Enforcing Arbitration Agreements, Quirky Question # 90

Quirky Question # 90:

Several years ago our company adopted as arbitration policy.  We felt that this was one way we could control our employment litigation costs.  Our arbitration policy is set forth in our Employee Handbook, which is available to our employees on line.  We encourage our employees to review the Handbook if they have any questions about our company’s policies.  Our system does not allow us to track who accesses the Handbook and who does not.  We recently terminated one of our employees.  He now claims that our decision was discriminatory and he filed a Charge of Discrimination.  He then obtained a right to sue letter and filed a lawsuit alleging race and age discrimination.  We intend to file a motion to compel arbitration.  Is there anything we should be concerned about  before proceeding to arbitration?

Dorsey’s Analysis:

As the very recent U.S. Supreme Court decision in the 14 Penn Plaza case illustrates, courts will enforce employment arbitration agreements.  (See Dorsey’s analysis of this decision, posted Monday, April 20, 2009.)  n 14 Penn Plaza, the nation’s high court enforced an arbitration agreement set forth in a collective bargaining agreement, requiring employees to arbitrate employment discrimination claims.  Many other courts have enforced arbitration agreements in a variety of different types of employment agreements.

The question you pose is whether an arbitration agreement contained in your Employee Handbook is enforceable.  Complicating the matter somewhat is that your Handbook is available electronically on-line rather than in hard copy.  Moreover, as you noted, your company does not have the capability to track who accesses your Handbook on-line and who does not.  As a consequence, you don’t really know which of your employees has reviewed your Handbook.  For that matter, you don’t even know which of your employees knows your company’s Handbook contains an arbitration provision.

Given that arbitration agreements are contracts, and subject to standard contract analysis (offer, acceptance, consideration), the factual context you describe may be problematic.  A fundamental question is whether, in the context you described, there has been a meeting of the minds with respect to the agreement to arbitrate.  As I’m sure you can appreciate, an employee who did not ever review your Employee Handbook on line, or who may even have reviewed the document but not indicated his/her assent to its provisions, may be able to advance a persuasive argument that he/she did not agree to arbitrate any of his/her employment claims.

Similar issues arose in the recent case of Kirleis v. Dickie, McCamey & Chilcote, P.C., No. 07-3504 (3rd Cir. March 24, 2009).  n Kirleis, a partner in a law firm challenged her firm’s mandatory arbitration policy.  When Kirleis filed complaints against her firm for sex discrimination, retaliation and hostile work environment under federal and state law, the law firm moved to compel arbitration pursuant to the firm’s By-Laws.  The firm’s By-Laws were set forth on-line.  Kirleis, however, challenged the legitimacy of the By-Laws’ arbitration provision, arguing that she: a) had never been provided with a copy of the firm’s By-Laws; b) was never informed the By-Laws contained an arbitration provision; c) never signed any agreement or other document referring to or incorporating the arbitration provision; and d) never agreed to arbitrate her claims.

The appellate court emphasized that the determination of whether the parties agreed to arbitrate turns on “ordinary state-law principles that govern the formation of contracts.”  Thus, before compelling arbitration pursuant to the Federal Arbitration Act, the court had to determine whether a “valid agreement to arbitrate exists,” and whether the “particular dispute falls within the scope of that agreement.”  The Third Circuit then assessed the state-law principles governing the formation of contracts – “(1) a mutual manifestation of an intention to be bound; (2) terms sufficiently definite to be enforced; and (3) consideration.”  The Court noted that under Pennsylvania law, arbitration agreements must be sufficiently specific to cover the employee’s claims and the employee must have “expressly agreed” to abide by the arbitration agreement.

Relying on earlier Pennsylvania decisions, one involving an arbitration agreement contained in an employee handbook that an employee had not received, the federal Court of Appeals concluded that Kirleis’s claims were not subject to arbitration.  First, the Court found that because Kirleis had not received a copy of the law firm’s By-Laws, she could not have agreed to arbitrate her claims.  Second, the Court observed that even had the By-Laws been provided to her, “a mere offer is insufficient to create a triable issue as to the existence of a contract to arbitrate.”  Because Kirleis had presented evidence that she did not agree to arbitrate her claims, the court was unwilling to compel arbitration.

The defendant law firm argued that Kirleis, as a shareholder/director of the firm, was on “constructive notice of the arbitration provision set forth in the By-Laws” and her “implied intent” to be bound thereby.  The appellate court recognized the “tension” between the law of contract and corporate law principles, but concluded that the contract law requirements predominated.  Finding that under Pennsylvania law, “explicit agreement is essential to the formation of an enforceable arbitration contract,” the notion that Kirleis “impliedly agreed to arbitrate “must fail.”

The principles of the Kirleis decision and other arbitration cases llustrate the problems your company may confront in trying to enforce the arbitration agreement set forth in your on-line Employee Handbook.  It would appear from the facts you presented that your company has not distributed the Handbook in hard-copy form.  Moreover, it is unclear whether all employees have access to your Handbook on-line.  (Does every employee have a company-issued computer?  For those employees not issued a computer, are they provided access to computer terminals on a regular basis?  During orientation or other training programs, are your employees advised that they should review your company’s handbook on-line?  When your company adopts handbook changes, are employees notified that they should review the changes that have been made?)  Given the fact that it’s unclear which of your employees have been provided access to your company’s handbook, and that you cannot monitor which of your employees accesses your on-line information, you also would be unable to rebut any contention that the particular employee who has filed suit might make regarding the absence of knowledge.

As the Kirleis case illustrates, even if you could establish that the employee had seen your Employee Handbook on-line, your company still would confront some additional issues.  First, you also would need to establish that the employee knew of the arbitration provision.  Second, you would need to establish that the employee assented to arbitrate his claims.  And, third, you would need to establish that there was consideration to support the agreement to arbitrate.  f the arbitration agreement was in place when the employee joined your Company, and the other elements of contract formation are satisfied, the consideration question should not present a problem.  But, if the arbitration requirement was put in place after the employee already had commenced employment with your company, the question of whether there was consideration sufficient to support the agreement may be more difficult to establish.

Bottom line, you may have some problems trying to enforce the arbitration provision in this situation. Rather than risk an adverse judicial determination holding that the arbitration agreement is not enforceable, it may be more prudent for your Company to take appropriate steps to ensure that the arbitration provision is enforceable in the future.

Dorsey & Whitney

Dorsey & Whitney

Dorsey is a business law firm, applying a business perspective to clients' needs. We make it our first priority to know the context in which you do business - your market, your competitors, your industry.

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