Fifth Circuit Holds Arbitration Provision Included in Employee Handbook is Illusory and Unenforceable Under Texas Law

In an unpublished opinion, the Fifth Circuit has affirmed a Texas federal court’s decision to deny a company’s motion to compel arbitration in an employment discrimination and retaliation lawsuit.  In Scudiero v. Radio One of Texas II, L.L.C., No. 13-20114, (5th Cir., October 24, 2013), Vince Scudiero and Christel Thornton filed a lawsuit in federal court against their employer, Radio One of Texas II, L.L.C. (“Radio One”), alleging race discrimination and retaliation against Scudiero and retaliation against Thornton.  Radio One responded by filing a motion to compel the parties’ dispute to arbitration.

In accordance with a magistrate judge’s recommendation, the district court dismissed Radio One’s motion to compel arbitration.  According to the lower federal court, the arbitration clauses included in the Radio One employee handbook were illusory and unenforceable because another provision in the handbook expressly stated that the company reserved the right to unilaterally “supersede, modify, or eliminate existing policies.”  After the company’s motion to compel arbitration was dismissed, Radio One filed an appeal with the United States Court of Appeals for the Fifth Circuit.

On appeal, Radio One argued that the employee handbook provision at issue did not render the arbitration clauses illusory.  After initially stating that Texas law provides “an ‘arbitration clause is not illusory unless one party can avoid its promise to arbitrate by amending the provision or terminating it altogether,’” the Fifth Circuit compared the facts of the case with the holding in In re 24R, Inc. (Tex. 2010).  According to the court,

Applying the above analysis to the instant case, because the arbitration provision is in the handbook that contains the language allowing the employer to unilaterally revise the handbook, the agreement to arbitrate is illusory and unenforceable. In other words, because the arbitration agreement is not a “stand-alone contract,” The provision allowing the employer’s unilateral modification of the handbook includes allowing unilateral modification of the arbitration agreement.

Next, the appeals court addressed the similarities between the facts of the Radio One case and the holding in D.R. Horton, Inc., v. Brooks,

Radio One is correct that D.R. Horton provides support for its argument that its arbitration policy is enforceable. However, we cannot reconcile the holding in D.R. Horton with the Texas Supreme Court’s subsequent analysis in In re 24R applying C & H News.

The court added that an intermediate appellate court’s 2011 decision in Weekley Homes, L.P., v. RAO also supported the lower court’s decision.

Finally, the Fifth Circuit affirmed the district court’s refusal to compel the dispute to arbitration by stating,

We hold that the district court did not err in denying the motion to compel because the arbitration provision is not a separate, stand-alone contract. Instead, it is contained in the handbook in which Radio One reserved the right to unilaterally supersede, modify or eliminate existing policies. Under these circumstances, Radio One’s promise to arbitrate was illusory and unenforceable.