Labor & Employment Law Daily Lower court erred in compelling arbitration before first finding parties had formed an arbitration agreement
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Friday, September 18, 2020

Lower court erred in compelling arbitration before first finding parties had formed an arbitration agreement

By Kathleen Kapusta, J.D.

“The issue of whether an arbitration agreement was formed between the parties must always be decided by a court, regardless of whether the alleged agreement contained a delegation clause or whether one of the parties specifically challenged such a clause.”

The court below impermissibly compelled arbitration based on an employee’s failure to specifically challenge the arbitration clause before first finding she and her former employer, United Healthcare, had formed the arbitration agreement, the Tenth Circuit ruled, vacating the district court’s order. While a delegation clause can typically be severed from an arbitration agreement, and can thus prevent a court from deciding certain arbitrability issues unless the clause was directly challenged, “a delegation clause cannot be severed from an agreement that does not exist,” the appeals court stated, and thus courts must first determine “whether an arbitration agreement was indeed formed before enforcing a delegation clause therein” (Fedor v. United Healthcare, Inc., September 16, 2020, Eid, A.).

After three years of employment as a care coordinator, the employee sued UHC, alleging it violated the FLSA and New Mexico’s wage law. Eight other former employees joined her lawsuit and UHC moved to dismiss and compel arbitration, arguing that the employees were all bound by its policy requiring settlement of employment-related claims through arbitration.

Different agreements. Although each of the employees had received an arbitration policy at the beginning of their employment with UHC, they started working in different years between 2009 and 2015. Because UHC periodically updated it arbitration policy, including in 2006, 2012, 2015, and 2016, not all of the employees signed the same arbitration policy. The 2006, 2012, and 2015 versions of the policy were signed by at least one of the plaintiffs but UHC argued it was the 2016 version that was the relevant version at the time it moved to dismiss the employee’s suit and compel arbitration.

2016 version. While the three earlier policies included an “amendment clause,” asserting that UHC “reserve[d] the right to amend, modify, or terminate the Policy effective on January 1 of any year after providing at least 30 days’ notice of its intent,” the 2016 version did not. It was, however, the only version to include a delegation clause establishing that an arbitrator—instead of a court—would resolve disputes regarding the policy’s “interpretation, enforceability, applicability, unconscionability, arbitrability or formation, or whether the Policy or any portion of the Policy is void or voidable.”

The employee argued that because of the amendment clause, the three earlier policies were void as illusory as UHC had the unilateral ability to amend or terminate the arbitration policy. She also argued that the 2016 version was irrelevant because none of the plaintiffs had signed it.

Lower court proceedings. The district court agreed that the earlier versions were illusory but compelled arbitration based on the 2016 policy. It noted that the employee challenged “only the validity of the contract as a whole,” and did not specifically challenge the policy’s delegation clause.

Rule of severability. On appeal, the employee argued that even for arbitration policies containing delegation clauses, courts must first determine whether an agreement to arbitrate was formed before sending the case to an arbitrator. Vacating the lower court’s decision, the appeals court first noted that Section 2 of the FAA established the “rule of severability,” which means that an arbitration clause within a contract is “severable” from the remainder of the contract. This rule, said the court, can also apply when an agreement to arbitrate is codified not as a single clause within a contract, but rather in the form of a separate arbitration contract altogether.

Delegation clauses. And while courts typically resolve issues such as the validity, scope, or enforcement of an arbitration agreement, delegation clauses within the agreement can commit the determination of those “arbitrability” issues to an arbitrator. Noting that these delegation clauses are severable, and thus considered separate from the rest of the arbitration agreement, the court pointed out that “if a party challenges the validity of an arbitration contract as a whole but fails to specifically challenge a delegation clause therein, then the delegation clause will typically require a court to compel arbitration and allow an arbitrator to determine whether the arbitration contract was indeed valid.”

Rent-A-Center. But not all arbitrability issues can be delegated, said the court, noting that the issue of whether an arbitration agreement was formed between the parties “must always be decided by court, regardless of whether the alleged agreement contained a delegation clause or whether one of the parties specifically challenged such a clause.” Acknowledging that the Supreme Court’s Rent-A-Center, West, Inc v Jackson, decision held that a litigant must specifically challenge a delegation clause in order to allow courts to determine the validity of an arbitration contract as a whole, the Tenth Circuit explained that Rent-A-Center’s holding does not apply in situations where a party alleges that no agreement “was ever concluded” between the parties.

Granite Rock. Moreover, just three days after Rent-A-Center, the Supreme Court, in Granite Rock Co v Int’l B’hood of Teamsters, reversed a Ninth Circuit decision compelling the parties to arbitrate their claims even though the formation of the underlying arbitration agreement was at issue. “Under Granite Rock’s ‘proper framework for deciding when disputes are arbitrable,’ a court cannot order arbitration of a particular dispute unless it is ‘satisfied that the parties agreed to arbitrate that dispute,’” the Tenth Circuit explained.

Issue of formation. In finding that the employee’s challenge to the 2016 policy had to be heard by a court, the Tenth Circuit noted that by claiming that neither she or the other employees had read or accepted the agreement, the employee raised an issue of formation, which according to both Rent-A-Center and Granite Rock, could not be delegated to an arbitrator. “It is of no matter that [the employee] failed to specifically challenge the delegation clause within the 2016 arbitration contract below.”

Further, the court pointed out, the employee’s issue here is quite different from the one in Rent-A-Center as she claimed she never saw or agreed to any aspect of the 2016 arbitration policy. “This is an issue of formation that inherently calls into question whether she agreed to the delegation clause within the policy,” the court wrote, finding that denying “her relief because of her failure to specifically challenge the delegation clause would thus contradict the Supreme Court’s repeated statement that courts may order arbitration only when ‘satisfied that the parties agreed to arbitrate.’”

Alternative grounds. The court also rejected UHC’s argument that the earlier agreements were valid and the parties implicitly agreed to arbitrate any claims against it by commencing employment with it. Affirmance on these grounds, said the court, would enlarge UHC’s rights by precluding future plaintiffs from bringing FLSA claims against UHC in federal court as the district court found the agreements were illusory. Thus, employees who left UHC prior to 2016 can currently bring employment-related claims against UHC in federal court without having to adjudicate such claims through arbitration, the court observed.

“However, if we were to disagree with the district court and find that the prior agreements were valid, then UHC could use its past agreements to compel employees (who left the company before 2016) to arbitrate employment-related claims rather than litigate them in court.” Because UHC did not raise this on cross-appeal, the appeals court declined to review the lower court’s finding that the prior agreements were illusory.

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