A Troubling Decision for Employment Arbitration Agreements with Potentially Ambiguous Language and What it Means for Employers Going Forward

On April 5, 2016, in a rare rebuke of an employment arbitration agreement by a federal court, the United States District Court for the District of New Jersey (Hon. Madeline Cox Arleo, U.S.D.J.) held that it would not compel arbitration mandated by an employment agreement because the agreement at issue was too ambiguously drafted.

In Ranieri v. Banco Santander S.A., Civil Action No. 15-3740, Plaintiffs were former Mortgage Loan Officers with the Defendants in their New Jersey branches who brought a collective action claim for wage and hour violations under federal and state law.  The collective action was on behalf of all current and former employees of Defendants whose job duties included working as a mortgage loan officer and who were not paid overtime or minimum wage in the past three years.

At the start of their employment, Plaintiffs received an offer of employment which mandated that Plaintiffs execute “the enclosed Mortgage Retail Development Officer Agreement” (“MDO”) and all attached exhibits, on or before the first day of work.  The offer letter also attached a copy of the Mortgage Sales Commission Plan.  The MDO Agreement contained six sections, including an arbitration clause which prohibited class, collective, and representative actions against Defendants.  Both Plaintiffs signed the MDO agreements on the bottom of the final page under a bolded sentence that read: “I certify, by my signature below, that I have received a copy of the Mortgage Sales Commission Plan, which has been provided to me.”  The MDO Agreement contained a Pennsylvania choice of law provision.

While the Court acknowledged that ordinarily a party’s signature on an agreement implies agreement to the entire contract, here the Court found that the language in the MDO Agreement was ambiguous, specifically the sentence above the signature line.  The Court found that the purpose of the signatures was too unclear: either the Plaintiffs could memorialize only that they received the Mortgage Sales Commission Plan or that they agreed to all of the terms of the MDO Agreement and that they were confirming receipt of the Mortgage Sales Commission Plan.  Due to the ability to logically construe the agreement in more than one way, the Court held that it would not compel arbitration because the intent of the parties could not be determined on the pleadings alone, and because the ambiguous language in the MDO Agreement should be construed against the drafters, the Defendants.  Defendants’ motion to compel arbitration was denied without prejudice and the Court ordered discovery on the question of arbitrability.

The Court’s decision is important because federal courts have traditionally viewed employment arbitration agreements very favorably based upon the Federal Arbitration Act and significant U.S. Supreme Court precedent.  Such agreements have also become more widespread.  Employers with arbitration agreements should have these agreements regularly reviewed by counsel, as the law is in a constant state of flux regarding the effectiveness of arbitration agreements as to state claims and the prohibitions on class claims that any good arbitration agreement contains.  Carefully drafted arbitration agreements are more likely to be enforced.  Note that beyond having employment counsel review arbitration agreements, employers should also discuss the need for such agreements to start with.  Employers often mistake employment arbitration agreements as a panacea to liability from claims by current and former employees, however, legal fees and discovery are often not significantly reduced and with appeal options severely limited, a bad decision by an arbitrator can be disastrous for an employer.  Instead, arbitration agreements are often most useful in industries and for employers who face significant potential wage and hour class and collective action exposure.  Careful consultation with an employment attorney is critical both in deciding whether to use employment arbitration agreements and if the decision is made to use such agreements, how to make sure that they remain enforceable in a constantly changing legal landscape.

For more information regarding employment arbitration agreements, please contact Harris S. Freier, Esq., a Partner in the firm’s Employment Law and Appellate Practice Groups, at hfreier@nullgenovaburns.com or 973-533-0777.

U.S. Supreme Court alert: American Express Co. v. Italian Colors Restaurant

Prior to its summer recess, the U.S. Supreme Court issued another decision concerning class arbitration which has implications for unionized and non-unionized employers with agreements to arbitrate workplace disputes.

In American Express Co. v. Italian Colors Restaurant, the Supreme Court held that the Federal Arbitration Act (FAA) does not permit courts to invalidate a contractual waiver of class arbitration simply because the plaintiffs’ cost of individually arbitrating their claims against the company exceeds their potential recovery. The Supreme Court reaffirmed its opinions in Stolt-Neilsen S.A. v. AnimalFeeds Inter. Corp., which held a company may not be compelled to submit to class arbitration without a contractual basis for doing so, and AT&T Mobility LLC v. Concepcion, which held the FAA preempts state laws that prohibit contracts from disallowing class arbitration.  

The plaintiffs in American Express were merchants who accepted American Express credit cards at their stores and restaurants. Their agreement with American Express contained a clause that required all disputes to be resolved through binding arbitration, and provided that “[t]here shall be no right or authority for any claims to be arbitrated on a class action basis.”

The merchants brought a class action suit against American Express alleging violations of various antitrust laws. American Express moved to compel individual arbitration pursuant to the clauses in its agreements with the merchants. The merchants certified to the trial court that the amount necessary to prove the antitrust claims could exceed one million dollars, whereas the maximum potential recovery for an individual was only $38,549. The trial court was not persuaded, and dismissed the merchants’ lawsuit pursuant to the class waiver provision. However, the Second Circuit Court of Appeals reversed, holding that because the merchants had shown they would incur “prohibitive costs if compelled to arbitrate under the class action waiver,” the waiver was unenforceable and class arbitration could proceed.

American Express appealed to the Supreme Court. The merchants argued there was a judge-made exception to the FAA, which allows courts to invalidate agreements that prevent the “effective vindication” of a federal statutory right — here, the fact that the cost of litigating the antitrust claims individually would be more than any recovery prevented the vindication of their rights. The Court rejected this argument, stating “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” In other words, the cost did not prevent the merchants from pursuing their antitrust claims, it simply made litigating the matter not worth their while financially. The Supreme Court ultimately held that arbitration agreements providing for a waiver of class arbitration may be enforced regardless of whether it is too expensive for plaintiffs to pursue their claims individually given the potential maximum recovery.

In light of recent Supreme Court decisions upholding class arbitration waiver provisions, employers should consider incorporating class waivers in employment agreements. However, particularly in light of the specificity required by courts and unresolved case law concerning class waivers on appeal from the National Labor Relations Board, employers should always confer with counsel when incorporating class waiver dispute resolution language in employment agreements to understand the risks and benefits of these provisions.

For more information on the implications of the American Express decision and preparing and implementing lawful class waiver provisions, please contact James J. McGovern, III, Esq., jmcgovern@nullgenovaburns.com, or Douglas J. Klein, Esq., dklein@nullgenovaburns.com, in the Labor Law Practice Group.