Rules and the decision of the arbitrator shall be final and binding. I
understand that Labor Ready also agrees to arbitrate in the same manner
any claims which the company believes it has against me. I HAVE READ
AND AGREE TO THE ABOVE STATEMENTS.
Adkins, 2002 WL at *2.
80
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Other courts have struck down arbitration agreements on the grounds
of unconscionability. For example, in Brennan v. Bally Total Fitness,81
the District Court for the Southern District of New York held that an
arbitration agreement was invalid because of (1) the disparity in bargaining
power between the employer and the employee, (2) the employer’s failure
to give the employees adequate time to review the agreement, (3) the
employer’s failure to tell the employees that they could review the
agreement with an attorney, (4) the employer’s threat that they would not
be promoted if they did not sign it, (5) the agreement allowed the employer
to unilaterally modify the agreement at any time, and (6) the employer
made the agreement apply to pending complaints.82
Similarly, in Prevot v. Phillips Petroleum Co.,83 the District Court for
the Southern District of Texas found an arbitration agreement was
unconscionable given language barriers that existed between the parties.
In Prevot, employees brought suit against their employer for injuries
incurred in connection with an explosion at the employer’s facility.
Because the employees had signed an agreement to arbitrate, the employer
requested that the personal injury claims be submitted to arbitration.84
81
Brennan v. Bally Total Fitness, 2002 WL 10434 (S.D. N.Y. 2002).
With respect to coercion, the district court noted:
The circumstances of the contract’s formation show that Brennan lacked a
“meaningful choice” when entering into the EDRP. The evidence shows
that Infante [a representative for Bally] used high pressure tactics to coerce
the employees into signing the Agreement. During the 1998 meeting, Infante
gave the employees no more than 15 minutes to review a 16-page singlespaced document, and never mentioned or suggested that the employees
could review the Agreement at home or with an attorney. He threatened the
employees that those who would not sign the document would not be
promoted. He did not address the impact the EDRP would have on pending
complaints against the company. At the end of the meeting, he asked aloud
whether each employee, including Brennan, had signed the Agreement.
Brennan, 198 F. Supp. 2d at 379.
83 Prevot v. Phillips Petroleum Co., 133 F. Supp. 2d 937 (S.D. Tex. 2001).
84 The arbitration agreement the employees signed stated in relevant part that
“each, every, and all claims, disputes and/or controversies, now existing or
82
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The district court refused to compel arbitration, however, finding that the
agreement was unconscionable because, at the time the employees entered
into the arbitration agreement, they were not able to read English.
Accordingly, courts will refuse to enforce an arbitration agreement if
it is too one-sided and presented on a take-it or leave-it basis. Although
most arbitration agreements will be presented on a take-it or leave-it basis,
they should survive an unconscionability finding so long as they are not
too favorable to the employer.
[9] — Severing Invalid Provisions.
When faced with arbitration agreements containing an illegal clause,
courts have either severed the illegal provision and ordered arbitration,
or found the entire agreement unenforceable.85 For example, in Perez v.
Globe Airport Security Services, Inc.,86 the plaintiff was required to sign
a pre-dispute resolution agreement that contained a fee-splitting
provision.87 After the Court of Appeals for the Eleventh Circuit concluded
hereafter arising, whether now known or unknown, including the arbitrability
of any claim, dispute or controversy, shall be exclusively resolved by the
parties first trying to settle by mediation . . . failing which, the settlement of
the dispute shall be by final and binding arbitration.
Prevot, 133 F. Supp. 2d at 937.
85 Compare Herrington v. Union Planters Bank, N.A., 113 F. Supp. 2d 1266 (S.D. Miss.
2000)(removing a provision in an arbitration agreement which contained language
prohibiting the award of punitive damages) with Graham Oil Co. v. ARCO Products Co.,
43 F.3d 1244 (9th Cir. 1994)(voiding an entire arbitration agreement which contained a
single unlawful clause).
86 Perez v. Globe Airport Security Serv., Inc., 253 F.2d 1280 (11th Cir. 2001).
87 The agreement stated in relevant part:
You agree that the option to arbitrate any such dispute is governed by the
Federal Arbitration Act and fully enforceable. You understand and agree
that, if the Company exercises its option, any dispute arbitrated will be
heard solely by an arbitrator and not by a court or agency, that the decision
of the arbitrator will be final and binding on both parties, and that such
decision will bar any further relief of any kind in any forum of all issues
that were or could have been brought, except those the Company specifically
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that the fee-splitting provision was invalid, the court refused to sever the
invalid provision. The court reasoned that an employer should not be
allowed to rely on the courts to sever unlawful clauses from arbitration
agreements, since doing so would not only provide an incentive for
employers to place unlawful clauses in arbitration agreements, but also
would add an extensive procedural step to the arbitration process by forcing
an employee to request that a court declare a provision unlawful prior to
initiating arbitration. 88
Nonetheless, some courts will sever an unlawful clause, particularly
if the agreement contains a severability clause. For example, in Gannon
v. Circuit City Stores, Inc.,89 the Court of Appeals for the Eighth Circuit
severed an unenforceable punitive damages provision from an arbitration
agreement rather than render the entire agreement unenforceable. The
court first noted that the dispute resolution agreement contained a
severability provision, which specifically stated that the agreement would
not become unenforceable merely because a section of the agreement
was declared by a court to be unenforceable. In addition, the court noted
that by signing the agreement, Gannon evidenced the intent to arbitrate
and that such an intent would not be altered by the removal of the punitive
damage clause from the agreement. Thus, the court concluded that an
arbitration “agreement should be enforced to the maximum degree possible
so as to encourage arbitration in accordance with the FAA.” 90
excluded from such arbitration. The Company and you agree that, despite
any rule providing that one party must bear the cost of filing and/or the
arbitrator’s fees, all costs of the American Arbitration Association and all
fees imposed by any arbitrator hearing the dispute, will be shared equally
between you and the Company.
Perez, 253 F.2d at 1282 (emphasis added).
88 Perez, 253 F.3d at 1286.
89 Gannon v. Circuit City Stores, Inc., 262 F.3d 677 (8th Cir. 2001).
90 See also “Proper Remedy for Unlawful Arbitration Provisions to Sever It Rather
than Not to Enforce Agreement at All, “ 168 Lab. Rel. Rept. 8, 11 (Sept. 3, 2001).
30
§ 1.05
ARBITRATION AGREEMENTS
[10] — Parties to the Agreement.
Every arbitration agreement should adequately identify the parties
who are to be bound by the terms of the agreement. In Cooper v. MRM
Investment Co.,91 the plaintiff, an employee of MRM Investment Company
(MRM)(a Kentucky Fried Chicken [KFC] franchisee), was hired to work
at a KFC store in Tennessee in January 2000. As part of her employment
contract, the plaintiff signed an arbitration agreement, which stated that
“KFC and I agree to use confidential binding arbitration for any claims
that arise between me and KFC, its related companies and/or their current
or former employees.”92 After asserting a Title VII claim in federal court
against MRM, the plaintiff attempted to overcome MRM’s motion to
compel arbitration by arguing that she was not required to arbitrate
employment-related disputes with MRM given the agreement only bound
her to arbitrate claims with KFC, which was not a named defendant in the
case. After examining the plain language of the contract, the district court
concluded that MRM was a “related company” within the meaning of the
agreement and ordered the plaintiff to arbitrate her employment-related
claims.
In short, employers should be careful to specifically reference all
parties, who are covered by the agreement to arbitrate, including parent
companies, subsidiaries, and supervisors who could be individually sued.
§ 1.05.
Conclusion.
Although it is now well settled that employers can enforce mandatory
pre-dispute arbitration agreements in federal court, and require employees
to arbitrate all claims, including statutory claims, the means by which
they achieve that objective, i.e., the agreement to arbitrate, will be closely
scrutinized by the courts. As the foregoing discussion illustrates, the
validity of an agreement to arbitrate may be challenged under a variety of
different theories, and the courts have been quite willing to deny
enforcement of agreements that overreach or fail to comply with traditional
contract principles.
91
92
Cooper v. MRM Investment Co., 199 F. Supp. 2d 771 (M.D. Tenn. 2002).
Cooper, 199 F. Supp. 2d at 774.
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§ 1.05
ENERGY & MINERAL LAW INSTITUTE
Although it is impossible to provide a universal standard for an
agreement to arbitrate given the conflicting positions the courts take on
several issues, adhering to the following guidelines will enhance an
employer’s ability to successfully require an employee to arbitrate
employment claims:
1) Require the employee to sign some document acknowledging
acceptance of the arbitration program, preferably a separate
arbitration agreement;
2) Expressly provide that the arbitration agreement covers all
disputes, including statutory claims (identify all applicable
statutes, federal, state, and local, by name); however, exclude
workers’ compensation and unemployment compensation claims,
as they typically have their own administrative schemes that do
not permit private arbitration of disputes;
3) Make it clear that both the employer (including its supervisors
and its affiliated companies) and the employee each are equally
bound by the duty to arbitrate, i.e., avoid disclaimers that could
be used to show that the arbitration agreement is unilateral or is
not a binding contract, and avoid including the arbitration
agreement in a handbook which contains such disclaimers;
4) Expressly provide that the employee and the employer each
promise to arbitrate all claims or disputes that each of them may
have against the other, and that such mutual promises constitutes
adequate consideration for the agreement to arbitrate;
5) Provide that the arbitrator can award all relief that may be
available in a court of law;
6) Provide that both parties waive their right to a trial by jury;
7) Require that the arbitrator issue a written decision that
explains the basis for his or her decision, and that the decisions
will be final and binding;
8) Pay all costs and fees for the arbitrator, and leave the question
of responsibility for attorneys’ fees to the arbitrator;
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§ 1.05
ARBITRATION AGREEMENTS
9) Shorten the statute of limitations for non-statutory claims, but
adhere to the existing statute of limitations for statutory claims;
10) Include a severability provision;
11) Adopt the AAA rules or implement other reasonable rules that
are not one-sided (if the AAA rules are going to be used, the
employer should provide the AAA with thirty days advance notice
before adopting them) and provide the employee with a copy of
the full arbitration program, including its rules and any updates
or changes; and
12) Provide that while the employer can amend the program, the
employee will not be bound by any amendments until after the
employee has been given written notice of the changes.
33