No Arbitration for Masseuse 2016-01-06T14:20:39-07:00

Posted on January 6, 2016

The Tenth Circuit just ruled that an arbitration agreement between a massage student and her school was not enforceable, because it would not permit the effective vindication of the student’s statutory rights. Nesbitt v. FCNH, Inc., No. 14-1502 (10th Cir. Jan. 5, 2016). The dispute involved a massage student’s claim that, when she gave massages to members of the public as part of her training, she was acting like an employee and entitled to be paid. She brought a class action, asserting claims for unpaid wages under state law and the FLSA. The massage school moved to compel arbitration, based on a provision in her enrollment application.

The court refused to require arbitration. The provision did not adequately protect the student’s rights because, first, it required the student to pay half of the arbitrator’s fees (which would not be necessary if the case was decided in a court), and second, it was not clear that if the student prevailed, she would be entitled to an award of her attorney’s fees (which would be available under the FLSA in a court action). The massage school argued that these problems should not prevent enforcement because the provision had an opt-out clause, but the Court ruled that the opt out clause was only relevant to whether the parties had agreed to arbitrate. In addition, the court refused to remove the improper provisions and then enforce the agreement, because the provision had no clause by which the parties agreed the court could make those changes.

Acceptable terms for arbitration agreements continue to evolve in every jurisdiction across the country. What’s in your form?

Chinese Arbitration Pact Enforced 2014-10-06T14:40:36-06:00

Posted on October 6, 2014

By Lori Phillips

Modern Space, located in Shanghai, China, extended to Plaintiff a written offer of employment setting out basic terms, including the requirement that the parties enter a separate, written employment contract (“Labor Contract”). The Labor Contract included an arbitration provision requiring any dispute arising under the contract to be submitted to arbitration within 60 days. Fast-forward a year. Modern Space terminated Plaintiff’s employment. Later, it brought a trade secret misappropriation claim against Plaintiff in Illinois district court. Plaintiff then filed a counterclaim against Modern Space and a third party complaint against two of its affiliates for breach of the employment agreement. Modern Space and its affiliates moved to compel arbitration of Plaintiff’s claims.

Plaintiff opposed arbitration on several grounds, all of which the court rejected. First, he argued the Labor Contract was executed under false pretenses because it was written in Chinese. Because Plaintiff’s challenge was to the Contract as a whole, and not the arbitration provision specifically, the Court held his argument must be referred to the arbitrator. Plaintiff then argued the Labor Contract was substantively unconscionable because it gave him only 60 days to bring a claim to arbitration. Because Modern Space stipulated that it would not challenge as untimely any of Plaintiff’s contractual claims, the Court found no basis for invalidating the arbitration provision for the restrictive time limit. The Court also rejected Plaintiff’s argument that the affiliates, as non-signatories, could not compel arbitration, holding that the claims against them are intertwined with claims against Modern Space brought under the Agreement. Finally, the Court rejected Plaintiff’s argument that Modern Space waived its right to invoke arbitration as to his claims by bringing the initial suit against Plaintiff in district court. The Court differentiated between Modern Space’s misappropriation claim, which arose from activity after Plaintiff’s employment, from Plaintiff’s counterclaim, which rests entirely on the employment agreement. The district court dismissed Plaintiff’s claims in their entirety, citing the Court’s lack of authority to alternatively compel arbitration in a foreign forum.

Lessons? (1) The federal policy in favor of arbitration reaches well beyond the limits of the United States. (2) An employer can help itself by relenting on unconscionable terms such as restrictive time limits. (3) Non-signatories can compel arbitration of claims brought against them—under certain circumstances. (4) Finally, an employer can have its cake and eat it, too, by litigating its own claims in court while forcing plaintiff to litigate his in arbitration, as long as the employer’s claims do not arise under the employment agreement.

Another Win for FLSA Class Action Waiver 2013-12-26T18:03:09-07:00

Posted on December 26, 2013

By Lori Phillips

In Porreca v. Rose Group, No. 13-1674 (E.D. Penn. Dec. 11, 2013), an employee attempted to bring class claims for violations of the wage and hour provisions of the FLSA against its restaurant employer in federal court. The restaurant moved to compel arbitration, and the employee fought it, arguing that the arbitration agreement was unconscionable. The court, despite its apparent distaste for such agreements in the big fish versus small fry context, compelled arbitration. In Pennsylvania, as in many states, a finding of unconscionability relies on a sliding scale of both procedural and substantive unconscionability. The agreement was procedurally unconscionable due to its “take it or leave it” nature and the inequality of bargaining power among the parties. However, the court could not find the agreement substantively unconscionable. Despite the provision waiving the employee’s right to collective action under the FLSA, the court recognized that it was bound by both Supreme Court and Third Circuit precedent to conclude one’s FLSA rights are waivable.

Court Nixes Non-Appealability Clause in Arbitration Agreement 2013-12-23T22:23:24-07:00

Posted on December 23, 2013

By Lori Phillips

Generally speaking, arbitration is a matter of contract, and arbitration agreements must be enforced according to their terms. The Ninth Circuit recently issued a caveat, however. In In re Wal-Mart Wage & Hour Employment Practices Litigation, No. 11-17718 (9th Cir. Dec. 17, 2013), an issue of first impression, the Ninth Circuit held that a non-appealability clause in an arbitration agreement that eliminates all federal court review of arbitration awards, including review under § 10 of the Federal Arbitration Act, is not enforceable. Federal court review of arbitration awards is already limited to the grounds enumerated in the FAA and to very limited circumstances in which an arbitrator manifestly disregards the law. Allowing parties to contractually eliminate all judicial review of arbitration awards, the court stated, would disregard the text of the FAA and take away the assurance of a minimum level of due process for the parties. This case shows that, while courts do strongly favor enforcing arbitration agreements according to their terms, there are still limits on the terms to which parties can agree.

Surprise! Shocker! Court invalidates arbitration agreement… 2013-10-30T18:06:01-06:00

Posted on October 30, 2013

…with “surprise” terms that “shock the conscience.”

By Lori Phillips

In Chavarria v. Ralphs Grocery Co., No. 11-56673 (9th Cir. Oct. 28, 2013), the Ninth Circuit shot down an employer’s motion to compel arbitration because it found the arbitration agreement both procedurally and substantively unconscionable under California contract law. In addition to the “take it or leave it” approach, which by itself puts one thumb on the “procedurally unconscionable” scale, the employer did not present the arbitration terms until three weeks after the employee had agreed to be bound by them. Next, relying on loose language from American Express Corp. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013), the court found the upfront splitting of arbitration costs between the employer and employee was substantively unconscionable because it makes many employees’ claims “impracticable.” Further, the court stated that the Federal Arbitration Act did not preempt California’s law regarding unconscionable contracts, and that the Supreme Court’s opinions favoring arbitration “cannot be read to immunize all arbitration agreements from invalidation.”

Despite the United States Supreme Court’s clear policy favoring the enforcement of arbitration agreements, lower courts continue to resist. The lesson? Employers can craft arbitration agreements with favorable terms, just as long as they are not too favorable.

Form Or Substance 2013-06-10T16:44:46-06:00

Posted on June 10, 2013

By Bill Wright

In a much-anticipated case the U.S. Supreme Court today reached a decidedly unremarkable conclusion. The gist of the U.S. Supreme Court’s new decision on class action arbitration agreements is old hat—courts may overturn an arbitrator’s decision under the Federal Arbitration Act only if the arbitrator acts outside the authority granted in the agreement. Here, the arbitrator’s decision itself is the interesting part. The arbitrator interpreted the following language: “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration . . . .” The arbitrator (twice) found this language permitted the contractor to bring a class action. As summarized by the Supreme Court, the arbitrator reasoned (a) the agreement sent to arbitration the same set of “disputes” that it barred the parties from bringing as civil actions; (b) class action is one possible “form” of civil action; therefore, (c) class arbitrations can be maintained. The Supreme Court carefully avoided endorsing the arbitrator’s reasoning; after all, the arbitrator does shift, without explanation, from the substance of the dispute (i.e. whether a health plan failed to pay the claimant for his services under the contract) to the “form” of civil actions barred from court. Oxford Health Plans LLC v. Sutter, No. 12-135 (U.S. June 10, 2013).

If you are drafting an arbitration agreement and want to avoid class action arbitration, be clear about forbidding class actions or preserve arbitrability questions for the court. Here the contracting parties failed to do either.

Federal Court Ignores Supreme Court Guidance on Collective Action Arbitration 2013-02-28T00:03:03-07:00

Posted on February 28, 2013

A federal district court in Idaho chose to follow the NLRB, instead of the Supreme Court and several U.S. Circuit Courts of Appeals, on the hot topic of collective action arbitration. Brown v. Citicorp, No. 1:12-CV-00062 (D. Idaho Feb. 21, 2013). The court reviewed an arbitration agreement between an employer and employee. In the agreement, the employee agreed to individually arbitrate employment disputes, and so agreed not to bring a collective action under the Fair Labor Standards Act. The court refused to compel arbitration; according to the court, the arbitration agreement was an unlawful waiver of the employee’s right to engage in “concerted action” under the National Labor Relations Act. The ruling ignores case law from Circuit Courts, and disregards a Supreme Court opinion that strongly suggested employees’ right to bring a collective action rights could be waived in an arbitration agreement. To top it off, the court relied heavily on an NLRB decision recently declared invalid because the NLRB did not have the requisite number of Board members at the time of the decision.

This leads us to ask: Do workers in Idaho get more protection from the NLRA than others?

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