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Arbitration or ‘Arbitrary’: The Misuse of Arbitration to Collect Consumer Debts
July 20, 2009 by Ross Runkel at LawMemo
A House subcommittee hearing on July 22 will focus on business-consumer arbitrations relating to to debt collection.
The title of the hearing gives you an easy way to predict the outcome: “Arbitration or ‘Arbitrary’: The Misuse of Arbitration to Collect Consumer Debts”
Text of the House press release:
For Immediate Release:
Contact: Nathan White (202)225-5871
Hearing: “Arbitration or ‘Arbitrary’: The Misuse of Arbitration to Collect Consumer Debts” Date: July 22, 2009, 2:00 p.m.
Location: Rayburn House Office Building, Room 2154
On Wednesday, July 22, 2009, at 2:00 p.m. in room 2154 of the Rayburn House Office Building, the Domestic Policy Subcommittee will hold a hearing entitled, “Arbitration or ‘Arbitrary’: The Misuse of Arbitration to Collect Consumer Debts.”
The purpose of this hearing is to evaluate contractually-mandated arbitration of disputes between businesses and consumers in the context in which the vast majority of those disputes occur—the collection of debts from consumers. The hearing will evaluate whether consumer debt collection arbitration, as currently administered, produces results that are fair and legitimate.
Experts invited to testify:
Mr. Michael Kelly, Chief Operating Officer, National Arbitration Forum
Mr. Richard W. Naimark, Senior Vice-President, International Centre for Dispute Resolution, a division of the American Arbitration Association
Mr. F. Paul Bland, Staff Attorney, Public Justice
Professor Christopher R. Drahozal, John M. Rounds Professor of Law, University of Kansas
The Honorable Lori Swanson, Attorney General, State of Minnesota.
Thanks to Disputing, U.S. Congress Hearing on the Misuse of Arbitration to Collect Consumer Debt, for the heads up and the links.
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Bill stuffer cannot add an arbitration clause
March 19, 2009 by Ross Runkel at LawMemo
When Santana Kortum-Managhan signed up for a credit card with the Herbergers department store, the agreement did not include an arbitration clause. However, it did contain a provision purporting to allow Herbergers to unilaterally change the agreement as it saw fit and specifying that a cardholder’s continued use of their Herbergers’ credit card or other services constituted agreement to Herbergers’ unilateral change in terms.
Later, Herbergers mailed out a notice (known as a "bill stuffer") in Kortum-Managhan's monthly bill. This document contained various changes in the terms of the agreement including the addition of an arbitration clause.
When Kortum-Managhan brought suit alleging violation of federal and state statutes, the store moved to compel arbitration. The trial court entered an order compelling arbitration, but the Montana Supreme Court reversed.
Kortum-Managhan v. Herbergers (Montana 03/17/2009) (5-1 vote).
The court cited a Montana constitutional provision protecting the rights to trial by jury and access to courts, and labeled these "fundamental constitutional rights that deserve the highest level of court scrutiny and protection." The court said "the waiver of a fundamental constitutional right must be proved to have been made voluntarily, knowingly and intelligently."
The court held that the store failed to show that the cardholder had "deliberately, understandingly and intelligently waived [her] fundamental constitutional rights to trial by jury and access to the courts."
The court said that the bill stuffer "is ambiguous and misleading because it seeks to waive the cardholder’s fundamental constitutional rights with a clause blended into the end of a document when bold type, capital letters and larger fonts are used to draw attention to other clauses."
"Based on the foregoing, we conclude that making a change in a credit agreement by way of a “bill stuffer” does not provide sufficient notice to the consumer on which acceptance of the unilateral change to a contract can be expressly or implicitly found."
The DISSENT said, "people should read their mail - especially when it comes from their credit card companies."
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Unconscionability the Washington State way
September 01, 2008 by Ross Runkel at LawMemo
Washington's approach to unconscionability is unusual because it is not necessary to establish both procedural unconscionability (e.g., disparate bargaining power, take-it-or-leave-it contract) and substantive unconscionability (a contract term that is one-sided or overly harsh). Substantive unconscionability alone is sufficient to support a finding of unconscionability.
McKee v. AT & T Corp. (Washington Supreme Court 08/28/2008) found four clauses to be substantively unconscionable while finding it unnecessary to decide the issue of procedural unconscionability.
Plaintiffs were long distance telephone customers who filed a class action suit claiming that AT & T unlawfully billed them for a city tax surcharge in the amount of less than $2 per month. The Washington Supreme Court refused to enforce an arbitration agreement which contained four unconscionable clauses.
- Class action waiver clause. The court found the class action waiver clause to be substantively unconscionable because (1) it eviscerated the public's ability to act as "private attorneys general" as intended in the Washington Consumer Protection Act, (2) it effectively exculpated the defendant for potentially widespread misconduct because class actions are often the only effective way to address claims of small and widespread wrongs, (3) small claims court or low-cost arbitration are not practicable ways for individuals to pursue small amounts of damages.
- Forum selection clause. The court refused to enforce a forum selection clause that would have required the court to apply the law of New York, which allows enforcement of class action waivers. The court reasoned that (1) absent the choice of law clause, Washington law would apply, (2) New York's allowance of class action waivers conflicts with Washington's "fundamental public policy to protect consumers through the availability of class actions," and (3) Washington's interest in protecting large classes of consumers outweighs New York's limited interest.
- Shortened statute of limitations. The court struck down a contract clause that provided for a two year limitation period in a case where the Washington Consumer Protection Act provided a four year statute of limitations. The court said this was "substantively unconscionable as against public policy" "when imposed on a consumer in a contract of adhesion for a basic consumer service such as long distance telephone service."
- Confidentiality clause. The court found a confidentiality provision to be substantively unconscionable, saying that "consumer adhesion contracts that require secrecy" violate the public policy favoring the open and public administration of justice and unreasonably favor repeat players such as AT & T.
My view: Almost no other state allows a finding of unconscionability without a finding of procedural unconscionability. Washington really is staking out a new form of "public policy" analysis under which some clauses are unenforceable even when there is no showing of any abuse of superior bargaining power.
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Spanish speaker bound by English agreement
August 29, 2008 by Ross Runkel at LawMemo
Morales sued the employer, asserting various claims arising from his discharge from employment. The employer moved to compel arbitration, but the trial court denied the motion. The 3rd Circuit reversed. Morales v. Sun Constructers (3rd Cir 08/28/2008).
The trial court determined that Morales didn't assent to the written arbitration agreement and thus declined to enforce it, based on its finding that the agreement was in English and Morales (who spoke only Spanish) didn't understand it.
The 3rd Circuit concluded that the trial court erred. The court cited Upton v. Tribilcock, 91 US 45 (1875) for the proposition that "[i]t will not do for a man to enter into a contract, and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained."
The court noted that, under the "objective theory" of contract formation, "what is essential is not assent, but rather what the person to whom a manifestation is made is justified as regarding as assent." The court concluded that, absent a showing of fraud, "the fact that an offeree cannot read, write, speak, or understand the English language is immaterial to whether an English-language agreement the offeree executes is enforceable."
My view: Courts are required to treat agreements to arbitrate on the same basis that they treat contracts generally. Under the almost-universal rule that a person is bound by the terms of a signed agreement (even if the signer did not understand it), the agreement can be enforced. Therefore, the decision is correct, and it's a little difficult to understand why the trial court thought the agreement should not be enforced.
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Antitrust and arbitration
April 26, 2008 by Ross Runkel at LawMemo
Have banks conspired to force credit card holders to accept mandatory arbitration clauses, coupled with no-class-action provisions, in their cardholder agreements?
That's the claim made by some cardholders against a bunch of banks in a lawsuit in federal court in New York. The case is Ross v. Bank of America (2nd Cir 04/25/2008).
Here's how the court described the plaintiffs' claims:
- Assuming the facts asserted in the Complaint to be true, “[b]eginning before late 1998 or early 1999, Defendants began communicating with each other and their co-conspirators concerning the imposition and use of mandatory arbitration clauses.” After preliminary meetings and communications, the banks formed an “Arbitration Coalition” to recruit other credit card issuers into using mandatory arbitration clauses. Over the next four years, the Arbitration Coalition held more meetings, shared plans for the adoption of arbitration clauses, and spun off additional working groups. Ultimately, “Defendants jointly forced unwilling and unaware cardholders to accept arbitration clauses and class action prohibitions on a ‘take-it-or-leave-it basis’ through the joint exercise of immense market power.”
- The cardholders argue that the banks’ collusion violated the antitrust laws. According to Plaintiffs-Appellants, the banks conspired in order “to immunize themselves from economic responsibility for antitrust and consumer protection violations, and to reap supra-competitive profits from their cardholders.” The cardholders also contend that the alleged collusion produced several market effects, including the creation of a “non-price trade advantage over cardholders” and the removal of any economic incentive for the banks to comply with antitrust and other laws, thereby shifting the risk and cost of their non-compliance to cardholders. The collusion is also alleged to have resulted in an increase in dispute-related costs to individual cardholders (including monitoring the banks’ conduct and seeking relief through costly individual arbitrations), the removal of all non-arbitration credit cards from the market, thereby depriving the cardholders of meaningful choice in the area of credit card services, and a diminution in the overall quality of credit services offered to consumers.
There are tons of legal issues in a case like this. The sole issue that was before the 2nd Circuit in yesterday's decision was whether the plaintiffs-cardholders had Article III standing to bring this suit. As the banks put it, the plaintiffs' alleged injuries "are entirely speculative."
The 2nd Circuit held that the plaintiffs do have standing, so the case can proceed ahead. The court said that the plaintiffs alleged a present injury, which is an injury to the market as opposed to injuries to individual cardholders. Specifically, those alleged injuries are:
- Added time and expense in monitoring banks' conduct because of the anti-class-action provision. (If they could bring class actions, then they would "have the option of relying on motivated class action attorneys.")
- "The alleged conspiracy to limit the cardholders to cards that require arbitration of disputes also diminishes the present value of the cards offered to the cardholders."
My view:
- An extremely narrow holding, addressing only standing under Article III of the constitution, and then addressing only the "injury in fact" element of standing. On remand, the trial court now has to take up two other Article III standing issues: causation and redressability.
- There is an additional standing question that the court did not address: standing under the antitrust laws.
- Oh, yes, let's not forget the merits. Was there an antitrust violation?
- A fascinating legal theory for attacking arbitration agreements and anti-class-action provisions. Obviously arbitration agreements are perfectly lawful, but what if major banks actually did get together and agree that they all would include arbitration clauses in their contracts? A violation of the federal antitrust laws? We'll have to wait and see.
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Acceptance by continuing to work
November 14, 2007 by Ross Runkel at LawMemo
Lots of blog buzz about Seawright v. American General (6th Cir 11/13/2007), which held that Seawright accepted her employer's offer of an arbitration agreement by continuing to work.
The case discusses some basics of contract law: offer, acceptance, consideration, unconscionability.
Offer: A couple of blogs have suggested that the employer's offer was made by mailing the new arbitration program to employees. Well, partly true. In fact, the employer announced the program in a bulletin, mailed a letter, and held informational meetings. Seawright signed a form indicating that she attended a meeting and received a copy of the new program. So, it seems to me that there is no significant issue as to whether the employer made an offer that was received by Seawright.
Acceptance: The offer said, "Seeking, accepting, or continuing employment ... means that you agree to resolve employment claims ... through this process instead of through the court system." The offer was made in 1999 and Seawright continued working for six more years.
The court held that under Tennessee law her continuing to work was an expression of assent to the offer. Therefore, she accepted the offer.
The dissent argued that there was no proof that Seawright assented. She didn't sign an arbitration agreement, and "no Tennessee court has decided whether continuing employment is effective as a waiver of constitutional rights."
The dissenting judge (Hon. Boyce F. Martin, Jr.) deserves an award for his Homer Simpson footnote:
Homer Simpson talking to God: “Here’s the deal: you freeze everything as it is, and I won’t ask for anything more. If that is OK, please give me absolutely no sign. [no response] OK, deal. In gratitude, I present you this offering of cookies and milk. If you want me to eat them for you, please give me no sign. [no response] Thy will be done.” The Simpsons: And Maggie Makes Three (Fox television broadcast, Jan. 22, 1995).
My view: The dissent reflects a continuing (growing?) distaste for cases in which an employer requires agreement to arbitration as a condition of employment. My view is that this represents a failure of judges to follow the command of the Federal Arbitration Act that requires courts to enforce arbitration agreements under the same standards that they enforce all other contracts.
No signature: Seaworth did not sign an arbitration agreement. This was a big deal for the dissenting judge. However, the FAA does not require a signature. It requires only that the agreement be in writing, which it was.
Consideration: Consideration was present because both Seaworth and the employer agreed to arbitrate. Their mutual promises were consideration for each other.
Illusory promise: Seaworth argued that the employer's promise was illusory because the employer retained the unilateral right to change or terminate the arbitration program. However, the employer had to give 90 days notice beforehand. Thus, the agreement was totally binding for at least 90 days, and thus was not "illusory."
More on this case from other sources:
- Workplace Prof Blog - Sixth Circuit Enforces Arbitration Agreement Mailed to Employees
- Daily Developments in EEO Law
- Wall Street Journal's Law Blog - Footnote Of the Day: Homer’s Unilateral Contract With God
- Ohio Employers Law Blog - Mmmmmmmm, arbitration clauses
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Knowing and voluntary consent not required
March 27, 2006 by Ross Runkel at LawMemo
The employer mailed a new arbitration program to employees, saying that if they continued to work they would be deemed to have accepted. Melena signed a form saying she received and understood the mailing, and she continued working. Later, Melena sued the employer claiming she was discharged because she had filed a workers compensation claim. The Illinois Supreme Court said she was bound by her agreement to arbitrate. Melena v. Anheuser-Busch (Illinois 03/23/2006).
| Employment Law Memo notified its readers about this case on 03/27/2006. |
Two interesting things from this case:
"Knowing and voluntary" consent.
The court rejected Melena's argument that she did not make a "knowing and voluntary" waiver of her right to a jury trial, and stated that "knowing and voluntary" consent is not required because that is not a requirement that applies to contracts generally. The general rule is that if you sign it, then you are bound by it. The court pointed out that there is broad disagreement among the courts as to whether consent to arbitrate must be "knowing and voluntary." More discussion on this point at Workplace Prof Blog: Illinois Supreme Court Rejects "Knowing & Voluntary" Standard for Employment Arbitration.
Whether arbitration is compatible with state statute.
The court wasted a lot of energy by analyzing whether there was any inconsistency between arbitration and the state workers compensation statute. In the end, the court found no inconsistency, so it upheld the agreement to arbitrate.
That analysis is proper (as in Gilmer v. Interstate/Johnson Lane (US Supreme Court 1991)) when the question is whether a federal statute is inconsistent with the Federal Arbitration Act (FAA). The analysis is simply an attempt to be sure Congress did not mean to exclude a particular federal statutory claim from arbitration.
However, that analysis has no place when the FAA is applied to a state claim. The simple reason is that the FAA preempts state law. If the state statute expressly says there can be no arbitration, that just does not matter. The state's anti-arbitration stance is preempted. The supremacy clause of the US constitution makes federal statutes supreme over state statutes. The discussion should begin and end there.
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Terminable arbitration agreement was enforceable
March 14, 2006 by Ross Runkel at LawMemo
Lots of courts have held that an employee-employer arbitration agreement cannot be enforced if the employer retains the right to terminate the agreement or to change the agreement. This is because of the contract-law doctrine of "consideration."
Each side has to promise something to the other. If one side "promises" something that really is nothing, then that is aptly called an "illusory promise." And an illusory promise cannot constitute consideration.
So a typical analysis is that if the employer promises to arbitrate under an agreement that the employer has the right to change, then that promise is illusory, it can't be consideration, and the whole agreement fails.
What if the employer's right to change the agreement is prospective only, can be done only once a year, and can be done only after giving 30 days notice? That was the case in Holloman v. Circuit City Stores (Maryland 03/13/2006) (5-2).
The court said the employer was obligated to give 30 days notice before changing the terms of the arbitration agreement, so the employer was bound to its agreement to arbitrate for at least 30 days. That constituted consideration.
The DISSENT argued that the agreement was so one-sided that it was unconscionable because there was no issue about which the employer had an interest or a need to arbitrate.
Rick Bales talks about this case at Workplace Prof Blog.
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Non-signers not bound to arbitrate
February 05, 2006 by Ross Runkel at LawMemo
Two recent cases, same results, different reasons, both saying that a person who did not sign an arbitration agreement is not bound to arbitrate.
Perhaps the outcomes are obvious to you. They were not obvious to me.
Peters v. Columbus Steel (Ohio Ct App 01/31/2006): An employee leasing company hired William Peters to work at Columbus Steel. William signed an arbitration agreement. After William died from on-the-job injuries, Alice Peters (his widow and administrator of his estate) sued Columbus claiming wrongful death.
The court held that Alice was not required to arbitrate her claim. The court's focus was on the nature of Alice's claim. Her claim is not one that is on behalf of William's estate. Her claim is an independent claim on behalf of William's next of kin. Therefore, the fact that William agreed to arbitrate his claims does not mean that Alice is required to arbitrate her claims.
Comer v. Micor, Inc (9th Cir 02/01/2006): Comer was a participant in two ERISA plans operated by Micor. The plan trustees retained Smith Barney to provide investment advice, and the agreement between the trustees and Smith Barney contained an arbitration clause.
Comer sued Smith Barney under ERISA claiming breach of fiduciary duty. Although such a suit is brought by an individual plan beneficiary, the suit is for the benefit of the plan and any recovery is on behalf of the plan as a whole.
It's important to understand that the 9th Circuit made it clear that Comer was not suing in a derivative capacity. Although any recovery from his suit will go to the plan, Comer has his own cause of action. (Similar to the Peters case discussed above.)
Once we make it clear that Comer had his own cause of action, it's equally clear that he is not bound by the arbitration agreement signed by the trustees. The 9th Circuit used what it considers to be ordinary contract principles to decide that Smith Barney cannot impose the arbitration clause on Comer.
A word of caution: These two cases are not based merely on the fact that the plaintiffs did not sign an arbitration agreement. Arbitration agreements can be enforceable without an actual signature, provided it can be shown that an individual agreed to arbitrate. These two cases are both based on the principle that the plaintiffs' claims were not derived from the claims owned by the party that did agree to arbitrate. The plaintiffs each had their own claims.
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Ryan's certiorari petition
June 26, 2005 by Ross Runkel at LawMemo
The 6th Circuit refused to enforce a pre-dispute arbitration agreement signed by employees of Ryan's Family Steakhouses' multi-state restaurant chain. Walker v. Ryan's (6th Cir 03/09/2005). Ryan's has petitioned [here] the US Supreme Court for a writ a certiorari.
Ryan's lost on several issues, and the petition invites the Supreme Court to correct them. The formal "Questions Presented" section of the petition raises four main points, claiming that the Court of Appeals improperly:
- Used a heightened "knowing and voluntary" standard for waiver of a jury trial.
- Used extraordinary scrutiny to declare the agreements unconscionable under state law, thus showing hostility to arbitration agreements.
- Applied the law of Tennessee to agreements that were entered into in other states.
- Invalidated the agreements based on a perceived potential for structural bias in the arbitration system.
Lawyers on the petition: Michael S. Pitts (counsel of record) and E. Grantland Burns of Nexsen Pruet Adams Kleemeir; David E. Nagle of LeClair Ryan.
My view:
- The real question in a petition for a writ of certiorari is whether a case merits the precious time and attention of nine Supreme Court Justices. Let's assume the 6th Circuit was wrong on all four points raised in the petition. In order to win, Ryan's must prevail on all four of them. That makes this case somewhat cumbersome for the Court, which prefers to decide single-issue cases.
- The Court is usually looking for cases that involve a split of authority between the Circuits, and Ryan's does not make a good case for such a split.
- Perhaps the Court will see this as case as being important because the 6th Circuit used a variety of legal devices to circumvent the core policy of the Federal Arbitration Act, which was to eliminate judicial hostility toward arbitration agreements.
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Ryan's certiorari petition
June 26, 2005 by Ross Runkel at LawMemo
The 6th Circuit refused to enforce a pre-dispute arbitration agreement signed by employees of Ryan's Family Steakhouses' multi-state restaurant chain. Walker v. Ryan's (6th Cir 03/09/2005). Ryan's has petitioned [here] the US Supreme Court for a writ a certiorari.
Ryan's lost on several issues, and the petition invites the Supreme Court to correct them. The formal "Questions Presented" section of the petition raises four main points, claiming that the Court of Appeals improperly:
- Used a heightened "knowing and voluntary" standard for waiver of a jury trial.
- Used extraordinary scrutiny to declare the agreements unconscionable under state law, thus showing hostility to arbitration agreements.
- Applied the law of Tennessee to agreements that were entered into in other states.
- Invalidated the agreements based on a perceived potential for structural bias in the arbitration system.
Lawyers on the petition: Michael S. Pitts (counsel of record) and E. Grantland Burns of Nexsen Pruet Adams Kleemeir; David E. Nagle of LeClair Ryan.
My view:
- The real question in a petition for a writ of certiorari is whether a case merits the precious time and attention of nine Supreme Court Justices. Let's assume the 6th Circuit was wrong on all four points raised in the petition. In order to win, Ryan's must prevail on all four of them. That makes this case somewhat cumbersome for the Court, which prefers to decide single-issue cases.
- The Court is usually looking for cases that involve a split of authority between the Circuits, and Ryan's does not make a good case for such a split.
- Perhaps the Court will see this as case as being important because the 6th Circuit used a variety of legal devices to circumvent the core policy of the Federal Arbitration Act, which was to eliminate judicial hostility toward arbitration agreements.
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email did not create duty to arbitrate
May 24, 2005 by Ross Runkel at LawMemo
The company president sent an email to all employees, including Roderick Campbell, and attached a new policy containing an arbitration clause. When Campbell sued under the ADA, the company moved to compel arbitration. Motion denied. Campbell v. General Dynamics Government Systems Corp (1st Cir 05/23/2005).
The company's theory was simple. They sent an email with a new policy attached, and that was an offer which Campbell (an at-will employee) accepted by continuing to work. Presto, a contract, enforceable under the Federal Arbitration Act (FAA).
The 1st Circuit said this agreement could not be enforced as to Campbell's claim arising under the Americans with Disabilities Act (ADA).
The court assumed that the agreement would be enforceable under state law.
The ADA contains a dispute resolution provision, Section 513 (42 USC 12212):
Where appropriate and to the extent authorized by law, the use of alternative means of dispute resolution, including settlement negotiations, conciliation, facilitation, mediation, factfinding, minitrials, and arbitration, is encouraged to resolve disputes arising under this Act.
The focus became the statutory word "appropriate." The court found no general problem with the use of email, and even cited the E-Sign Act (15 USC 7001-7031). The problem was that the company typically did not use email to handle personnel matters, and had never before used email as means of creating a contractual term that was to become a condition of employment. In addition, the email message did not sufficiently bring home to Campbell that the attached policy contained an arbitration clause that would bind him if he kept working. In short, the email did not provide the employee with "minimally sufficient notice by signalling to a reasonable employee that the Policy was a contractual instrument whose terms would be deemed accepted upon continued employment."
My view: The court applied federal law here, although the language is "offer-and-acceptance," suggesting state law of contract formation. The federal law is ADA Section 513.
This is an intensely fact-driven case. It does not mean employers can't use email to form contracts (including contracts to arbitrate ADA cases) that will be enforceable under the Federal Arbitration Act. It means that the email (or whatever communication method is used) must contain enough of a "red flag" to put an employee on notice that the employer intends to change the contractual relationship.
For more discussion, see Michael Fox's comments at Jottings By An Employer's Lawyer.
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Modifiable agreement supported by consideration
May 16, 2005 by Ross Runkel at LawMemo
Lots of cases say arbitration agreements are not enforceable (for lack of consideration) when the employer retains the unilateral right to modify the arbitration rules. Courts often refer to these deals as "illusory promises," which are not promises at all, and therefore cannot be consideration for the employee's promise to arbitrate.
The agreement between La'Tia Holloman and Circuit City Stores allowed the employer to modify the arbitration rules on March 1 of any year upon giving 30 days written notice.
The fact that the employer had to give notice distinguished Holloman's case from the other cases. The employer's promise was not illusory, and there was consideration. Holloman v. Circuit City Stores (Maryland Ct App 05/05/2005).
My view: The contract-formation doctrine of "consideration" is a question of state law that is not preempted by the Federal Arbitration Act (FAA), so there can be different results from state-to-state. The Maryland case follows the analysis given in the Restatement of Contracts, and is probably the general rule (at least in cases not involving employment arbitration).
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Promise to arbitrate is consideration
May 08, 2005 by Ross Runkel at LawMemo
One way to prevent enforcement of an agreement to arbitrate is to show that the agreement lacked consideration. If no consideration, then no contract, then no arbitration requirement.
When Shedrick Payne sued his former employer, Kinko's moved to compel arbitration under an agreement Payne had signed. Payne argued there was no consideration, the trial court bought his argument and refused to compel him to arbitrate. According to the trial court, Kinko's gave no consideration in exchange for Payne's promise to arbitrate.
The Florida Court of Appeals reversed. The legal rule is simple. Kinko's agreement to submit to arbitration is sufficient consideration for Payne's agreement to submit to arbitration. Kinko's v. Payne (Florida Ct App 05/06/2005)
The court also trashed Payne's argument that he signed the agreement by mistake. Unless he was prevented from reading it or coerced into signing it, he's bound by what's in it.
My view: One of the state law doctrines that is not preempted by the Federal Arbitration Act (FAA) is the doctrine of consideration. Being state law, the rules vary from state to state. Florida has taken the modern view that "consideration" exists if one party has agreed to do something it otherwise had a legal right not to do. In this case, the right not to arbitrate. Other states sometimes make it more difficult to establish that consideration exists, often looking for some extra payment of money.
The doctrine of consideration historically developed as a means of sorting out enforceable agreements (business deals, mainly) from non-enforceable agreements (e.g. - promises to make gifts, social promises). Arbitration agreements are business deals. However, some courts use the doctrine of consideration as a method for refusing to enforce agreements that they don't like (that is, they don't like for some other reason).
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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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