Arbitration Waiver, Quirky Question # 131

Quirky Question # 131:

We have employment agreements with our employees that contain mandatory arbitration provisions.  Recently, one of our senior executives departed and joined a competitor.  This arguably violated his non-competition agreement, though that involves issues unrelated to my present inquiry.

We filed a lawsuit against our executive alleging breach of contract and other wrongful conduct.  At the same time we filed our Complaint, we filed a Motion for Preliminary Injunction and a Motion to Compel Arbitration.  We decided not to pursue the Motion to Compel Arbitration, electing instead to see what kind of result we could first obtain from the federal court on our preliminary injunction motion.  Our thinking was that if we could get a positive outcome from the federal judge on the injunction motion, we could keep the case in federal court and disregard the arbitration forum.  Unfortunately, the federal judge ruled against us on our motion for injunctive relief, so our former employee continues to compete with us.

We now are trying to schedule our motion to compel arbitration.  Our ex-employee’s attorney, however, claims that we “waived” our right to pursue our claims in arbitration.  How can that be?  We filed our Motion to Compel Arbitration at the beginning of the case, some four months ago, so our ex-employee was on notice all along regarding our desire to arbitrate.  Moreover, shouldn’t the arbitrator decide the issue of whether we “waived” our right to pursue arbitration?

Roy’s Analysis:

You ask whether your company’s conduct could be construed as a waiver of your company’s right to arbitrate.  Let’s start with the basics.  To establish an enforceable arbitration agreement, three conditions must be satisfied: a) a written agreement to arbitrate must exist; b) the dispute must fall within the scope of the arbitration agreement; and c) the party seeking arbitration must not have waived its right to arbitrate.

You stated that your company uses employment agreements that contain arbitration provisions, so the first requirement is satisfied.  Presumably, your former employee’s competition with your company falls within the scope of your arbitration provision.  So, the enforceability of the arbitration agreement will turn on whether your organization has waived its right to arbitrate.

Your last question was: “Who decides the issue of waiver – the court or the arbitrator?” This seemingly straightforward question is not quite as easy as one might assume, since the decision-maker on “waiver” is dependent on the type of waiver that is alleged.  When waiver claims are based on the argument that critical evidence has been lost due to the delay of the other party, the arbitrator decides the issue.  This type of waiver is referred to as “laches” or “estoppel” waiver.  (See, e.g., Parler vs. KFC Corp., 529 F. Supp. 2d 1009, 1012 (D. Minn. 2009)).

When the waiver argument is based on actions involving the initial pursuit of claims in court, however, a judge, not an arbitrator, decides whether waiver has occurred.  As the District Court recently summarized in the Parler decision, “courts generally decide whether a party has waived its right to arbitrate by ‘actively participat[ing] in a lawsuit or tak[ing] other actions inconsistent with the right to arbitration.’” Id. (internal citations omitted).  In short, for the type of waiver involved in the fact pattern you described, the court, not the arbitrator, decides the waiver issue.

Courts focus on three questions when assessing this type of waiver: 1) did the party seeking arbitration know of an existing right to arbitrate; 2) did the party act inconsistently with that right; and 3) did those inconsistent actions prejudice the other party?  That is the analytical framework that should be applied to your fact situation.

As you note, your company included an arbitration obligation.  Moreover, your firm clearly was aware of that provision (you pointed out that you filed a Motion to Compel Arbitration at the same time you filed the Complaint).  So the first question clearly would be answered in the affirmative.

The second inquiry – whether your company acted inconsistently with your right to arbitrate – will be the legal battleground on this issue.  As the courts have pointed out, this type of waiver is evaluated from the “totality of the circumstances” and must be assessed “in context.”  There are no per se rules dictating the way this issue is assessed.  So, courts have the opportunity to look at any and all factors they consider relevant to the waiver issue.

Further, courts have recognized that a party to an arbitration agreement “acts inconsistently” with its right to arbitrate when it: delays assertion of its right to arbitrate; actually participates in a lawsuit; substantially invokes the litigation machinery; or takes other actions inconsistent with the right to arbitrate.  These are the standards that will be applied to your company’s conduct.

In support of your argument that your company has not waived its arbitration rights, you will be able to point out that you filed your Motion to Compel Arbitration simultaneously with your filing of your Complaint.  Arguably, that action put your employee on notice of your intent to arbitrate.

The other facts you describe, however, are more problematic for you.  You note, for example, that you filed your Motion to Compel Arbitration.  But, apparently, you did not serve your arbitration motion on the opposing party, the action that starts the clock running on when the opposing side must respond to a pending motion.  Even worse, your company took no steps to pursue its Motion to Compel Arbitration.  Juxtapose that decision with your effort to pursue your Motion for a Preliminary Injunction.  In the period since the filing of your Complaint, you have been able to schedule, brief and argue your Preliminary Injunction Motion.  Presumably, you could have done the same with Motion to Compel Arbitration had you been serious about pursuing that motion.

You also state, “We decided not to pursue the Motion to Compel Arbitration, electing instead to see what kind of result we could first obtain from the federal court on our preliminary injunction motion.  Our thinking was that if we could get a positive outcome from the federal judge on the injunction motion, we could keep the case in federal court and disregard the arbitration forum.”

In sum, as you acknowledge, you made a conscious decision not to pursue arbitration initially, hoping first to obtain a favorable ruling from the federal court on your preliminary injunction motion.  You also point out that had your company been able to obtain a positive outcome from the federal court on your injunction motion, you would have elected to forego arbitration altogether.

These facts are particularly problematic for you.  As a number of courts have noted, filing a case in federal court and “seeking arbitration only after the litigation goes badly is acting inconsistently with the right to arbitrate.”  See, e.g., Parler, 529 F. Supp. 2nd at 1015.  As the Eighth Circuit emphasized in a recent decision, the defendant “wanted to see how the case was going to go in federal district court before deciding whether it would be better off there or in arbitration.  [Defendant] wanted to play ‘heads I win, tails you lose’ [which] is the worst possible reason for failing to move for arbitration sooner than it did.”  Hooper v. Advance America Cash Advance Centers of Missouri, Inc., No. 08-3252 (December 16, 2009).

The bottom line is that your company seemingly engaged in the very conduct that a number of courts have decried, first testing the waters in a judicial forum and only after suffering a setback, attempting to pursue the claim in arbitration.  Whether your company’s efforts to pursue your federal court action constituted a waiver of your right to pursue claims in arbitration will be for the court to decide but, as discussed above, some of the facts you revealed are problematic.

Now, some readers may be wondering whether I’ve missed an important point, specifically, the idea that your federal court lawsuit was only a Motion for a Preliminary Injunction, arguably intended to preserve the status quo pending a merits resolution of the underlying dispute.  With regard to this issue, I’d make several quick observations.  First, whether a company has the right to pursue an injunction motion in court (state or federal) in advance of an arbitration may depend, at least in part, on how the arbitration provision in the employment agreement is drafted.  Some arbitration provisions specifically state that a company may pursue an injunction in court without prejudice to the right to later pursue arbitration.  Other arbitration provisions do not.  As to the latter group of contracts, the federal circuits are divided on whether a company may first seek an injunction in court.  Second, note that a company could pursue an injunction in an arbitral forum.  Third, as noted above, the time lag between the employee’s departure and the filing of the Complaint and injunction motion may bear upon the court’s analysis.  How did the status quo change since the employee’s departure?

Finally, the third part of the waiver analysis is whether the opposing party would be prejudiced by requiring arbitration.  Here, too, there is a split among the circuit courts, with some minimizing the significance of this variable.  But, for those courts that do examine this issue, they look at the consequences for the adverse party, focusing on: a) how much has the party expended on the litigation in the period preceding the motion to compel arbitration; b) how much of the work already conducted would have to be repeated in the arbitration; and c) what costs would be associated with repeating some or all of the work in the arbitral forum.  Some courts also factor in the investment by the judiciary in the pre-arbitration period, with some sensitivity to the issue of wasting not just parties’, but judicial, resources as well.

As stated by the Eighth Circuit just one month ago in the Hooper case, a party must do “all it could reasonably have been expected to do to make the earliest feasible determination of whether to proceed in arbitration.” It does not appear to me that your company did so, a fact that enhances your opponent’s waiver argument.

Arbitration Agreements for Non-English-Speaking Employees, Quirky Question # 110

Quirky Question # 110:

Our company utilizes a mandatory arbitration policy for our employees.  In essence, our employees are required to arbitrate any claims relating to their employment relationship.  As is true for many other companies, our workforce has become increasingly diverse, and now includes many employees for whom English is a second language.  If we sought to enforce our arbitration agreement against someone with limited English language skills, would we encounter any problems?

Roy’s Analysis:

I apologize for offering an equivocal answer to your question about whether an arbitration agreement, written in English, could be enforced against someone with limited English-language skills, but, it depends.  Let’s start with two basic principles.  First, the Federal Arbitration Act (FAA), and the decisions interpreting that statute and parallel state statutes, make clear that courts favor the enforcement of arbitration agreements mutually agreed upon by the parties.  See, e.g., Moses H. Cone Mem’l. Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24 (1983) (noting the “liberal federal policy favoring arbitration agreements”).

Second, arbitration agreements are contracts.  As such, they must meet the requirements of any other valid contract – offer, acceptance and consideration.  For contracts to be enforceable, there must a “meeting of the minds”; in other words, an agreement as to the nature and content of the contract.  If one party’s English-language skills are so limited that he/she cannot understand the offer being made, it is difficult to understand how he/she could agree to, or “accept” the contract terms. 

As the last paragraph suggests, the key question, therefore, is just how “limited” are the language skills for your employees with “limited English language skills”?  Can they understand any English?  If not, how do you communicate with them regarding other important workplace policies?  Are your employees predominantly of one minority group who speak the same language (e.g., Hmong, Hispanic, etc.) or is your workforce a melting pot of various ethnicities, races, cultures, and languages?  If the former, do you have translators available to communicate with those whose English-language skills may be less well developed than their peers?  Or, can one or more of your employees who language skills are better translate policies or work directions for those whose language skills are poor?

The underlying theme of these observations is that your policies (including, but not limited to, your arbitration policies) need to be understandable to your workforce.  Early in this Blog’s existence, I wrote about the analogous context of whether sexual harassment policies needed to be understandable to a teenage workforce (check out Quirky Question # 12, accessible by using the “View by Topic” tab on the upper left hand corner of this page and scrolling down to the subject of ‘Sexual Harassment.’)  In that analysis, I pointed out that important workplace policies needed to be understandable by those in the workforce if an employer hoped to enforce the policies successfully.  Moreover, within reason, the policies needed to be tailored to the nature of the workforce, e.g., a workforce composed largely of teenagers.  The same general principles apply here.

Here are six practical suggestions for your consideration that should enhance the enforceability of your company’s arbitration policy.

First, consider producing your company’s most important policies, including your arbitration policies, in multiple languages.  If you suspect that a number of your employees do not understand your company’s policies due to their limited English-language skills, you should consider producing at least your most important policies in other languages.  The practicality of this approach will be influenced by the diversity of your workforce, the number of native languages spoken, the associated costs, etc.

Second, if you do not want to incur the costs associated with reproducing your policies in multiple languages, consider including a brief statement at the start of your policies (whether in an employee handbook or in other documents) that is written in multiple languages.  The statement could state simply something along the lines of: “The following Employee Handbook is written in English.  If, for any reason, you are unable to read the Handbook, please inform your HR representative as soon as possible.  If you inform an HR representative that you are unable to read the policies or do not understand them, we will assist you to read and understand the policies.  If you do not inform an HR representative that you need assistance, we will assume that you can read and understand the policies.”  Of course, you then need to follow through appropriately if one of your employees apprises you that he/she cannot read or understand your policies.

Third, as an alternative to publishing your policies in more than one language, consider using a translator to help certain members of your workforce understand your policies.  In connection with this effort, ensure that your employees execute an acknowledgement form, in their native languages, stating that they have had the policies translated and explained to them.  (An interesting question, beyond the scope of this analysis, is whether an employee who signed an arbitration agreement and who was hired based on his/her execution of that document, would need to be provided any additional consideration if you later determined that he/she did not originally understand what he/she was signing.)

Fourth, consider training all of your employees periodically with regard to your company’s policies.  As you conduct this training, ensure sufficient interaction with your employees to ascertain whether they are able to understand your policies as written.

Fifth, (and I confess to some reservations about this next option), consider training a subset of your employees, i.e., those whose English-language skills are suspect.  Depending on the size of your workforce, you could consider having a HR representative meet with these employees to ask them about several of your most important company policies, including your arbitration policy.  (Three admonitions with respect to this approach.  1)  Undertake this effort carefully and diplomatically.  2) Explain carefully to the affected employees the legitimate purpose of your inquiries, so this group does not feel discriminated against or mistreated in any way.  3)  Ensure that the company does not take any adverse action against those whose understanding of your policies may be limited due to deficiencies in their English-language skills.)

Sixth, regardless of how you approach all of the recommendations set forth above, ensure that your key policies are not buried in a lengthy handbook or other document.  Display them prominently.  Where appropriate, use separate acknowledgement forms for each important policy.

In a recent decision by the United States District Court for the District of Maryland, Oumar Dieng v. College Park Hyundai, Civil Action No. DKC 2009-0068 (July 9, 2009), the District Court addressed a number of issues involved in the enforceability of arbitration agreements, including whether the agreements were enforceable as to employees whose English-language skills were limited.  Unfortunately, the Court’s opinion does not shed much light on the issue because the Court concluded, with little explanation, that while English was not the first language of the plaintiffs, “all Plaintiffs are fully capable of speaking, reading and writing in English.”

The plaintiffs in Dieng claimed that they were not paid the commissions for vehicles they sold and were required to work in excess of 40 hours per week without receiving overtime compensation.  Plaintiffs sued for violations of the FLSA, the Maryland Wage Payment Statute, and common law claims.  The Defendant auto dealer moved to compel arbitration based on the arbitration clause set forth in the employee handbook.  The Court granted the Motion to Compel notwithstanding the plaintiffs’ claims that the agreement: a) lacked consideration; b) lacked mutuality; c) was unconscionable both procedurally and substantively; and d) was void as against public policy.  (I won’t discuss the ways in which the Court dealt with each of the arguments advanced by the plaintiffs but they all were rejected by the Court.  If your company is confronting any of these issues, however, you might find the opinion an interesting read.)

The lack of English fluency played out in the procedural unconscionability argument.  The plaintiffs argued that because English was not their first language, they needed time to consult with counsel prior to executing the arbitration agreement.  Similarly, plaintiffs argued that the defendant failed to explain how arbitration worked or how their rights would be affected under the agreement.  The court rejected these arguments, noting, “In its simplest terms, Plaintiffs argue that they should not be held to an agreement that they signed, but not have or take the time to read and understand.”  The court pointed out that the arbitration provision was on the second page of a two-page document, and was written in bold, underlined and CAPITALIZED lettering.  Given the prominence of the arbitration provision and the Court’s perception that although English was not the native language of the plaintiffs, they all were capable of reading and understanding English, the Court was not persuaded by the plaintiffs’ arguments.

The Dieng opinion does not provide much insight into how the issue might have been resolved if the plaintiffs truly were not able to read or understand English.; But, as referenced in the recommendations above, the decision does highlight another way in which an employer can insulate itself from a challenge to the arbitration agreement – display it prominently and clearly, and have the employees acknowledge reading and understanding the document. Another option available to employers, but not discussed by the Court, would be to provide prospective employees with a copy of the arbitration policy several days in advance of their hiring, with encouragement that they seek legal guidance or other assistance to read and understand the policy. Taking these steps should ensure that an otherwise valid policy is not subject to challenge.