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Arbitration Agreement Scrutinized by the Third Circuit

Posted on April 02, 2012

Agreements compelling employees to submit employment-related claims to arbitration have become a standard part of many employment contracts. However, the language employers can use and the limitations employers can impose in these agreements are closely regulated by both law and court decisions. The Third Circuit Court of Appeals recently analyzed the provisions of an arbitration agreement that required the employer and employee to submit to arbitration “any and all claims and disputes… that are related in any way to [the employee’s] employment or termination of employment.” In Quillon v. Tenet HealthSystem Philadelphia, No. 11-393 (3d. Cir. March 14, 2012), an employee ignored the agreement and filed federal and state claims in federal district court, arguing that the arbitration agreement was unconscionable and, therefore, unenforceable. Id. at 8. The court disagreed. The court found that the agreement was enforceable and remanded the case to the lower court with instructions to grant the employer’s motion to compel arbitration under the terms of the agreement. Id. at 31.

In Pennsylvania, courts determine whether a contract is unconscionable by considering both types of unconscionablility: substantive and procedural. A contract is substantively unconscionable when the opposing party did not assent to the agreement and it unreasonably favors the party asserting the contract. The Quillon court analyzed several provisions of the employer’s arbitration agreement to determine its substantive enforceability.

First, the court considered the agreement’s potential prohibition on an employee’s recovery of attorneys’ fees. Id. at 16. Generally, provisions requiring parties to be responsible for their own expenses are unconscionable because federal statutes allow fee-shifting as a remedy. This agreement provided that “[the employee] and the company will be responsible for the fees and costs of [their] own respective legal counsel, if any, and any other expenses and costs….” Id. at 17. However, the agreement also gave the arbitrator the authority to award any remedies otherwise available under applicable law. Id. The first clause alone would be unconscionable, but the second clause made the question of unconscionability an ambiguous one. Ambiguities should be resolved by arbitrators and, therefore, this provision was not substantively unconscionable in this case. Id. at 18. The question was left for an arbitrator to decide. Importantly, employers should remember that arbitration agreements cannot limit fee-shifting as a remedy as this one did, or the contract could be deemed substantively unconscionable. This clause was saved only by the delegation of authority to award remedies to the arbitrator.

Second, the court considered the possibility that the agreement barred class action arbitration which could make the agreement substantively unconscionable. Id. at 19. This agreement did not expressly include a class action waiver, an omission that tends to indicate that class actions are prohibited. However, the court decided that this agreement was ambiguous, and the final determination of whether an ambiguous agreement prohibits class action is left for the arbitrator to interpret. Id. at 22. Additionally, the court deemed a Pennsylvania law prohibiting class action waivers preempted by the Federal Arbitration Act, which allows class action waivers. Id. at 22. Therefore, the meaning of the agreement’s silence on class action arbitration could be determined by an arbitrator and was not substantively unconscionable, and the Pennsylvania law that attempted to eliminate class action waivers could not bar use of these waivers. Employers may use class action waivers in arbitration agreements.

Third, the court considered the possibility that the employer could use the in-house dispute resolution process to “run out the clock” on the applicable statute of limitations. According to the court, time limits in arbitration agreements are substantively unconscionable only if they are “clearly unreasonable and unduly favorable to the employer.” Id. at 24. The employer’s in-house process involved several internal steps and procedures and provided approximate time limits in which the employer would respond. The court decided that the employer’s time guidelines were reasonable in this case and even if they were not, the employee could have filed a motion to compel arbitration to pursue her claim. Id. at 25. As a result, the in-house dispute resolution process did not render the agreement substantively unconscionable. Employers may utilize reasonable procedures with reasonable time constraints as part of their dispute resolution process. Overall, the agreement was not substantively unconscionable.

In addition to finding that the the agreement was not substantively unconscionable, the Court also decided that the agreement was not procedurally unconscionable. An agreement is procedurally unconscionable when the weaker party has a lack of meaningful choice in accepting the contract, and the agreement was formed through oppression and unfair surprise. Id. at 26-7. Employment contracts are considered normal agreements and do not typically trigger unconscionability concerns, unless an employee depends on the employer for a service or cannot understand the terms of the contract on his or her own. While the employee in this case was in a position of weaker power as an employee of a multi-national corporation, her position as an employee did not put her in a demonstrably unequal bargaining position. The employee was college educated and could read what she signed. She agreed to the arbitration agreement twice: at her initial hiring, and again once she returned to the company after leaving for a position elsewhere. Even if the employee did not remember signing the employment agreement initially, she signed it again, demonstrating that she should have known about the policy. Id. at 29-30. Parties are assumed to know the contents of the documents they sign, and this case did not provide a reason to deviate from that rule. The employer did not have oppressive power over this employee, and the employee did not lack a meaningful choice in agreeing to arbitrate. Id. at 30. Therefore, the arbitration agreement was not procedurally unconscionable. Since the agreement was neither substantively nor procedurally unconscionable, the employer could force the employee to bring her claims to arbitration as she agreed to do by signing the contract.

Taken as a whole, the Quillon case serves as a good reminder that the provisions of arbitration agreements are highly scrutinized by courts. Many clauses can implicate legal issues. While employers have some leeway to adapt these agreements to their needs, employers should seriously consider consulting an attorney before implementing an arbitration agreement as part of their employment contracts.

For help with arbitration agreements in your business, please contact any Knox Labor and Employment attorney at 814-459-2800.

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