A Well-Drafted Arbitration Agreement Can Apply To Disputes Arising Before Parties’ Relationship And To Disputes With Successors

[author: Liz Kramer]

Three federal circuit courts have recently looked at the shelf-life of an arbitration agreement.  Can it apply even before the contract is effective?  What about after a successor takes over the relationship?  What if one party unilaterally changes its terms?  The answer is that a properly worded arbitration agreement can apply in all those instances, with appropriate notice.

In Gove v. Career Systems Development Corp., ___ F.3d ___, 2012 WL 2892472 (1st Cir. July 17, 2012), a pregnant woman applied for a job and was rejected.  After she sued in federal court alleging gender discrimination, the defendant moved to compel arbitration based on a provision in the job application stating that her “submission of this Employment Application constitutes [her] agreement that the procedure set forth in the Arbitration Agreement will also be used to resolve all pre-employment disputes.”  The district court denied the motion to compel and the First Circuit affirmed that ruling. 

The appellate court found that the language “pre-employment disputes” was susceptible to two meanings: either the period of time between applying and discovering whether or not the applicant obtained the position; or only the process leading up to an actual hiring of the applicant, because “pre-employment” assumes employment.  Therefore, the agreement was ambiguous and the court construed it against the drafter, the defendant.  Interestingly, the court noted that the contract rule of interpreting language against the drafter conflicted with the arbitration rule of construing ambiguity in favor of arbitration, and said that under the applicable state law, the contract interpretation rule trumped (which elicited a significant dissent).

In another employment dispute, Dawson v. Rent-A-Center, Inc., 2012 WL 3038175 (6th Cir. 2012), the employee had entered into an arbitration agreement with Rent-Way, Inc.  After Rent-Way became a subsidiary of Rent-A-Center, Inc. through a merger, the employee sued Rent-A-Center for racial discrimination.  Rent-A-Center moved to compel arbitration and the district court denied the motion, finding insufficient continuity between Rent-Way and Rent-A-Center.  The Sixth Circuit reversed, noting that the arbitration agreement defined Rent-Way to include “its present and future parents, subsidiaries, affiliates, successors and assigns.”  Because Rent-A-Center is a “successor” to Rent-Way by virtue of the merger, and because the applicable state law binds all successor corporations to assume the predecessors’s liabilities, the court concluded that Rent-A-Center could enforce the arbitration agreement at issue.

Filho v. Safra Nat’l Bank of N.Y., 2012 WL 3023805 (2d Cir. July 25, 2012), dealt with a successor agreement, not a successor corporation.  In it, a customer’s original agreement with a bank did not require arbitration.  But, it did authorize the Bank to change the terms of the agreement, and three years later the bank changed its general terms to include an arbitration clause.  However, the customer said he never received notice that the terms had changed.  Because the Second Circuit found the bank had not sufficiently proven that the customer received actual or constructive notice of the change in the term, it remanded the case to the district court for a trial on that issue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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