FORCING ARBITRATION OF NON-SUBSCRIBER INJURY CLAIMS

(YES, YOU CAN!)

I. How Does "Mandatory Binding Arbitration" Fit Into My Business?

A. Do I Need An Insurance Policy or ERISA Plan to Compel Arbitration?

(No. You can install a "stand-alone" arbitration program.)

Non-subscribing Texas employers who do not purchase occupational accident insurance might want to consider a stand-alone policy of binding arbitration for workplace injury claims. Your arbitration program is not dependent on purchasing an accident insurance policy or having an ERISA Plan. It works well with them, but it can easily stand alone.

Claim arbitration can be made a condition of continued "at-will" employment with your company. However, it is critical for the at-will employee to receive notice of your claim arbitration requirement, and to clearly understand that injury claims must be arbitrated if he or she continues employment with you. When your at-will employee (i) has received a clear and simple notice; (ii) understands the conditions of employment; and (iii) continues to work for you; (iv) then, he or she has accepted arbitration as the exclusive dispute resolution mechanism for workplace injury claims. No court litigation.

B. The Halliburton Case.

The Texas Supreme Court ruled on May 30, 2002 that continuing employment by an at-will employee is "deemed acceptance" of a workplace dispute resolution program, including its mandatory binding arbitration provisions. In re Halliburton Company, et al., 80 S.W.3d 566 (Tex. 2002). Halliburton sent notice of a new Dispute Resolution Program (the "Program"), which included an arbitration clause, to all employees. This Program provided that binding arbitration was the exclusive method to resolve all disputes between Halliburton and its employees. Id. at 568. The notice, given in November 1997, stated that by continuing to work after January 1, 1998, the employees would be accepting the Program. Id. The Plaintiff in the case was an employee who continued to work for Halliburton after January 1, 1998. This employee did not dispute that he received the notice, but he claimed that he did not fully understand it. Id. Sometime during 1998, Halliburton demoted him, and he brought suit alleging wrongful demotion under the Texas Commission on Human Rights Act. Id. The Texas Supreme Court eventually held that continued at-will employment, after proper notice, constitutes acceptance of the claim arbitration program. Id. at 569.

The Halliburton Court cited In re Jebbia, 26 S.W.3d 753 (Tex. App.—Houston [14th Dist.] 2000, no pet.) (a case handled by our law firm) to reject the argument that an arbitration agreement lacks mutual consideration because the employment relationship is "at-will." Halliburton, 80 S.W.3d at 569. This case reversed a number of prior cases which held the opposite. Halliburton now provides the arbitration model by which to judge arbitration agreements. The Texas Supreme Court made it clear that so long as an arbitration agreement: (1) meets the requirements for altering at-will employment; (2) is neither procedurally nor substantively unconscionable; and (3) is otherwise enforceable under general Texas contract principles, it will be enforced by Texas courts. Id. at 572-73.

 C. Are there other specific Laws Governing Arbitration? (Yes.)

Under the Federal Arbitration Act (the "FAA"), an agreement to arbitrate which is valid under general principles of Texas contract law, and which touches upon interstate commerce, is "valid, irrevocable, and enforceable" as a matter of federal law. 9 U.S.C. § 2. The FAA has led to a settled body of federal cases supporting mandatory claim arbitration. Arbitration does not prohibit an employee negligence claim against you. Neither you nor your employee give up any substantive rights. But the injury claim, rather than being a lawsuit in a court, is decided by an arbitrator, or a panel of three arbitrators. An arbitration agreement simply moves the forum for the claim from a court to an arbitration panel. You will still be sued, but you can compel the claim out of court and into an arbitration forum.

Texas courts have long favored using arbitration to resolve disputes. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737 (Tex. 2005); see also Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944 (Tex. 1996) (there is a presumption favoring arbitration and application of the FAA). Both the FAA and Texas law (through the Texas General Arbitration Act) provide a framework for binding arbitration. But, the Texas General Arbitration Act does not apply to any claim for personal injury (including workplace injuries) except with the advice of counsel to both parties, evidenced by a written agreement signed by both parties and by counsel for each party. TEX. CIV. PRAC. REM. CODE ANN. § 171.002(c) (2005).

Mandatory claim arbitration can also be required through your ERISA documents. Non-subscriber "occ-accident" insurance policies, issued by life insurance carriers, cannot provide legal indemnity coverage (i.e., protection against negligence claims). However, adding mandatory binding claim arbitration via your ERISA Plan can reduce the impact of workplace injuries. Properly structured and properly implemented, your ERISA Plan can make the life insurance product much more effective.

This is the subject of a separate memo, titled "Non-subscriber Workplace Injury Benefit Plans," available free from us at www.texasatty.com.

D. Are Pre-Injury Claim "Waivers" any good?

Prior to June 17, 2001, a small number of Non-subscribers used pre-injury claim waivers to protect themselves against common-law claims. These waivers were typically executed as ERISA plan adoption documents prior to any injury, and provided a waiver of future claims in exchange for ERISA plan coverage and benefits.

On March 29, 2001, with Texas appeals courts split on the issue, the Texas Supreme Court ruled that pre-injury waivers were enforceable. Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, 553 (Tex. 2001). In response, the Texas Legislature immediately passed, and the Governor signed, a Bill outlawing pre-injury waivers made thereafter. The Texas Workers’ Compensation Act now provides: "A cause of action [to recover damages for personal injuries or death sustained by an employee in the course and scope of employment] may not be waived by an employee before the employee’s injury or death. Any agreement by an employee to waive a cause of action…before the employee’s injury or death is void and unenforceable." TEX. LAB. CODE § 406.033(e)

(2005). This law became effective June 17, 2001. A pre-injury claim waiver may be enforceable in Texas only when the waiver was signed and the injury was suffered before June 17, 2001. See Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190 (Tex. 2004); Villareal v. Steve’s & Sons Doors, Inc., 139 S.W.3d 352 (Tex. App.—San Antonio 2004, no pet.).

II. What Can Arbitration Do for Me?

A. Arbitration can avoid an excessive jury award. Arbitration takes the "runaway jury" out of the claim process.

B. Arbitration is confidential. If a negative arbitration "award" results, the arbitration process provides confidentiality for the result. You may want to "set an example," when an unwarranted lawsuit is brought. An arbitration proceeding typically does not lend itself to an "example setting" fight. (Hey, who needs an "example setting" fight, anyway?)

C. Arbitration is usually cheaper. Arbitration can be a lot cheaper than litigation, if depositions, witnesses, experts, document production, etc. are limited in your arbitration agreement. Your cost savings lie in attorney fees and court expenses, because of the streamlined process. However, because the process frequently begins with a lawsuit, a "motion to compel arbitration" in the court is usually necessary to move the claim out of the courthouse.

D. Arbitration is usually quicker. This is true, even after working through a "motion to compel arbitration". For one thing, there are no court docket and trial setting delays.

E. Arbitration is usually "final". Trial court judgments can be appealed for a wide variety of reasons. This can drag the proceeding out for years, and greatly increase legal costs. Arbitration awards, on the other hand, can be "vacated" by a court only on limited grounds, particularly here in Texas when the FAA is specified and applied.

F. Arbitrators may be more familiar with your business. Many arbitrators come from the same industry in which the injury claim arises. They may have industry experience, and may understand your workplace problems better than a judge or jury.

G. Arbitration can limit punitive damages. Your arbitration agreement can bi-laterally limit or deny certain procedural remedies, like punitive damages. This is a growing trend. Whether this will reduce the actual dollars awarded is uncertain. Case law supporting these limitations is discussed below.

III. Can I Simply "Require" Binding Arbitration of Workplace Injury Claims? (Yes.)

A. The Federal Arbitration Act is Powerful.

Texas courts have now addressed this issue several times. A workplace injury claim must be arbitrated if a valid arbitration agreement under the FAA exists, and if the claim falls within the scope of that arbitration agreement. In re David’s Supermarket, 43 S.W.3d 94 (Tex. App.—Waco 2001, no pet.). In this case, the employer had a comprehensive "dispute resolution program" which first required "non-binding mediation." If mediation did not resolve the dispute, "binding arbitration" was required. Id. at 96. Workplace injury claims were specifically listed as subject to the agreed dispute resolution program. Further, in this case the employee was to pay one-half the arbitration cost. Id. The FAA applied. A David’s employee was injured on the job and filed a negligence suit against David’s. The Court compelled arbitration of the injury claim. After applying the two-part test under the FAA, the Court found (i) there was a valid agreement to arbitrate, and (ii) the workplace injury claim was within the scope of that agreement. Id. at 99. The Court also held that Texas public policy did not prohibit mandatory binding arbitration of a workplace injury claim. Id. at 100.

B. The H.E.B. Cases.

H.E.B., with 40,000 employees, is the largest Non-subscriber in Texas (and therefore in the world!). In In re H.E. Butt Grocery Co., the employee signed a pre-injury waiver agreeing to "release H.E.B. from all existing and future claims for occupational injury, death or disease." 17 S.W.3d 360, 365 (Tex. App.—Houston [14th Dist.] 2000, pet. denied) (Remember, these pre-injury waivers are now prohibited by the Texas Labor Code (see above)). The employee also agreed to arbitrate all claims. The FAA applied to the arbitration agreement. The Court held the arbitration agreement was enforceable.

The employee had signed an agreement for "extra benefits" under the employee injury benefit plan, rather than taking the "basic coverage." Id. The "extra benefits" agreement: (1) waived lawsuits; (2) released H.E.B. from future claims for occupational injury, death, or disease; (3) limited recovery to the ERISA Plan benefits; and (4) indemnified the employer. Id. The "extra benefits" agreement also included an arbitration provision. The Court reviewed several Texas contract law issues to determine whether the arbitration agreement was enforceable, including: illegality, illusory consideration, unconscionability, fraudulent inducement, and void against public policy. The Court held for the employer on all these issues. Other issues were left to the arbitrator. Other defenses such as collateral estoppel (arbitration had been denied in two other cases involving the H.E.B. arbitration agreement), express negligence and ambiguity, were also rejected.

In another H.E.B. case, Smith v. H.E. Butt Grocery Co., the Beaumont Court of Appeals held that whether the terms of an arbitration agreement are "unconscionable" is an issue for the arbitrator, not for the court; but, if the question is whether the circumstances surrounding the making of the agreement (i.e., fraud, misrepresentation, duress) were unconscionable, that issue is for the court. 18 S.W.3d 910, 912 (Tex. App.—Beaumont 2000, pet. denied). The Texas Supreme Court, however, has since "clarified" this principle by holding that a court may consider unconscionability of both the terms of an agreement and the circumstances surrounding the making of the agreement to determine whether to compel arbitration. See In re Halliburton, 80 S.W.3d at 572. Finally, the Smith Court held that "unequal bargaining power," by itself, does not defeat an arbitration agreement. Smith, 18 S.W.3d at 912.

IV. Can I "Require" Binding Arbitration of "Other" Workplace Disputes? (Yes.)

A. Employment Discrimination Claims are Subject to Arbitration.

Workplace disputes in employment law include discriminations based on race, age, disability (not workers’ compensation claims), national origin, pregnancy, sexual orientation, religion, creed, color, ancestry, marital status, medical discharge, wrongful discharge, constructive discharge, sexual harassment, and similar areas. Granite Constr. Co. v. Beaty, 130 S.W.3d 362, 366 (Tex. App. – Beaumont 2004).

The landmark United States Supreme Court decision in arbitration and employment disputes was an Age Discrimination in Employment Act ("ADEA") claim. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). The Court held that the registration agreement, which contained an arbitration clause, was enforceable despite the ADEA claim. Id. at 35.

Texas is in the Fifth Circuit. The Fifth Circuit later expanded Gilmer to include all Title VII claims. See e.g., Mouton v. Metro. Life Ins. Co., 147 F.3d 453, 457 (5th Cir. 1998). Alford v. Dean Witter Reynolds, Inc., 939 F.2d 229 (5th Cir. 1991) (where former employee brought action against employer for Title VII discrimination); Rojas v. TK Communications, Inc., 87 F.3d 745 (5th Cir. 1996). (female radio jockey alleged sexual harassment and retaliation under Title VII against employer and the court found that the FAA was intended to be read broadly and thus, her contract was subject to arbitration). The Fifth Circuit has also held that the explicit language of the Americans with Disabilities Act ("ADA") supported alternative dispute resolution and that "Congress did not intend to exclude ADA from the scope of the FAA." Miller v. Pub. Storage Mgmt., Inc., 1221 F.3d 215, 218 (5th Cir. 1997).

The FAA has further been expanded to include other employment disputes. Reynolds v. Halliburton, F. Supp. 2d 756, 757 (E.D. Tex. 2002) (plaintiff made claims of hostile work environment, discriminatory hiring practices, and retaliation); Trigg v. Citigroup Inc., No. 3-02-CV-0335-L, 2002 U.S. Dist Lexis 12879 (N.D. Tex. July 15, 2002) (plaintiffs filed racial discrimination and retaliation claims against employer); Gross v. H.F. Ahmanson & Co., No. H-98-1232, 1998 U.S. Dist. LEXIS 20911 (S.D. Tex. Dec. 14, 1998); Douglas v. Timex Corp., No. H-98-985, 1998 U.S. Dist. LEXIS 23392 (S.D. Tex. Nov. 25, 1998) (sexual harassment); Shaw v. Walsh Servs., Inc., No. 3:96-CV-1772-D, 1997 U.S. Dist. LEXIS 23464 (N.D. Tex. Jan, 22, 1997) (Title VII violation because plaintiff had to take a leave of absence for her pregnancy); Fleetwood

Enter. v. Gaskamp, 280 F.3d 1069 (5th Cir. 2002); Webb v. Investacorp, Inc., 89 F.3d 252, 257-58 (5th Cir. 1996).

Courts have also required arbitration for claims involving the Family Medical Leave Act ("FMLA"), Federal Labor Standards Act ("FLSA"), 42 U.S.C. § 1981, and Employment Retirement Income Security Act ("ERISA"). Shaw v. Walsh Serv., 1997 U.S. Dist. Lexis 23464 (N.D. Tex. Jan. 22, 1997) (court granted the motion to dismiss because the Title VII, FMLA, and intentional infliction of emotional distress claims were subject to mandatory arbitration); Bailey v, Ameriquest Mortgage Co., 346 F.3d 821 (8th Cir. 2003) (the arbitration agreement clearly included the FLSA claims at issue); Hampton v. ITT Corp., 829 F. Supp. 202 (S.D. Tex. 1993) (employees failed to show that Congress intended to preclude arbitration as to FLSA claims); Cuie v. Nordstrom, Inc., 2005 U.S. Dist. Lexis 26698 (E.D. Pa. Nov. 3, 2005) (mandatory arbitration of specific claims brought under Title VII and 42 U.S.C. § 1981 did not offend the FAA); Hernandez v. Jobe Concrete Prods., 282 F.3d 360 (5th Cir. 2002) (arbitration agreements are enforceable under ERISA plans). However under the Uniform Services Employment and Reemployment Rights Act ("USERRA"), claims are not subject to mandatory arbitration. Lopez v. Dillard’s, Inc., 382 F. Supp. 2d 1245 (D. Kan. 2005) (although employee would not have lost any substantive rights under USERRA if the claim was arbitrated, the arbitration agreement was precluded from imposing mandatory arbitration on the employee as a precondition for relief)

B. At-Will Employment and Arbitration Agreements in Texas

Under at-will employment, either party can impose modifications to the employment terms. Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227, 229 (Tex. 1986). The party claiming the modification must prove that it notified the other party of definite changes in the employment terms, and that the other party accepted such modifications. Id. If the employer notifies an employee of changes, the employee must accept the new terms or quit. Id. If the employee continues to work at the place of employment with the knowledge of the changes, he has accepted the changes. Id. Notification in Texas requires unequivocal notice, not effective notice. Id. The employee must know the nature of the modifications and the certainty of their imposition, in order to have knowledge of the modifications. Id. Additionally, the employee’s promise to continue working and the employer’s promise to continue paying his salary are sufficient consideration for a modification of an employment contract. Id. Evidence that an employee may have found or read an amended policy is insufficient to qualify as "notice" to the employee of changes to the terms of employment. Nasir v. Air Liquide Am. Corp., 2004 U.S. Dist. Lexis 20005 (N.D. Tex. 2004).

At-will employees can contract with employers on any issue, excluding anything that would limit the ability of either employer or employee, or terminate the at-will employment. Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644-45 (Tex. 1994). Mutual promises to submit all employment disputes in arbitration is sufficient consideration because both parties are bound by the promises to arbitrate. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 228 (Tex. 2003). If an employer has unilateral, unrestricted right to refuse arbitration in an at-will employment context, the promises underlying the at-will employment contract are insufficient consideration. Id. at 229. In other words, one party does not have the unilateral capability to refuse to arbitrate. Dumais v. Am. Gulf Corp., 299 F.3d 1216, 1219 (10^{th Cir. 2002) (holding an arbitration agreement allowing one party the unfettered right it alter the existence of the arbitration agreement was unenforceable).}

V. What Law Applies to My Arbitration Agreement? (The Federal Arbitration Act, most likely.)

Since the 1991 United States Supreme Court decision in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), arbitration agreements covering employment law issues have proliferated. On March 21, 2001, ten years later, the Supreme Court ruled again in Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 123 (2001), holding employment-related arbitration agreements to be valid and enforceable. Circuit City settled any remaining validity issues for workplace arbitration agreements. Neither the FAA nor these cases exclude workplace injuries as the subject of enforceable arbitration, and the FAA preempts contrary state law. It is quite reasonable to assume that workplace injuries are a proper subject of workplace arbitration agreements.

Where the parties designate which arbitration statute (e.g., the FAA) they wish to have control the claims, the court will apply their choice. Volt Info. Scis., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468 at 479 (1989); D. Wilson Constr. Co v. Cris Equip. Co., 988 S.W.2d 388, 392 (Tex. App.—Corpus Christi 1999, orig. proceeding).

The existence of interstate commerce (to apply the FAA) may be shown in a variety of ways: location of headquarters in another state; transportation of materials across state lines; manufacture of parts in a different state; billings prepared out of state; business use of interstate mail; and interstate telephone calls in support of a contract. Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266 at 270 (Tex. 1992).

A Texas trial court’s order denying arbitration under the Texas Arbitration Act is subject to interlocutory (immediate) appeal. TEX. CIV. PRAC. & REM. CODE ANN. 171.098(a) (Vernon 2005). However, relief from denial of arbitration sought under the FAA must be pursued by writ of mandamus, there being no interlocutory appeal. 9 U.S.C.A. § 1, et seq. (1999); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 91 (Tex. 1996); Feldman/Matz Interests, L.L.P. v. Settlement Capital Corp., 140 S.W.3d 879 (Tex. App.—Houston [14th Dist.] 2004, no pet.).

VI. Have I "Contracted Away" My Agreement to Arbitrate, by My Other Employment Papers? (Be careful here.)

A. Do I Have a Valid Arbitration Agreement?

Whether a valid arbitration agreement exists is a matter of contract interpretation, to be decided by the court (not by the arbitrator). In re Big 8 Food Stores, Ltd., 166 S.W.3d 869 (Tex. App.—El Paso 2005, no pet.). The elements necessary to form this contract will be determined under Texas law, and are: (1) an offer; (2) acceptance of that offer; (3) a meeting of the minds; (4) each party’s consent to the terms; and, (5) execution and delivery with intent to be binding. Villareal v. Art Inst. of Houston, Inc., 20 S.W.3d 792, 798 (Tex. App.—Corpus Christi 2000, no pet.).

Consideration running both ways is an element of every contract. J.M. Davidson, Inc. v. Webster, 49 S.W.3d 507, 512 (Tex. App.—Corpus Christi 2001). In the Davidson case, the "arbitration agreement" signed by the employee did not bind both parties. The employer retained the right to unilaterally abolish or modify any "personnel policy." Because of this language, the Court held the arbitration agreement was not really binding on the employer (and therefore it was not binding both parties). The consideration of "mutual agreements" was lacking. (Note that the Texas Supreme Court held later, that continued "at-will" employment is consideration for an arbitration agreement in Halliburton). See also In re Bustamante, 104 S.W.3d 704 (Tex. App.—El Paso 2003, no pet.) (holding that the arbitration agreement was supported by mutual consideration when it clearly required the consent of both parties to modify the agreement).

An employer may agree to arbitrate work-related disputes with an at-will employee so long as the agreement is supported by mutual consideration. In J.M. Davidson, Inc. v. Webster, although it ultimately found certain contract language ambiguous and remanded the case, the Court made clear that there must be mutual consideration for an arbitration agreement. 128 S.W.3d 223, 227-28 (Tex. 2003). If an employer retains the right to unilaterally modify or abolish the agreement to arbitrate (as was at issue in Davidson), then the arbitration agreement is not reciprocal and will not bind either party. Id. at 231, n.2.

As discussed above, Halliburton provided that an employer can require an at-will employee to enter into an agreement to arbitrate: if an at-will employee refuses to agree to arbitrate any disputes, he or she may generally be terminated. See, e.g., Winters v. Houston Chronicle Pub. Co., 795 S.W.2d 723, 723-24 (Tex. 1990) (noting that under the doctrine of employment-at-will, an at-will employee can be terminated at any time with or without cause as long as the employee does not fall under a statutory or common-law exception). However, an agreement to arbitrate is unenforceable if it conditions the employer’s obligation to arbitrate on the at-will employee’s continued employment. Accordingly, if an arbitration agreement allows the employer to escape an existing agreement simply by terminating the employee, then the agreement was illusory because it did not genuinely bind the employer. In re Halliburton, 80 S.W.3d at 569.

In a similar case, an employment handbook containing an arbitration policy provided (in "boilerplate") that no contract was created by the handbook in the absence of a separate formal written agreement. Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386, 387 (Tex. App.—Houston [14th Dist.] 1998, pet. dism’d w.o.j.). The language of the employment handbook (that no "contract" was created by the handbook) precluded formation of a "contract" to arbitrate.

For a contract to arbitrate to be valid, the circumstances surrounding its creation must be reasonable. Yet, as a general matter, an employee’s illiteracy or inability to speak English does not automatically render an agreement to arbitrate unenforceable.

In In re Ledet, 2004 Tex. App. LEXIS 11474 (Tex. App.—San Antonio 2004, no pet.), a son, acting on his sick mother’s behalf, signed an agreement to arbitrate with a nursing home. Even though the son did not speak English and therefore could not read the contract, and even though he felt "pressured to sign the contract because his mother’s admission required the signature," the agreement was held enforceable. Because the son did not ask for an explanation, none was required, and the son was presumed to have read and understood the contract. Other courts have adopted this position. In Big 8 Food Stores, the Court held that illiteracy "does not relieve a contracting party of the consequences of his agreement." 166 S.W.3d at 878. Unless the employee lacks capacity, or unless there is evidence that the agreement was obtained by fraud, misrepresentation, or concealment, then illiteracy and inability to understand or speak English does not preclude enforcement of an arbitration agreement.

You must be careful when requiring employees who are illiterate or who cannot speak or understand English to enter into an arbitration contract. In one Non-subscriber injury case, an arbitration agreement executed by the employee, supported by consideration, and governed by the FAA (it involved interstate commerce, as almost all do), was still found unenforceable. Prevot v. Phillips Petroleum Co., 133 F. Supp. 2d 937 (S.D. Tex. 2001). There, when two employees injured in an explosion brought suit, the employer moved to compel arbitration. In determining the validity of the agreement, the Court noted the following facts: (1) the agreement was written in English; (2) the employees could not read English; (3) the agreement was not translated for the employees; (4) the employees did not know the nature of the agreement; and (5) management told them not to worry about the document and to sign quickly so that they could get back to work. Id. at 940. The Court found the agreement unconscionable and refused to compel arbitration. Id. at 940. Texas courts reached a similar result in In re Turner Bros. Trucking Co., 8 S.W.3d 370, 377 (Tex. App.—Texarkana 1999, pet. denied). The Court found the agreement unconscionable because: (1) the employee presented with the arbitration agreement did not know its meaning; (2) the employee had no one to explain the document to him before he signed it; (3) the personnel presenting the agreement to the employee did not understand the agreement themselves; and (4) the employee was functionally illiterate and had a reading disorder. Id; see generally In re Jobe Concrete Products, Inc. 2003 Tex. App. LEXIS 6582 (Tex. App.—El Paso July 31, 2003, pet. denied).

B. Non-subscriber Arbitration Cases (Texas State Courts).

Mutual agreement between the employer and employee to "give up the right" to litigate will usually constitute consideration for the arbitration agreement. In re Jebbia, 26 S.W.3d 753, 758 (Tex. App.—Houston [14th Dist.] 2000, no pet.). In that Non-subscriber injury case, the agreement language clearly indicated the requirement to arbitrate applied equally to the employer and the employee.

In another Non-subscriber injury case, In re Copeland, 45 S.W.3d 348 (Tex. App.—Texarkana 2001, no pet.), the employee sued Stanley Transportation for negligence. The Court was heavily influenced by the then-recent Texas Supreme Court decision in Lawrence v. CDB Servs., Inc., 44 S.W.3d 544 (Tex. 2001), which held pre-injury waivers were not against public policy and the benefits of the employer’s benefit plan need not be comparable to workers’ compensation benefits (this was decided prior to TEX. LAB. CODE §406.033(e), which outlawed waivers). The Court enforced the arbitration agreement and reiterated that the FAA (at Article 9, Section 2) makes arbitration enforceable if interstate commerce is involved, and if the parties have agreed under state law contract principles to arbitrate. Copeland, 45 S.W.3d at 349-50.

C. Non-subscriber Arbitration Cases (Federal Courts).

A Fifth Circuit federal case, Strawn v. AFC Enterprises., Inc., No. 99-41384 (5th Cir. Nov. 29, 2000), involved an employee slip-and-fall. The employer required arbitration, in order to participate in the ERISA Plan. There was no waiver of claims or limitation on causes of action, remedies or damages. The District Court held the arbitration agreement was "against public policy." An appeal ensued.

The first step of the two-step inquiry under the FAA is to determine whether an agreement was made to arbitrate the dispute. State law contract principles apply to determine whether there was a valid agreement to arbitrate, and whether the claim falls within that arbitration agreement. The second step is to determine whether legal constraints outside the parties’ agreement would foreclose arbitration. The Fifth Circuit Court held:

Standing alone, neither the benefit plan nor the arbitration clause violate Texas law or public policy. (Employer) is not required to participate in the statutory workers’ compensation plan. Cupit v. Walts, 90 F.3d 107, 109 (5th Cir. 1996). Participation is voluntary in that an employer may refrain from becoming a subscriber under the TWCA. Id. With respect to the arbitration clause itself, (employee) was not required to limit or waive any cause of action; she simply was required to bring any claims to arbitration rather than to Court. As such, the only possible claim (employee) has is that the entire agreement, i.e., the combination of the benefit plan and the arbitration agreement, violates Texas public policy.

The Fifth Circuit held the arbitration agreement was enforceable and compelled arbitration. This opinion was not published, and is not binding authority in Texas state courts, but it is frequently presented for consideration by trial courts, anyway.

VII. How Does a Court Decide to Compel Arbitration? (The basic law.)

A. A Three-Step Program.

In deciding whether to compel arbitration, a court will analyze the following three factors:

(i) whether the parties formed a contract to arbitrate the dispute;

(ii) whether the dispute falls within the scope of that arbitration agreement; and

(iii) "whether legal constraints external to the parties’ agreement foreclose the arbitration of those claims."

See Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 429 (5th Cir. 2004) (the third factor quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S. Ct. 3346, 3355, 87 L. Ed. 2d. 444 (1985).

Even after the court has determined that an arbitration agreement exists and the dispute falls within the scope of the agreement, an arbitration agreement can (and will) still be attacked. First, an injured employee can attack the arbitration clause under step (i), and if the attack is directed only at the arbitration clause, the court will decide if it is enforceable. If the attack is directed at the entire contract, the arbitrator will decide if it is enforceable. See Prima Paint, 388 U.S. 395, 402-04, 87 S. Ct. 1801, 18 L. Ed. 2d. 1270 (1967). An employee may also attack the breadth of an arbitration clause under step (ii) by alleging that the agreement does not cover the particular dispute at issue. In re David’s Supermarket, 43 S.W.3d at 98. Alternatively, a party can mount a more global challenge to the arbitration agreement under step (iii), by arguing that the arbitration agreement is void as against Texas public policy. "Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements, without contravening the FAA." Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S. Ct. 1652, 1656, 134 L. Ed. 2d 902 (1996).

Countering those arguments, the employer might argue that: (a) even if the arbitration agreement is found voidable, then the plaintiff employee has "ratified" arbitration by accepting benefits under the ERISA Plan; or, (b) enforceability of the arbitration agreement should be decided by an arbitrator, not by the court.

B. What about when ERISA is involved?

When a dispute arises under a contract implicating rights under the Employee Retirement Income Security Act (ERISA)(29 U.S.C.A. §§ 1001 et seq.), an arbitration agreement may still be enforceable. If the arbitration provision is contained within a collective bargaining agreement, courts will typically not consider the FAA and will instead turn to an "exhaustion or remedies" approach. Under the "exhaustion of remedies" approach, courts will typically enforce an arbitration provision as long as such provision is sufficiently broad in scope to cover the ERISA-based claim.

When arbitration provisions are not contained within collective bargaining agreements, rather are contained within the provisions of other contracts, courts will typically refer to the FAA to determine if parties are required to submit their dispute to arbitration. When analyzing whether the FAA will require arbitration, courts will look to the nature of the employee’s claim. If the claim is for benefits under the ERISA statute, courts have uniformly determined that an agreed-upon remedy of arbitration must be exhausted before such a claim may be brought in federal court under the ERISA statute. On the other hand, if the employee brings a statutory ERISA claim, courts are split as to whether an arbitral remedy must be exhausted before bring the case to federal court. The Fifth Circuit believes that ERISA does not preempt the FAA, and that even statutory ERISA claims are first subject to the exhaustion of an agreed-upon arbitral remedy. See Kramer v. Smith Barney, 80 F.3d 1080 (5th Cir. 1996).

C. Remember, the FAA Is Powerful.

A federal Fifth Circuit case illustrates the power and reach of the FAA. Hernandez v. Jobe Concrete Prods., Inc. 282 F.3d 360 (5th Cir. 2002). The injured employee sued in Texas state court for retaliation, negligence, breach of contract, breach of covenant of good faith and fair dealing, and intentional infliction of emotional distress. The employer removed to federal court under the FAA, and moved to compel arbitration. Id. at 360. All claims but the negligence claim were preempted by ERISA, and the Fifth Circuit went on to hold that the ERISA Plan was not put in "solely for the purpose of complying with the Texas Workers’ Compensation Act" (an exception to ERISA coverage). Id. at 363. The case was stayed, and the parties were ordered to arbitration. Id. at 364.

VIII. Can I Limit Punitive Damages in My Arbitration Agreement? (Probably.)

A. Some Cases Have Allowed This Limitation.

One of the first Texas cases concerning limitation of damages in an arbitration agreement was a Texas federal case, Kinnebrew v. Gulf Ins. Co., 67 Fair Empl. Prac. Cas. (BNA) 189 (N.D. Tex. 1994). This was not a Non-subscriber case; but a federal sex discrimination claim. The arbitration agreement limited damages to an "amount sufficient to compensate the aggrieved party for such direct injury," and did not permit punitive damages, attorney fees, or equitable relief. Federal Judge Buchmeyer held the arbitration agreement was enforceable and the damages limitation permissible, unless Congress had "evinced an intention to preclude waiver of judicial remedies for the statutory rights at issue." As a side note, the Court also held the question of whether the arbitration agreement was "unconscionable" was itself subject to arbitration.

A Texas state court case concerning an arbitration agreement which limited damages is Pony Express Courier Corp. v. Morris, 921 S.W.2d 817 (Tex. App.—San Antonio 1996, no writ). Because the Trial Court had ruled the arbitration agreement was unconscionable (without a hearing), the Appeals Court sent it back for a hearing on that issue. The Appeals Court stated, on the limitation of damages issue under the FAA, that "federal policy allows such limitations when statutory (damage) rights are not mandated." Id. at 832.

The Federal Eighth Circuit Court of Appeals has held that "the potential unavailability of punitive damages is not a ground for denying effect to an otherwise valid agreement to arbitrate." Morgan v. Smith Barney, Harris Upham & Co., 729 F.2d. 1163, 1168 n. 7. (8th Cir. 1983). James Morgan, a former account executive for Smith Barney, sued the brokerage firm, asserting slander and various tort claims associated with his departure from the firm. Morgan argued that his claims should not be arbitrated, because he would lose his "right" to punitive damages in an arbitration proceeding. In footnote 7, the Court cited Bascalski v. Paine Webber, Jackson & Curtis, Inc., 514 F. Supp. 535, 543 (N.D. Ill. 1981), where waiver of a "right" to pursue punitive damages turned on the fact that the parties had agreed to application of New York law, which expressly denied punitive damages under the circumstances. The case did not turn on whether the parties waived the right to punitive damages within the arbitration provision itself; the punitive damages were waived as a matter of law through the "choice of law" provision.

In a recent Texas case, In re Luna, 2004 Tex. App. LEXIS 8241 (Tex. App.—Houston [1st Dist.] Sept. 9, 2004, no pet.), the Court acknowledged that provisions in arbitration agreements that prohibit punitive damages and other statutory remedies are generally enforceable. But the Court found that the limitations of remedies in the agreement at issue were unconscionable because the dispute involved an employer’s retaliation against the employee for filing a worker’s compensation claim. Id. at *20. The Court held that, under the circumstances, it was against public policy to enforce the remedy limitations. Id. at *21.

When attempting to limit punitive damages within the arbitration agreement, the important thing to remember is that you may not limit the damages available under statutory claims. The Supreme Court has stated that "by agreeing to arbitrate a statutory claim, a party does not forego the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than judicial forum." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)). This is the case because the "beneficiaries of public statutes are entitled to the rights and protections provided by the law, including all of the types of relief that would otherwise be available in court." Paladino v. Avnet Computer Tech., Inc., 134 F.3d 1054, 1059 (11th Cir. 1998)(citation omitted). So, in a case in which the former employee brought statutory Title VII claims against the employer, the Eleventh Circuit Court of Appeals found that the employer’s arbitration agreement was unenforceable because although it purported to cover "any controversy or claim," it precluded the arbitrator from awarding any damages other than contract damages. (emphasis in original).

B. Does It Matter? (Maybe Not.)

In practice, arbitrators will sometimes award all damages as a simple "actual damage" amount, in order to avoid further litigation on the issue of punitive damages. In those cases, the sum awarded might be the same as if a punitive amount had been itemized and included.

IX. What if I Don’t Like the Arbitration Award? (You Live with it.)

Grounds for vacating an arbitration award under the Federal Arbitration Act are very limited. The statutory grounds for vacating an arbitration award under the FAA are found at Section 10 of the FAA, and include: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final, and definite award upon the subject matter submitted was not made. See 9 U.S.C. § 10. There is also a judicially created non-statutory ground for vacating an arbitration award under the FAA. As approved by the U.S. Supreme Court, an arbitrator’s award may also be reviewed under a "manifest disregard of the law" standard. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). Although the Supreme Court did not define the standard, many federal circuit courts have adopted their own variation of the standard of review. The Fifth Circuit adopted the "manifest disregard of the law standard" in 1999. Williams v. Cigna Financial Advisors, Inc., 197 F.3d 752 (5th Cir. 1999). Although it has never been readily defined, the Fifth Circuit has adopted the Second Circuit’s explanation of the standard. Prestige Ford v. Ford Dealer Computer Servs., Inc., 324 F.3d 391 (5th Cir. 2003) (cert. denied). The Second Circuit describes the standard accordingly: "…[I]t clearly means more than error or misunderstanding with respect to the law. The error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. Moreover, the term "disregard" implies that the arbitrator appreciates the existence of a clearly governing principle but decides to ignore or pay no attention to it." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Bobker, 808 F.2d 930, 933-34 (2nd Cir. 1986). As this description illustrates, the "manifest disregard" standard is an extremely narrow rule with only very limited applicability. See Prestige Ford, 324 F.3d at 396.

X. CONCLUSION (Fair and binding arbitration is useful and good).

Mandatory, binding arbitration of workplace injury claims can be required under your ERISA Plan. It can also be accomplished without an accident insurance policy or an ERISA Plan. Claim Arbitration should be considered whether or not you purchase alternative insurance. You can implement claim arbitration as a stand-alone employment policy. Specify and use the FAA. Be thorough and fair, if you want it to work.

 

DISCLAIMER

Do not use this memo as legal advice or to make legal decisions. Each workplace is different, including yours. Do not attempt to make company policy or solve an individual problem on the basis of this Memo. This brief discussion of the current status of claim arbitration for Texas Non-subscriber employers is not meant to be exhaustive, and is not. It is also not intended as legal advice, but is offered only to alert you to business conditions in Texas. Anyone attempting to implement any idea or provision in this memo should first seek advice from competent counsel!!

Mike Dodge can be reached at (214) 273-3290;  miked@texasatty.com