By Lorene D. Park, J.D.
Because an arbitration agreement reserved to the employer the right to make changes or terminate the agreement but did not require advance
notice of any change to the employee, it was illusory under Texas law, ruled the Fifth Circuit. The lower court therefore erred in granting the employer’s motion to compel arbitration (Nelson v. Watch House International, LLC
, March 2, 2016, Stewart, C.).
The same day the employee was offered a job as a training instructor for the Federal Air Marshal Program in Dallas, he was sent the employee handbook, which contained the employer’s arbitration plan. The plan stated that both parties agreed to "submit any claim covered by this agreement to binding arbitration" as the "sole and exclusive remedy." Covered claims included employment discrimination, harassment, and any claim for failure to hire or wrongful discharge. In addition, the plan stated that the agreement could not be altered except by consent of the company and "shall be immediately effective upon notice" to the employee of the terms, regardless of whether signed, and that any change only applied prospectively.
During the employee’s time with the company, he was allegedly harassed by coworkers based on his religion and his race, which included comments about his interracial relationship. About 15 days after he reported the racial comments to his supervisor, he was fired. He filed suit alleging that his termination violated Title VII and the Texas Labor Code.
Motion to compel granted.
The employer moved to compel arbitration under the plan. In opposition, the employee argued that: (1) he did not fall within the plan’s definition of "employee" because he did not sign the plan, which defines "employee" as the "individual whose signature is affixed hereto;" and (2) the plan was unenforceable because it was illusory. The district court granted the employer’s motion to compel and dismissed his suit with prejudice.
Plan illusory for lack of savings clause.
Reversing, the Fifth Circuit agreed with the employee that the arbitration plan was illusory. Under Texas law, an arbitration agreement is illusory if one party has the unrestrained unilateral authority to terminate its obligation to arbitration, unless there is a savings clause. In the seminal Texas Supreme Court case, In re Halliburton Co.
, the agreement was not illusory because no amendment to the agreement would apply to a dispute of which the employer had actual notice on the date of amendment and the termination of the employer’s obligation would not be effective until 10 days after reasonable notice was given to the employee or as to disputes arising before the termination date.
Under a test recently articulated in Lizalde
by the Fifth Circuit with respect to a Halliburton
-type savings clause, an employer’s retaining the power to terminate does not make the agreement illusory so long as: (1) that power extends only to prospective claims; (2) applies equally to both the employer’s and employee’s claims; and (3) the agreement requires advance notice to the employee before termination is effective.
Plan failed to require advance notice.
Here, the appeals court noted that the first page of the handbook containing the arbitration plan stated that the procedures, policies, and benefits "may be modified or discontinued from time to time," and in the acknowledgment form, the company reserved the right to revoke its policies and practices and any terms "at any time with or without notice." Under the Fifth’s Circuit’s test, even though the language of the plan also stated that any changes to the agreement "will only be effective upon notice to the Applicant/Employee and shall only apply prospectively," the fact that advance
notice to the employee was not required meant that Halliburton
was not satisfied. Advance notice is required, plain and simple.
Though the parties also disputed whether the plan truly extended only to prospective claims, the appeals court found it unnecessary to resolve that issue because the lack of advance notice was dispositive. Consequently, the court reversed the district court’s granting of the motion to compel.