The U.S. Court of Appeals for the Fifth Circuit recently affirmed a trial court's order compelling the arbitration of an employee's federal age discrimination claim against a financial institution employer, holding that the trial court correctly found that there was a meeting of the minds between the employee and the employer as required to form the arbitration agreement.
In addition, the Fifth Circuit held that the trial court properly referred this dispute to an arbitrator because the employee's defense that the arbitration agreement was procedurally unconscionable went to the Agreement's enforceability, not its existence.
A copy of the decision is available at: Link to Opinion
The plaintiff employee worked for the employer from 1998 until her October 2017 termination. During her employment, the employee "agreed several times through employment contracts and acknowledgments of employee handbooks to refer all employment disputes to arbitration."
In 2016, the employer again required the employee to "review and acknowledge" the employer's Arbitration Agreement. The Agreement required referring any employment-related dispute to arbitration pursuant to the rules of the American Arbitration Association. The Agreement delegated to the arbitrator "any legal dispute . . . arising out of, relating to, or concerning the validity, enforceability or breach of this Agreement, shall be resolved by final and binding arbitration."
On November 15, 2016, the employee viewed the Arbitration Agreement and electronically certified that she "carefully read the Employment Dispute Resolution Program/Agreement within and that I understand and agree to its terms."
In October 2017, the employer terminated the employee for allegedly inappropriate interactions with employees that she supervised. The employee eventually filed suit in federal court claiming that the termination violated the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964.
The employer timely moved, under the Federal Arbitration Act and pursuant to the 2016 Arbitration Agreement, to compel the employee to arbitrate her claims.
The employee responded to the motion to compel arbitration by asserting that no Arbitration Agreement existed for two reasons.
First, she argued that no meeting of the minds occurred because "she did not understand that she was agreeing to a binding arbitration agreement and therefore there was not the mutual assent necessary for contract formation under Mississippi law."
Second, she claimed that "the Agreement was procedurally unconscionable because of disparate bargaining power and her lack of a meaningful opportunity to bargain."
The trial court granted the employer's motion to compel arbitration and dismissed the case with prejudice finding that a meeting of the minds occurred to form the Arbitration Agreement. In addition, the trial court held that the arbitrator could decide the unconscionability claim because it only allows a court to nullify an existing agreement rather than affecting whether an arbitration agreement actually exists.
This appeal followed.
The Fifth Circuit initially observed that when a party disputes whether an arbitration contract exists, "the challenge is always for the courts to decide." Will-Drill Resources, Inc., v. Samson Resources Co., 352 F.3d 211, 219 (5th Cir. 2003). However, if a court determines that an arbitration contract exists, "then whether that contract may be enforced for or against the parties in the particular case is for an arbitrator to decide."
The Fifth Circuit applies state contract law to determine if a challenge to a contract is "to formation itself or to subsequent enforcement." The dispute here arose out of a Mississippi contract which requires the following: "(1) two or more contracting parties, (2) consideration, (3) an agreement that is sufficiently definite, (4) parties with legal capacity to make a contract, (5) mutual assent, and (6) no legal prohibition precluding contract formation."
The Fifth Circuit first examined the employee's argument that no meeting of the minds occurred. The Fifth Circuit determined that it may decide this issue because it "goes to the formation of the Arbitration Agreement."
The Fifth Circuit noted that the employee received and reviewed electronic communications that "clearly identified an arbitration agreement as the subject of the communications." The employee certified that she "carefully read the Employment Dispute Resolution Program/Agreement within and that I understand and agree to its terms." The employee does not dispute that she "agreed to the Arbitration Agreement," but claims that she "simply acknowledged "receipt of another policy or directive" without understanding that she agreed to arbitrate any employment disputes.
The Fifth Circuit rejected this argument because the employee's "unilateral lack of diligence does not preclude contract formation under Mississippi law." To hold otherwise would "destroy the value of all contracts." Thus, the trial court correctly determined that there was a meeting of the minds necessary to form the Arbitration Agreement.
The Fifth Circuit next turned to the employee's argument that no arbitration contract existed because a disparate bargaining power rendered the contract procedurally unconscionable. The Fifth Circuit examined this argument under Mississippi law.
The Mississippi Supreme Court examined this issue in Caplin Enters. Inc. v. Arrington, 145 So. 3d 608 (Miss. 2014), where the plaintiffs argued that an arbitration clause in a larger contract was both procedurally and substantively unconscionable. The Mississippi Supreme Court held that both of these unconscionability claims related "to the enforcement of the arbitration agreement, not to whether the agreement to arbitrate was itself validly formed."
Consistent with this, the Fifth Circuit noted that, "applying Mississippi law to an arbitration challenge, this court has likewise categorized both procedural and substantive unconscionability as challenges to contract enforcement, not contract formation." See Banc One Acceptance Corp. v. Hill, 367 F.3d 426, 430 (5th Cir. 2004).
Here the employee's procedural unconscionability argument to an existing contract challenges "contract enforcement rather than contract formation." Thus, Fifth Circuit held that the trial court correctly referred this challenge to an arbitrator.
Therefore, the Fifth Circuit affirmed the trial court order compelling arbitration and dismissing this case.
Ralph T. Wutscher
Maurice Wutscher LLP
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