NY Federal Court Decision Highlights Importance of Careful Drafting of Arbitration Program

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Morgan LewisThe US District Court for the Southern District of New York (SDNY) ruled that an employer’s mandatory arbitration program was unenforceable because its terms were contained in an employee handbook and did not create a binding contractual obligation to arbitrate claims. The decision in Seltzer v. Clark Associates, LLC serves as a reminder for employers who are implementing or renewing arbitration agreements to ensure that they do so in a manner that will meet the minimum standards of contract formation.

BACKGROUND

The plaintiff-employees in Seltzer alleged they had been wrongfully terminated after they notified their employer, a law firm, about the allegedly fraudulent billing practices of another employee. During the course of their employment, the plaintiffs each had received a copy of the firm’s employee handbook, which included a provision describing the firm’s “mandatory arbitration program” in some detail. The arbitration provision explicitly stated that the program covered “all employment related disputes” and purported to be mutually binding on employer and employee. Both plaintiffs signed a written acknowledgment of receipt of the handbook at the start of their employment and a few years later when the firm issued an updated version. The acknowledgment stated, “I understand that [the handbook] contains information about the employment policies and practices of the firm” and “I agree to read and comply with this Employee Handbook.”

After plaintiffs filed their complaint in the SDNY, defendant moved to compel them to arbitrate their claims pursuant to the arbitration provision in the employee handbook. At the same time, the defendant commenced separate arbitrations against each plaintiff pertaining to the same facts alleged in the court complaint. Plaintiffs then moved for an order staying those arbitrations until the defendant’s motion to compel arbitration was resolved. Senior District Judge Alvin K. Hellerstein acknowledged that there was a strong public policy in favor of arbitration, but found that the arbitration provision in the employee handbook was not an enforceable contract. Accordingly, the court denied the defendant’s motion to compel and ruled that plaintiffs’ request for a stay of the arbitrations was moot because the plaintiffs had no duty to defend against defendant’s claims in the arbitration.

THE DECISION

The court relied on two key facts to support its holding – the handbook’s express disclaimer of any contractual obligations and its failure to clarify that arbitration was a required condition of employment.

First, the court observed that the handbook contained an explicit disclaimer that the policies contained therein were only “guidelines” and were “not intended to create contractual obligations with respect to any matters.” The handbook acknowledgement that the plaintiffs signed also contained similar language disclaiming any contractual obligations in the handbook. Judge Hellerstein held that “an employer cannot rely on the very same terms to snatch away employees’ contractual rights with one hand while imposing asymmetric contractual duties with the other.”

Second, the court took issue with the fact that the handbook did not notify employees that agreeing to arbitrate was a condition of their employment, nor did it otherwise explain that employees were foregoing their right to bring claims in a court. The court noted that several other provisions in the handbook were expressly identified as a “condition of employment,” but similar language was absent from the arbitration provision. The court found “a reasonable employee [would] suspect that the omission of any comparable language in the arbitration provision was more than a coincidence.”

The court concluded: “[i]n sum, the Handbook, which both renounces contractual effect and lacks any indication that agreeing to arbitrate is a condition of employment, does not create an enforceable contract restricting Plaintiffs to arbitration.”

Further, in ruling on the plaintiffs’ motion for a stay, the court held “[a]t most, the Handbook’s arbitration provision outlines the protocol by which arbitration may be pursued by either party on consent.” Accordingly, the court held that a stay was unnecessary because the plaintiffs had no obligation to participate in the arbitration.

TAKEAWAYS

The court’s decision highlights that notwithstanding several recent US Supreme Court decisions[1] reaffirming a national policy in favor of arbitration as embodied in the Federal Arbitration Act, courts will perform a strict and searching review of arbitration agreements to ensure the basic elements of contract formation as to the arbitration provision are met.

There are several best practices employers can follow when adopting or expanding employee arbitration programs to avoid a similar result as the defendant in Seltzer. First, employers should consider using separate arbitration agreements that satisfy all of the required contractual elements. Second, if an employer chooses to include an arbitration provision in a handbook, the provision should contain an explicit representation that the arbitration provision itself is a binding contract, as well as a term and condition of employment. Finally, employers should ensure that the terms advise employees in plain language that they are waiving their right to bring an action in court for any claims covered by the agreement.

 

[1] Read our prior alerts on this topic: Supreme Court Upholds Class Waivers in Employment Arbitration Agreements; Supreme Court Enforces Class Action Waivers in Employment Arbitration Agreements; and US Supreme Court Holds No Class Arbitration Absent Express Consent: Four Things to Know.

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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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