Businesses seeking to enforce an arbitration agreement against an employee must show that the employee had actual notice of the agreement, and the employee’s failure to opt out is not enough, a federal judge in New Jersey has ruled.

The ruling underscores the importance of having the proper procedures in place to ensure that arbitration agreements can withstand scrutiny in court.

The takeaway from the court’s ruling in Schmell v. Morgan Stanley & Co., Inc. is that employers must do more than simply send a policy or agreement and expect it to be binding on its employees. Employers should require signed, acknowledgements of receipt to ensure that the employee received it and had an opportunity to review.    

The plaintiff, Craig Schmell, is a former senior vice president for Morgan Stanley who claims he was fired after telling the company that he was writing a self-help book that referenced his history with drug and alcohol abuse. He brought claims for disability discrimination and Morgan Stanley sought to compel arbitration.

Like many employers, Morgan Stanley emailed notice of the arbitration agreement to its employees and noted that the agreement was mandatory unless the employee opted out. The notice said that by continuing their employment without opting out, employees had accepted the agreement.

But Schmell certified that he had no recollection of receiving, viewing, or opening the email, nor any memory of viewing the agreement on any of the company’s internal systems.

Judge Anne Thompson refused to enforcement the arbitration agreement, finding that Morgan Stanley had presented no direct evidence that Schmell opened and viewed the email, but instead offered only circumstantial evidence that he was using his email on the day the agreement was sent. 

Without any proof that the agreement was reviewed by the Schmell, the judge held that Schmell’s certification to the contrary created a “genuine dispute” about whether an agreement was actually reached. Relying on prior precedent, Judge Thompson said she recognized that an arbitration provision cannot be enforced without demonstrating a willingness and intent to be bound. Because there was no evidence that Plaintiff had even seen the agreement, the Plaintiff was therefore, not required to arbitrate his claim.