Dallas COA Holds Arbitration Clause Illusory and Unenforceable

The Dallas Court of Appeals has held that certain language contained in an employee handbook rendered the contained and referenced arbitration and mediation agreements illusory and unenforceable.

In Weekley Homes, L.P. v. Rao, No. 05-10-00570 (Tex. App. – Dallas, March 22, 2011), Len Rao, former Division President of David Weekley Homes, filed a lawsuit against the company which alleged breach of contract, conversion, breach of fiduciary duty, libel, slander and defamation. Weekley Homes responded by filing a plea in abatement and motion to compel arbitration, arguing that Rao agreed to arbitrate any and all claims against the company when he acknowledged and accepted a dispute resolution policy contained and incorporated by reference in the company’s employment handbook. According to Rao, the arbitration agreement contained in the handbook was not binding because language in the handbook rendered any promise to arbitrate made by Weekley Homes illusory. After the trial court denied Weekley Homes’ plea in abatement, Weekley Homes appealed. The Dallas Court of Appeals granted an emergency stay pending the appeal. The court also granted Rao’s motion to stay the arbitration proceeding filed by Weekley Homes during the pendency of the appeal.

According to the Dallas Court, three pertinent documents were entered into the court record: (1) a printed copy of Weekley Homes’ online employment handbook; (2) a four-page document titled “Dispute Resolution Policy;” and (3) an email dated March 1, 2007 sent from Weekley Homes personnel to Rao which confirmed Rao received a copy of the online handbook.

In a section titled “The Purpose of this Handbook,” the employment handbook contained the following language:

Polices are not to be interpreted as a promise by the Company that any particular situation will be handled in the express manner set forth in the text.

In a later section, under the larger heading “DWH Policies Section” was a section titled “Dispute Resolution.” Language in this section indicated “any claim, controversy or other dispute” related to employment at Weekley Homes “shall be resolved by arbitration, in lieu of jury trial or any other legal proceeding” under the Federal Arbitration Act. This section also contained a link to the four-page “Dispute Resolution Policy,” which likewise contained language which stated any claim or dispute arising from employment or termination of employment must be resolved by arbitration.

Weekley Homes argued the Dispute Resolution Policy was enforceable against Rao because he agreed to its terms and acknowledged receipt of the handbook. Although Rao admitted to receiving the handbook, he argued the promise to arbitrate was made illusory by the terms of the handbook. Weekley Homes maintained the language in the handbook did not apply to the Dispute Resolution Policy because it was a “separate, fully valid and enforceable” document that contained no modification language.

The Dallas Court of Appeals held the modification language contained in Weekley Homes’ employment handbook applied to the separate arbitration policy because the,

very structure and language of the Handbook connects the modification language directly with the Dispute Resolution Policy. First, we note the modification language is set out in a section of the Handbook entitled “PURPOSE OF THIS HANDBOOK.” That section makes broad reference to “policies.” Second, we note the Handbook’s table of contents includes a category of provisions titled “DWH POLICIES SECTION.” The listed provisions under that title include “DISPUTE RESOLUTION.” In the body of the Handbook, the section titled “DISPUTE RESOLUTION” describes “The David Weekley Homes Dispute Resolution Policy [as being] designed to maintain a healthy work environment, encourage communication between Team Members, and resolve problems in an efficient manner.” Then, below the title “DISPUTE RESOLUTION” is another section titled “MEDIATION AND ARBITRATION.” Following that titled paragraph, are three paragraphs of text. . . . Following that statement is a link to the four-page Dispute Resolution Policy. One is invited to “Click HERE ” to review the “complete,” four-page Dispute Resolution Policy. Contrary to the Weekley Parties’ position, the Dispute Resolution Policy is incorporated by reference into the Handbook and an integral part of it.

The court also disagreed with Weekley Homes’ contention that the modification language did not make the promise illusory because it stated employees would receive notification of any changes. According to the court, the modification language failed to state any changes to the agreement would be made prospectively and the,

plain language of the modification provision gives Weekley Homes the unilateral power, at any time, to elect not to enforce any policy or provision in the Handbook. By virtue of the modification language, Weekley Homes has “expressly denied that [it] was bound by the policies set out in that document.” (citation omitted).

After holding the arbitration obligation was illusory, the Dallas Court of Appeals affirmed the trial court’s order denying Weekley Homes’ plea in abatement and motion to compel arbitration and lifted its stay on the trial court proceedings.

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