How not to set up an arbitration system
March 09, 2005 by Ross Runkel at LawMemo
Ryan's Family Steak Houses set up an interesting three-party arbitration arrangement. (1) Potential employees signed an agreement with Employment Dispute Services, Inc. (EDSI), an arbitration service-provider, agreeing to use EDSI as an arbitration forum. In theory, Ryan's could enforce that contract as a third-party-beneficiary. (2) Ryan's and EDSI had a contract in which Ryan's agreed to use EDSI to resolve employee disputes. In theory, an employee could enforce that contract as a third-party-beneficiary.
The 6th Circuit found so many flaws in this deal that I cannot list them all. In Walker v. Ryan's (6th Cir 03/09/2005) employees sued claiming FLSA violations, and Ryan's moved to compel arbitration. Denied; denial affirmed.
Lack of consideration - no contract
EDSI provided no consideration to the employees because EDSI retained the right to modify its arbitration rules at any time. Ryan's provided no consideration because it was not obligated to submit its employment disputes to EDSI.
No knowing and voluntary waiver - no contract
Lots of facts on this point. Plaintiffs were poorly educated, in dire financial circumstances, were hired quickly with time to read the arbitration policy, possibly got misleading information from managers. Bottom line: No waiver of the right to go to court.
Lack of mutual assent - no contract
The arbitration language was on page 10 of an 11 page contract; it was a take-it-or-leave it deal in which the employee had no bargaining power; the employee was poorly educated; and the agreement was not adequately explained. Conclusion: no mutual assent.
Biased arbitration panel
The 6th Circuit found that the EDSI arbitration forum was not neutral, and that made the agreement unenforceable. EDSI is a for-profit company and Ryan's provided 42 percent of its gross income during one year. Said the court, "Ryan's effectively determines the ... pools of arbitrators." On top of that, EDSI had no protocol for selecting potential arbitrators out of its pools of arbitrators. Usually, arbitrator bias is a matter for post-arbitration litigation, but here the court felt that this system was "fundamentally unfair."
OK Ryan's. Maybe you should try using a real arbitration system.
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