Waffle House’s arbitration agreement included valid delegation clause supporting motion to compel
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Wednesday, August 9, 2017

Waffle House’s arbitration agreement included valid delegation clause supporting motion to compel

By Kathleen Kapusta, J.D.

Because an arbitration agreement between Waffle House and a newly hired employee—who unbeknownst to the company at the time it hired him was suing it for alleged violations of the Fair Credit Reporting Act (FCRA) in connection with a prior job application—included a valid delegation provision that clearly and unmistakably evinced the parties’ intent to arbitrate all gateway issues of arbitrability, Waffle House’s motion to compel arbitration of his lawsuit should have been granted. Vacating the decision of the court below, the Eleventh Circuit also joined the Tenth Circuit in declining to adopt what has come to be known as the wholly groundless exception (Jones v. Waffle House, Inc., August 7, 2017, Marcus, S.).

After the employee was rejected for a job with a Florida Waffle House in December 2014, he sued the company and various data-reporting companies in federal district court, claiming violations of the FCRA, seeking to represent a class of U.S. residents who applied for employment or were employed with Waffle House in the preceding five years against whom Waffle House took adverse employment actions based on a background check.

Arbitration agreement. While that lawsuit was pending, he applied for and was hired at a Waffle House is Kansas City, Missouri. In connection with that employment, he signed an arbitration agreement that covered “all claims and controversies [ ], past, present, or future, arising out of any aspect of or pertaining in any way to [his] employment,” and also included a delegation provision requiring that “[t]he Arbitrator, and not any federal, state, or local court or agency, shall have authority to resolve any dispute relating to the interpretation, applicability, enforceability, or formation of this Agreement.”

Motion to compel denied. The employee did not tell the lawyers representing him in the federal lawsuit about his new job or the arbitration agreement and did not tell the Kansas City Waffle House that he was actively suing the company in Florida. When the company’s lawyers later learned of the agreement, they moved to compel arbitration but the federal district court denied the motion.

Delegation clause. On appeal, the Eleventh Circuit observed that before deciding whether the district court was correct to deny the motion to compel, it had to first address the employee’s challenge to the delegation provision. Pointing out it can examine a challenge to a delegation provision only if the claimant challenged the provision directly, the court noted that the employee must have alleged that the delegation provision specifically, and not just the agreement as a whole, can be “defeated by fraud, duress, unconscionability, or another generally applicable contract defense.”

Observing that on the record here, he did not directly challenge the delegation provision but instead directed the heart of his argument at the agreement as a whole, the appeals court found that even if it assumed he specifically challenged the delegation provision, his challenge still would fail. While he claimed it was procedurally unconscionable, the court found the clause was written in clear, comprehensible terms and in readable type; he was given at least three hours to read and sign his employment paperwork; and most importantly, at the time he signed the agreement containing the delegation provision, he was the only one aware that he had a pending lawsuit against Waffle House.

Pre-signed agreement. Nor did the company’s practice of having its vice president pre-sign the arbitration agreements make the delegation provision procedurally unconscionable, said the court, noting that it was not “abhorrent to good morals and conscience,” and there was no evidence that Waffle House was seeking to take fraudulent advantage of the employee. Under these circumstances, the court could not find that the mere fact of preprinting the agreements with the vice president’s signature already affixed transformed the unambiguous delegation provision into a procedurally unconscionable one.

Not substantively unconscionable. Nor was the provision substantively unconscionable. The delegation provision did not, on its own, terminate the employee’s class-action lawsuit and in any event, he agreed to the provision voluntarily without informing his class-action lawyers that he was doing so, and the Kansas City Waffle House had no knowledge he was involved in a class-action suit against the corporation. In this situation, the court explained, the employee had the upper hand.

Gateway question of arbitrability. Because the delegation provision was valid, the court turned to whether the parties agreed to arbitrate the gateway questions of arbitrability. Noting that it looks to the wording of the delegation provision itself to determine whether the parties have manifested a clear and unmistakable intent to arbitrate gateway issues, the court found the language of the provision here clearly and unmistakably evinced an intent to arbitrate all gateway issues as it required arbitration of “any dispute” relating to gateway issues.

Wholly groundless exception. Observing that in many of its sister circuits a finding of a clear and unmistakable intent ends the analysis, the court noted that the Fifth, Sixth, and Federal Circuits recognize what is called the “wholly groundless” exception to an otherwise clear and unmistakable intent to arbitrate gateway issues. Pursuant to this exception, if the district court finds that the assertion of arbitrability is wholly groundless, then it may deny the moving party’s request for a stay.

Joining with the Tenth Circuit, the only court to have expressly rejected this exception, the court found it had no place in this analysis. “The essential question is whether the parties clearly and unmistakably agreed to arbitrate gateway issues of arbitrability. If they did, then the district court is required to give effect to that intent and must compel arbitration,” the court explained. This exception, the court observed, runs against the Supreme Court’s unambiguous instructions that lower courts may not “delve into the merits of the dispute.” If the parties clearly and unmistakably intended to arbitrate all gateway issues, then all gateway issues—regardless of how frivolous the court may deem them to be—should be arbitrated, the court stated, observing that “It’s not for the courts to say the parties really didn’t mean to do so in some circumstances, when the language they have employed allows for no such exceptions.”

Clear intent. Here, the court found that the delegation provision evinced a clear intent to arbitrate gateway issues. In the face of this agreement, the district court was not free to pass judgment on the wisdom or efficacy of the provision in the first instance and should have compelled arbitration, the court concluded.

Court’s managerial authority. As to the employee’s claim that the motion to compel interfered with the district court’s managerial authority over class actions, the appeals court found that there was not the slimmest shred of evidence the arbitration agreement was part of a purposeful attempt to communicate with putative class members, nor was there anything in the record even remotely suggesting that Waffle House contacted any putative class members and tried to get them to sign arbitration agreements.

Not ex parte communication. Finally, the court rejected the employee’s contention that the district court properly denied the motion to compel arbitration because the agreement was an unauthorized ex parte communication in violation of Florida’s ethical rules concerning the conduct of its attorneys. Observing that this claim stemmed from Waffle House’s practice of pre-signing the arbitration agreements so that they are given to new employees with the vice president’s signature already affixed, and that the vice president also served as general counsel, the court noted that the communication at issue, the arbitration agreement, did not mention the FCRA, the employee’s FCRA claim, or his ongoing lawsuit. Nor was there any evidence that the VP knew the communication had been made to a party who was represented by counsel in an ongoing lawsuit, let alone that the employee had filed a class-action lawsuit in the Middle District of Florida. Moreover, he signed the agreement as VP, not general counsel, and was never listed as counsel in the employee’s FCRA lawsuit.

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