Supplemental considerations for employment and adhesive arbitration contracts.

In the previous edition of this newsletter (May 2019), I addressed general considerations for drafting and customizing arbitration agreements for general commercial and civil matters. Courts across the country have closely scrutinized arbitration agreements made in circumstances where there is a perception of potential abuse or overreaching in employment contracts. Similar concerns exist for other adhesive consumer contract situations such as condominium sales, nursing home care, emergency medical services, malpractice and the like. This second installment on the drafting of arbitration agreements supplements the considerations discussed in the first installment. If you need a copy of that first installment, give me a call or send an email and I would be happy to send a copy to you.

Courts have applied contractual principles of unconscionability as well as judicially articulated concerns founded upon considerations of public policy to invalidate arbitration agreements. This second installment will discuss drafting considerations focused on the employment context. The considerations apply also to consumer and adhesive contract situations. In such situations, counsels need to pay additional special attention to drafting their arbitration agreements.

Consider the following:

1. Be clear. Use plain and understandable English. Make the arbitration provision prominent. Don’t bury it in fine print. Provide features that will provide indicia of fair notice such as highlighting, bold fonts, places for approval initials and signatures and the like. Consider having the arbitration agreement as a stand-alone document rather than having it be incorporated in a lengthy employee handbook. If employment agreement forms are managed and accessible online, require a specific action such as clicking an acceptance button to indicate an express agreement from the employee.
2. Be balanced and fair. Resist making the agreement one sided. Courts in many jurisdictions have applied principles of procedural and substantive unconscionability in reviewing challenges to agreement agreements that have provisions that unfairly favor the stronger party.
3. Make the agreement mutual. Ideally, to reflect mutuality of agreement, both the employer and employee should sign the arbitration agreement. Avoid provisions permitting unilateral changes to the arbitration agreement terms.
4. Where employment leasing entities are utilized or where employees may perform work for different or multiple related entities, the agreement should specify whether claims and disputes involving the employee and the associated entities are subject to the arbitration agreement and/or may be consolidated.
5. Consider having the stronger bargaining party bear a greater portion of the arbitration process costs such as arbitration filing and agency fees, arbitrator fees. Courts have sometimes invalidated arbitration agreements where the costs to the employee to pursue arbitration of an employment-related dispute are more than it would have cost him or her to proceed in court. Consider providing employees with an opportunity and procedure to “opt out” of the arbitration requirement within a reasonable period of time.
6. Train representatives to avoid conduct that might be viewed as coercive or threatening. Allow reasonable time for review and consideration of the terms of the agreement.
7. Give special attention to the scope of claims that will be subject to the arbitration agreement. While it is important to consider broadening the scope of issues to include tort claims and certain statutory claims such as discrimination and civil rights claims, be careful to exclude other employment agreements or benefit plans that may have separate or different dispute resolution procedures and statutory remedial statutes such as wage and hour, workers compensation and personal attorney general claims.
8. Adopt appropriate rules. In the employment context, special attention should be given to the adoption of any arbitration rules to be applicable to the arbitration of employment claims. The several alternative dispute resolution agencies (DPR, AAA, JAMS) have different rules that apply to their administration of employment arbitrations. DPR uses its general arbitration rules for commercial arbitration including employment matters. AAA has specific employment arbitration rules and has adopted an Employment Due Process Protocol which attempts to address fairness and due process concerns that have been raised in the employment context. JAMS also has specific employment arbitration rules and has adopted a JAMS Policy on Employment Arbitration Minimum Standards of Procedural Fairness. The JAMS Policy excludes individually negotiated employment agreements and agreements made by parties who were represented by counsel in the negotiation of an employment agreement. Drafters of arbitration agreements for employment agreements must review the rules of the administering agency if one of these agencies is selected for the arbitration agreement to determine their suitability. Alternatively, parties may wish to consider not adopting the supplemental rules of an alternative dispute resolution agency and/or providing their own statement of applicable rules which supplement the applicable arbitration statute.

An excellent comparison and contrast of cases that address the common arguments raised in opposition and support of arbitration clauses can be found in reviewing appellate court cases coming out of employment arbitration cases involving Carrols, LLC, a major multi-state Burger King franchisee. Carrols has over 500 franchise restaurants in over thirteen states across the country and has had multi-year and multi-court battles over enforceability of its Mandatory Arbitration Policy (MAP). The Company adopted its MAP and required all new employees to sign a copy of the MAP. Pre-existing employees were provided with a memorandum informing them of the MAP and which stated that the employee’s action of coming to work on or after a stated date would indicate the employee’s assent to the MAP. The MAP set forth the following arbitration provision: 

Under this arbitration program, which is mandatory, Carrols and you agree that any and all disputes, claims or controversies for monetary or equitable relief arising out of or relating to your employment, even disputes, claims, or controversies relating to events occurring outside the scope of your employment (“Claims”), shall be arbitrated before JAMS, a national arbitration association, and conducted under the then current JAMS rules on employment arbitration.

It also stated:

Claims subject to arbitration shall include, without limitation, disputes, claims, or controversies relating or referring in any manner, directly or indirectly, to * * * the Federal Fair Labor Standards Act or similar state statutes * * *

In Jones v. Carrols, LLC, d/b/a Burger King, 9th Dist. Summit No. 28918, 2019-Ohio-211, Jones, a franchise restaurant manager, was terminated. Jones, a pre-existing employee at the time of promulgation of the MAP, who had not signed a copy of the MAP brought suit alleging claims of racial and age discrimination, intentional infliction of emotional distress, invasion of privacy and negligent supervision. The appellate court ruled that:

1. A party seeking to invalidate an arbitration clause on grounds of unconscionability must establish that the provision is both procedurally and substantively unconscionable.
2. Unconscionability consists of two separate concepts: (1) unfair and unreasonable contract terms (substantive unconscionability); and (2) an absence of meaningful choice on the part of one of the parties(procedural unconscionability).
3. The party seeking to invalidate an arbitration clause on grounds of unconscionability bears the burden of proof to establish that the provision is both procedurally and substantively unconscionable.
4. When determining procedural unconscionability, a reviewing court considers “factors bearing on the relative bargaining position of the parties, including age, education, intelligence, business acumen, experience similar transactions, whether the terms were explained to the weaker party, and who drafted the contract.”
5. Contract terms are unconscionable if they are unfair and commercially unreasonable or are so one-sided as to oppress or unfairly surprise a party.
6. Provisions that reserved the mutual right to seek court relief to prevent irreparable injury and other provisions of the arbitration agreement were not vague and ambiguous.
7. The employee failed to provide evidence that the costs of the arbitration under the JAMS rules were substantively unconscionable.
8. The clause “any claim or controversy arising out of or relating to the agreement” is not overbroad and the language of the agreement expanding the scope of claims that are subject to arbitration was broad enough to include statutory and tort claims.
9. The agreement’s waiver of class action does not violate public policy. (“[a]greements voluntarily and fairly made between competent persons are usually valid and enforceable, and the principle that agreements opposed to public policy are not enforceable should be applied cautiously and only in circumstances patently within the reasons on which that doctrine rests.”)

However, contrast the Jones case with Arnold v. Burger King, 2015-Ohio-4485, where an entry level employee was raped by supervisor while on duty. The employee signed a copy of the employer’s arbitration agreement statement. The employer, Carrol, LLC, sought to compel arbitration of the employee’s claims of assault, sexual abuse, harassment, emotional distress and employment discrimination. A different Ohio court of appeals panel of three judges considered essentially the same arbitration agreement language but found the terms of the agreement to arbitrate unconscionable and directed the matter to arbitration.

The Court in the Arnold case ruled that:

equity and fairness require that greater scrutiny be given to arbitration provisions that do not involve parties of equal sophistication and bargaining power: To be sure, an arbitration clause in a consumer contract with some characteristics of an adhesion contract “necessarily engenders more reservations than an arbitration clause in a different setting,” such as a collective-bargaining agreement or a commercial contract between two businesses.

The Court cited case law for the following principle:

This Court merely seeks, as a matter of public policy, to promote the procurement of arbitration in a commercially reasonable manner. To interpret an arbitration agreement to apply to actions completely outside the expectations of the parties would be inconsistent with this goal.

The Court determined that:

a tort claim that is completely independent of a contract and may be maintained without reference to the contract is not arbitrable. Clearly, a lawsuit arising from a rape is an outrageous tort that is legally distinct from the contractual relationship between the parties.

The Court reasoned that an intentional tort such as rape was not foreseeably a claim that would arise under the employment related agreement. It stated:

Foreseeability embraces the knowledge, sophistication and expectations of the parties at the time of contracting. This is not a case where an employee whose claims arose directly out of the employment relationship, was a professional with a negotiated contract of employment whose education, experience, and marketability provided an option to seek another position instead of accepting employment that required arbitration.

The Court found a clear disparity in bargaining power, superior knowledge on the part of the employer and confusing, incomplete and ambiguity in the provisions of the arbitration agreement. The Court noted:

There can be no true meeting of the minds when a party is unable to understand the agreement. We restate that the MAA not only defines “Claims” as events arising out of the employment as well as outside of the scope of employment, it provides a laundry list of legal causes of actions and laws, in legal terminology, such as strict liability, Family Medical Leave Act, and Employee Retirement Income Security Act. The exceptions to coverage are the “exclusive remedies under either workers compensation law or employee injury benefit plan.” The MAA includes arbitration of “personal or emotional injury to you or your family.” The agreement does not, in any way, explain the tremendously overreaching impact of its terms on the employee’s life both within and outside the scope of employment.

The Court also found lacking the employer’s process of referring employees to the JAMS website (which it found to be a “labyrinth” of information and difficult for an unsophisticated employee to navigate) with general language that the arbitration would be conducted on such “then current” rules and without explanation of the employee’s responsibility for the payment of cost associated with arbitration. The Court concluded that the Burger King arbitration agreement was both procedurally and substantively unconscionable.

It is difficult to reconcile the apparent inconsistency reflected by these two Ohio court of appeals decisions. The cases exemplify the difficult challenge in crafting a fair and balanced arbitration agreement in cases involving employees and consumers in circumstances that may be viewed to be adhesive in nature. The cases merit close study and present valuable guidance for drafters of enforceable arbitration agreements.