For a long time now, courts have had a great affection for arbitration agreements. Courts will typically defer to an arbitration agreement and have even held that the question of whether an arbitration agreement governs a particular situation is itself subject to arbitration.
Arbitration is a form of alternative dispute resolution that is binding and, rather than resolving a matter by a jury of your peers, instead places the fate of a litigant in the hands of an arbitrator or arbitration panel (three or more arbitrators). Plaintiffs, or parties bringing a lawsuit, are at a disadvantage in arbitration as it deprives them of a jury of their peers. Furthermore, there is no appeal from an arbitration award. In rare instances, an arbitration award can be set aside, but it is highly unusual. Arbitration is governed by its own set of rules and procedures, which differ from the state and federal rules or procedure and evidence. While small plaintiff’s law firms do not always have expertise in arbitration, most large defense firms have attorneys that specialize in the somewhat obscure arbitration rules and are highly trained to find “trap doors” to effectively dismiss cases in their early stages using these tools. For these reasons, many plaintiffs’ lawyers do not represent parties bound by an arbitration agreement.
In addition, the costs of arbitration can be far higher than filing suit in a conventional court and costs can be shifted to the losing party more readily in arbitration. This creates a distinct downside for one-time litigants who traditionally have less money and less influence over an arbitrator/arbitration panel. Arbitrators/panels are customarily composed of industry insiders who, some believe, have a bias toward big business. This is thought to result from repeat use of the arbitration process by large, nationwide construction companies, auto sales/manufacturing companies, employers and stock trading firms, to name a few. These large conglomerates may arbitrate with the same provider, such as AAA, the American Arbitration Association, numerous times over the course of a year, whereas the typical consumer may arbitrate once in a lifetime.
Courts like arbitration and readily defer to an arbitration agreement as it lessens the load on the court’s docket and reduces the number of cases that are heard before conventional courts. More and more businesses use arbitration agreements in consumer transactions. Arbitration agreements in automobile sales contracts, construction contracts, stock transactions and employment agreements are becoming more and more common.
In the employment context, to the extent the arbitration agreement is a part of the employer’s policy and procedure handbook, however, the agreement may not be enforceable. A relatively recent holding in Carey v. 24 Hour Fitness, USA, Inc. has the effect of invalidating arbitration agreements under certain circumstances.
In Carey, the United States Court of Appeals for the Fifth Circuit, which governs Texas and “makes the law” to some degree in Texas employment disputes, in part, held that an arbitration agreement was illusory under a contract theory. The Fifth Circuit first looked at the standard to determine whether the parties agreed to arbitrate:
- whether there is a valid agreement to arbitrate; and
- whether the dispute in question falls within the scope of that arbitration agreement.
To determine whether a valid arbitration agreement exists, the Court applied ordinary state-law principles that govern the formation of contracts. Under Texas law, an arbitration clause is illusory if one party can “avoid its promise to arbitrate by amending the provision or terminating it altogether.” Id. at 567. The Court found that the arbitration provision in the 24 Hour Fitness handbook was illusory because the employer’s manual contained a “change-in-terms” clause that allowed 24 Hour Fitness to unilaterally avoid its promise to arbitrate by modifying the Handbook.
Typical clauses of this type in employer’s handbooks or “policy and procedure manuals” contain language that allows an employer to, “at its option may change ,delete, suspend or discontinue any part of the policies in this manual at any time without prior notice as business, employment legislation, and economic conditions dictate.” If the employer’s manual contains both an arbitration agreement and a change in terms agreement, the arbitration agreement is unenforceable. The Fifth Circuit affirmed the District Court’s judgment invalidating the arbitration agreement as illusory uses traditional state law contract analysis guidelines to reach this holding. One Caveat: if a separate written agreement to arbitrate exists independently from the employer’s policy and procedure manual, this may alter the analysis.