Two Courts of Appeals Reject Arbitration Agreements Post-Epic

June 18, 2018

The U.S. Supreme Court’s May 21, 2018, decision in Epic Systems, Inc. v. Lewis handed a major victory to employers in holding that arbitration agreements containing class action waivers do not violate the National Labor Relations Act. (See McGuireWoods’ May 22 legal alert, “Supreme Court Scratches ‘Triple Bank Shot’ Attempt to Invalidate Class/Collective Action Waivers.”)  But mere weeks after the Epic Systems ruling, two federal Courts of Appeals have refused to enforce employer arbitration agreements under state law contract principles. These decisions are a reminder to employers that, despite the Supreme Court’s endorsement, arbitration agreements must meet state law rules of contract formation, and courts will continue to closely scrutinize agreements that waive employees’ legal rights.

On June 11, 2018, the 5th U.S. Circuit Court of Appeals in Huckaba v. Ref-Chem, L.P. reversed a district court order compelling arbitration of an employment lawsuit. In that case, the plaintiff had signed an arbitration agreement with her employer, Ref-Chem, under which both parties agreed to refer “all claims and disputes between them” to binding arbitration. When Huckaba later sued Ref-Chem in federal court, Ref-Chem moved to compel arbitration, attaching the arbitration agreement that she had signed. The district court granted the motion to compel and dismissed the case pending arbitration.

The 5th Circuit held that compelling arbitration was erroneous and that the arbitration agreement was invalid because only the plaintiff, and not a representative of Ref-Chem, had signed it. The 5th Circuit said both parties’ signatures were necessary, not based on any specific contract language requiring mutual execution, but on boilerplate language common to many arbitration and other agreements. Specifically, the court pointed to language in the agreement declaring that “by signing this agreement the parties are giving up any right they may have to sue each other,” a no-oral modification clause that required any amendments to be in a writing signed by both parties and the presence of a signature block for Ref-Chem. These elements, the court held, manifested an intent that both parties must sign the arbitration agreement in order for it to be valid. 

The Huckaba court also held that the district court had erred by applying a presumption in favor of enforcement of arbitration agreements and by placing the burden on the plaintiff to refute the validity of the agreement. The court noted that because contract formation is a state law issue, federal caselaw evincing a strong policy favoring arbitration (presumably including Epic Systems) does not apply. Huckaba held instead that Texas law governed the issue and “has no presumption in favor of arbitration when determining whether a valid arbitration agreement exists.”

One day after the Huckaba ruling, on June 12, 2018, the 4th U.S. Circuit Court of Appeals issued an unpublished opinion in Weckesser v. Knight Enterprises, again invalidating an arbitration agreement on state law grounds. In Weckesser, the plaintiff had signed an Independent Contractor Services Agreement with Knight Enterprises S.E., LLC, and a separate Arbitration Rider and Class Action Waiver with a related company, Jeffry Knight Inc. d/b/a Knight Enterprises. The latter agreement required that any dispute be resolved through arbitration in the plaintiff’s individual capacity and not through a class, collective or representative action. 

The plaintiff filed a class and collective action against Knight Enterprises in federal district court, alleging that Knight Enterprises had misclassified him and others as independent contractors. Knight Enterprises then invoked the arbitration agreement and asked the court to dismiss or stay the action pending arbitration. The district court refused to do so on the basis that the arbitration agreement was between the plaintiff and “Jeffry Knight, Inc” not the defendant, Knight Enterprises S.E., LLC. and thus applied only to disputes between the plaintiff and Jeffry Knight, Inc.

On appeal, the 4th Circuit agreed. Like the Huckaba court, the 4th Circuit held that the Federal Arbitration Act does not “alter background principles of state contract law” and therefore South Carolina law governed whether a valid arbitration agreement existed. Under those principles, the court held that the arbitration agreement was unambiguously between the plaintiff and Jeffry Knight, Inc., which was not a party to the case. The 4th Circuit further rejected Knight Enterprises’ arguments that it could nonetheless enforce the arbitration agreement under the doctrines of misnomer or scrivener’s error or as a third-party beneficiary. In so doing, the court held that because the arbitration agreement appeared to be a “form contract of adhesion,” any ambiguity should be construed against the drafter and the federal policy favoring arbitration “is no armor for Knight Enterprises here.”

These two rulings are noteworthy because they seem to undermine the Supreme Court’s preference for enforcement of arbitration agreements. Huckaba and Weckesser illustrate that, notwithstanding the Supreme Court’s pronouncements, arbitration agreements remain creatures of state law and must strictly comply with state law principles. They also illustrate that courts will place the burden on employers to establish that arbitration agreements are valid and enforceable.

For employers who are implementing arbitration programs in light of Epic Systems, the Huckaba and Weckesser cases are a reminder that procedures for obtaining employee assent to arbitrate claims must be airtight, conform with state law requirements and allow the employer to prove the existence of a valid agreement, potentially years later. For employers with existing employment arbitration programs, these cases should prompt a review to ensure that arbitrations agreements name the correct corporate entity, have been mutually executed or contain clear language that mutual execution is not required, and follow all other contract formalities.

For assistance or advice on implementing or updating employment arbitration agreements to utilize a class and collective action waiver, or for questions related to this article, please contact the authors, your McGuireWoods contact or a member of the firm’s labor and employment group.