Arbitration agreements often seem one-sided, and in some employment cases, they may seem downright predatory.
But as the Fifth Circuit affirmed in their most recent look at arbitration agreements, even an agreement that allows the employer to unilaterally terminate is not illusory -- it's legal.
The Illusion of an Arbitration Agreement
Arbitration agreements are some of the most heinous contractual provisions for a reason. Even in cases where other circuits have found them to be one-sided and adhesive, they're almost always upheld. This leaves the hapless layperson who unwittingly agrees to arbitration in a very vulnerable position -- especially when he or she has no right to back out.
In Jorge Lizalde v. Vista Quality Markets, Vista Quality Markets, compelled arbitration on an employee, Lizalde, for his on-the-job injury claim on the strength of their Arbitration Agreement -- which can be terminated by Vista under certain limited circumstances. However, the Arbitration Agreement uses Lizalde's company benefits payments as consideration for the agreement, which the company may terminate at any time.
Not surprisingly, Lizalde argued that by reading the benefits plan together with the Arbitration Agreement essentially gave Vista the power to terminate the Agreement without any constraints. This, he argued, rendered the agreement illusory. The district court agreed and denied Vista's motion to compel arbitration.
But the Fifth Circuit found that under Texas contract law, there actually is some restraint on Vista to make the Agreement enforceable.
Limited Powers to Terminate Are OK
All parties agreed that Texas contract law governed this case, and the law seems pretty cut and dried. The Texas Supreme Court found that for arbitration agreements, a "[m]utual agreement to arbitrate claims" is sufficient consideration for an arbitration, but the agreement may be illusory if one party can avoid arbitration by terminating the agreement altogether.
But not all termination power makes an agreement illusory. Following Texas precedent, the Lizalde Court reviewed these three factors for termination power:
- Extends only to prospective claims
- Applies equally to employer's and employee's claims
- Advance notice to employee is required prior to effective termination
By itself, the Arbitration Agreement contains all three elements (including a 10-day notice period before effective termination), but Vista can still unilaterally terminate the benefits plan at any time, torpedoing the Arbitration Agreement.
The Agreements Aren't One Contract
The Fifth Circuit pulled a rabbit out of their hat on this one, interpreting both agreements in a way that termination only applied to the agreement in which it was found. Put another way, the Lizalde Court basically decided that the benefits plan termination clause didn't apply to the Arbitration Agreement.
The key was to interpret all contracts in a way that doesn't make either one meaningless. Vista probably didn't intend to write conflicting termination clauses, so the court interpreted them as being self-contained and consistent.
Bottom Line
Courts will bend over backwards to uphold arbitration agreements, even if it means adopting a contract interpretation that salvages the agreement -- even when the promises to arbitrate seem illusory.
Related Resources:
- Employees Must Abide by Mandatory Arbitration Agreements (FindLaw's U.S. 3rd Circuit Blog)
- To Compel Arbitration, There Must First Be Agreement to Arbitrate (FindLaw's U.S. 3rd Circuit Blog)
- It's Called 'Binding Arbitration' for a Reason (FindLaw's U.S. 10th Circuit Blog)
- 5th Circuit to Decide Arbitration Agreement Controversy (FindLaw's U.S. 5th Circuit Blog)
