Fifth Circuit Hands Down Mixed Ruling on Validity of Later-Added Arbitration Clause

by Hinshaw & Culbertson LLP

Employers must always be careful when adding an arbitration clause to an existing employment agreement.  The amendment process becomes even trickier when the employment relationship is governed by multiple documents.That was the situation in Sharpe v. AmeriPlan, where the Fifth Circuit analyzed whether an arbitration provision that an employer added to one contract could be harmonized with provisions in two other contracts that defined the employment relationship.

The Fifth Circuit faced two fundamental issues: (1) whether the later-added arbitration requirement was compatible with the forum selection clause contained in another document, and (2) whether the arbitration clause could be reconciled with provisions in other contracts requiring that disputes first be submitted to non-binding mediation.  The court ultimately held that the arbitration requirement could be harmonized with the forum selection clause, but not with the mediation requirement under these facts.  The case provides potentially important guidance for employers to follow when considering whether they can lawfully add an arbitration provision to an existing agreement.

The employer, AmeriPlan, operated through a network of independent business owners (“IBOs”) who sold health plans and also recruited additional IBOs to work beneath them.  The IBOs attained the title of “Sales Director” after they had achieved a certain sales volume.  In this multi-level structure, the higher-level IBOs would receive a percentage of the profits from the “down line” IBOs they recruited.  The employment agreement between AmeriPlan and the Sales Directors was governed by three contracts: (1) the Broker Application and Agreement, (2) the Sales Director Agreement, and (3) the Policies and Procedures Manual.  None of the agreements contained an arbitration provision when the plaintiffs entered into them. 

In November 2010, the company added an arbitration clause to the Policies and Procedures Manual, but not to the other documents.  The validity of that arbitration clause came into dispute in May 2012 when plaintiff Sales Directors filed a class action in Los Angeles County Superior Court claiming that the company had failed to pay the promised residual income.  The case was transferred to a federal court in Texas, where a district court judge ordered the case dismissed in favor of arbitration.  On appeal, plaintiffs challenged the validity of the arbitration provision on several  grounds based on the different versions of the contracts they had signed.

The Arbitration Provision Versus the Forum Selection Clause

One Sales Director plaintiff argued that the arbitration provision conflicted with a forum selection clause contained in her Sales Director Agreement.  That clause stated, in part:  “Any action brought on matters relating to this Agreement shall be maintained in Dallas, Dallas County, Texas."

The court held that no inherent conflict existed between the provisions because the forum selection clause merely established a venue for legal proceedings, which might include arbitration.  “Requiring that any lawsuit be filed in Dallas is not incompatible with the later-added arbitration requirement because lawsuits often proceed arbitration,” the court stated.  “A forum selection clause thus still has effect in determining where any lawsuit – even one that may result in an order compelling arbitration – must be brought."  Accordingly, the court held that the later-added arbitration provision was not incompatible with the previously existing forum selection clause.

The Arbitration Provision Versus the Mediation Provision

Other Sales Director plaintiffs argued that the arbitration clause conflicted with the dispute resolution provisions in their Sales Director Agreements.  These provisions set forth a detailed process for resolving disputes, which included (1) a requirement that all conflicts be submitted to non-binding mediation and then, if the dispute is not resolved, (2) a provision expressly allowing for litigation of the claims.

The court held that these “detailed and expansive” provisions were in direct conflict with the new arbitration-only provision – especially considering that the Sales Director Agreements explicitly allowed Sales Directors to take their cases to court.  “Those expansive dispute resolution provisions cannot be harmonized with the similarly expansive arbitration provision without rendering the dispute resolution proceedings meaningless,” the court stated.

The lesson here is that courts may look skeptically at arbitration-only provisions if other portions of the employment agreement expressly allow employees to sue in state of federal court.  The Sharpe case highlights the challenges employers may face when amending an existing employment agreement.  Determining when courts will enforce a later-added arbitration agreement is not always self evident. 

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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