Poor Drafting Leads to Poor Results for Arbitration 'Agreement'

Southard v Newcomb Oil Co, LLC, is a decision by our very own U.S. Court of Appeals for the Sixth Circuit in a case that originated in the Western District of Kentucky. Let’s only look at that part of the court’s ruling that concerns an alleged agreement to arbitrate that the employer was hoping to enforce. Oops, did I say “alleged?” I may have just spoiled the ending.

“To use the Federal Arbitration Act [FAA] to enforce an arbitration agreement, a party must have entered an arbitration agreement.” Words of wisdom to live by.  I like how Judge Cole writes. Let’s just continue to quote the decision:

There is a “liberal federal policy favoring arbitration agreements,” which is, “at bottom a policy guaranteeing the enforcement of private contractual arrangements.” But the “presumption” favoring arbitration, as it is sometimes called, applies only to the scope of an arbitration agreement, not its existence. “[N]o matter how strong the federal policy favors arbitration, ‘arbitration is a matter of contract between the parties, and one cannot be required to submit to arbitration a dispute which it has not agreed to submit to arbitration.’” (internal citations omitted).

The court noted that “despite it being the titular term, the FAA does not define arbitration.” I bet you had to look that word up too. To determine whether its an arbitration agreement, you have to see if it resembles “classic” arbitration: a final, binding remedy by a third-party independent adjudicator with substantive standards and an opportunity for all sides to be heard. So, basically the court is saying if it looks like a duck and walks like a duck, it’s a duck. 

Here, the employment application states that conflicts could be referred to “Alternative Dispute Resolution” and the handbook states: “… you agree to Alternative Dispute Resolution a forum or means of resolving disputes, as arbitration or mediation, that exists outside the state or federal judicial system, ... as a means to resolve any disputes…that cannot be resolved internally.” And, on its last page states: “If there is a conflict that cannot be resolved between the employee and the company, both agree that the matter will be referred to mediation.”  

The court stated “[m]ost notably, arbitration is juxtaposed with mediation …” (or as Webster’s dictionary would say, they are “side by side …”) and determined that none of this added up to an agreement to arbitrate and, if anything, the parties agreed to mediate disputes. I have to agree, but the fun was getting there. 

Bottom line, and I will try not to complicate this: if you want to require arbitration, for Pete’s sake, at least say so. Also, don’t put it in an employee handbook that begins with “nothing in this handbook is intended to create any contractual rights” because that would include (or should I say preclude) a contract to arbitrate.  

Finally, as an arbitrator, let me give two final tips. First, don’t require a three-arbitrator panel to decide your cases. Generally employers are required to pay the fees charged by the arbitrator(s) and if there are three arbitrators, you are looking at $1,200 or more an hour for the panelists together to decide every discovery dispute, and for every administrative call, etc. It will make it a very expensive process.

Second, I know many employers in certain industries like to prevent class action wage claims (“collective” actions) by requiring them to be brought individually through arbitration. But consider the risk of one attorney representing all 100 or so employees in 100 or more separate arbitration cases for which you are paying all 100 or more arbitrators. While it may result in only a few thousand dollars awarded to each employee it could cost your company tens of thousands awarded to the attorney on each case. This is not the panacea it has been made out to be. Please consult with your legal counsel before you meander down that twisty road.

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