I Missed One

Yesterday, the Workplace Prof Blog pointed out in a post that the Fifth Circuit had issued an opinion, back on May 18, 2006, in which it refused to compel arbitration (link is to .pdf file of the opinion). Obviously, this is a big deal and an unusual event in the Circuit, so apologies for us having missed the opinion.

The reason for the omission, for the curious, is the Court’s decision to not publish the opinion. We are frankly not as diligent about checking unpublished opinions as we are published ones. However, the opinion is important even if it’s not precedential, so I’m glad Prof. Bales spotted it. This also raises an interesting issue as to how one tracks these opinions. Prof. Bales obviously searches Westlaw regularly for opinions which reference arbitration; the link he provides is to the Westlaw opinion, and not the Court’s opinion, and thus would require a Westlaw contract to read it.

I have been searching opinions from the Court’s site directly. I simply read all the published opinions from the Fifth Circuit and blog about the ones which pertain to arbitration or which are otherwise interesting. Since this blog discusses legal issues other than arbitration, it seems like the way to go; a search for “arbitration” would miss the interesting non-arbitration cases, and I don’t know how to search for “interesting law”. However, as noted above, I do not read all the unpublished opinions, so cases like the one I’m about to discuss (I promise) can slip through the cracks (although I guess it did not really slip through the cracks, but you know what I mean).

Anyhoo, enough about us. The case in question involves an interesting employment arbitration scheme which had already been invalidated by other circuit courts around the country. Ryan’s Family Steakhouses had a contract with an outfit called Employment Dispute Services, Inc. (“EDSI”), whereby EDSI would arbitrate disputes between Ryan’s and its employees. Each Ryan’s employee would then have a separate contract with EDSI, whereby they were compelled to use EDSI to arbitrate disputes with Ryan’s. Ryan’s and its employees, however, did not have direct arbitration agreements in place.

The problem the recent case presents stemmed from the fact that the contract Ryan’s had with EDSI was different from the contract EDSI had with the Ryan’s employees. Ryan’s itself could opt-out of its agreement to arbitrate employment disputes by giving EDSI ten days’ notice; Ryan’s employees had no such option. Thus, despite EDSI’s and Ryan’s representations to Ryan’s employees, Ryan’s had no real obligation to arbitrate. The analysis was made a bit more complicated by the fact that Ryan’s and its employees were each third-party beneficiaries of the other’s contract with EDSI and not direct contractual partners with each other.

The Fifth Circuit affirmed the district court’s decision to refuse to compel arbitration, on the basis that no consideration existed for the employees’ agreement to arbitrate with EDSI. EDSI’s promise to provide neutral arbitration services to the employees was illusory, since the employer could opt-out, and since EDSI could alter its rules that would govern the arbitration at its pleasure. Incidentally, this rule-alteration argument escapes me, as I was under the impression that many arbitration clauses contain language like “arbitration subject to the AAA rules for Arbitration of Commercial Disputes in effect at the time,” which to me means that the AAA can change its rules as well. But maybe I’m missing something, and the opinion does not discuss it at length.

At any rate, although the opinion was not published, and although it involved a convoluted three-party arbitration scheme, it is an important one as it demonstrates at least one fact pattern that, in the Fifth Circuit, does not allow for an arbitration clause’s enforceability. However, it is important to note that the Court’s problem was not with Ryan’s ability to escape arbitration (that is, the lack of mutuality of the arbitration agreement), but with the fact that the agreement was based on a false premise on Ryan’s part. Ryan’s and EDSI represented to the employees that all employment disputes would be arbitrated, when in fact Ryan’s had no such obligation. A failure of consideration, therefore, rather than an unconscionably one-sided agreement. Something to chew on.

Finally, it is interesting to review the FAQ section of EDSI’s website, which states in relevant part:

EDSI uses a stand-alone pre-dispute agreement that has been sustained by five United States District Court decisions. Decisions made by EDSI’s three-member arbitration panel have never been appealed. Period. So questions of bias have not been an issue.

I could not find any discussion of the Goins case, or the others it cites, on the EDSI website, but in all fairness I do understand from the opinion that EDSI has “fixed” its arbitration clauses to avoid this problem in the future.

Goins v. Ryan’s Family Steakhouse, Cause No. 05-51549 (5th Cir. 2006) (not released for publication).

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