Fifth Circuit COA Holds Dallas Employer’s Arbitration Plan Was Illusory and Unenforceable

The United States Court of Appeals for the Fifth Circuit has ruled that an arbitration agreement included in an employment contract was unenforceable because the “savings clause” failed to expressly require that advance notice regarding any amendments or termination of the arbitral agreement be provided to workers.  In Nelson v. Watch House Int’l, L.L.C., No. 15-10531 (5th Cir., Mar. 2, 2016), a man, Nelson, secured a position as a training instructor with Watch House International in Dallas, Texas. Prior to beginning his employment, Nelson received an electronic copy of an employee handbook.  The handbook included an arbitration agreement which stated the parties agreed to resolve any disputes through binding arbitration.

The arbitral agreement also stated:

This agreement is issued with the authority of the Company and is binding on the Company. This Agreement may not be altered except by consent of the Company and shall be immediately effective upon notice to Applicant/Employee of its terms, regardless of whether it is signed by either Agreeing Party. Any change to this Agreement will only be effective upon notice to Applicant/Employee and shall only apply prospectively.

After working for Watch House International for approximately four years, Nelson reported to his employer that he was being harassed at work over both his race and religion.  About two weeks after reporting the alleged harassment, Nelson was fired.

In response to his termination, Nelson filed a lawsuit against his former employer in the Northern District of Texas.  Watch House International then filed a motion to compel arbitration.  In his opposition to Watch House International’s motion, Nelson claimed:

(1) he did not fall within the Plan’s definition of “employee,” because he did not sign the Plan and the Plan defines “employee” as “the individual whose signature is affixed hereto;” and

(2) the Plan was unenforceable because it was illusory under, inter alia, In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), and Lizalde v. Vista Quality Markets, 746 F.3d 222 (5th Cir. 2014).

Next, the federal district court granted Watch House International’s motion to compel arbitration and dismissed Nelson’s case without prejudice.

On appeal to the nation’s Fifth Circuit, Nelson argued:

1) that the Arbitration Plan is illusory because it fails  to include a savings clause related to existing claims and disputes and requiring advance notice of termination;

(2) that Nelson does not fall within the Plan’s definition of “employee” and so is not bound to arbitrate; and

(3) that the district court abused its discretion in considering inadmissible evidence in ruling on Watch House’s motion.

After stating Texas law governed the parties’ dispute, the Fifth Circuit said:

Here, the Plan provides that Watch House may make unilateral changes to the Plan, purportedly including termination, and that such a change “shall be immediately effective upon notice to” employees. Watch House’s retention of this unilateral power to terminate the Plan without advance notice renders the Plan illusory under a plain reading of Lizalde, which is supported by recent decisions from Texas intermediate courts. See, e.g., Temp. Alts., Inc., 2014 WL 2129518, at *4–5 (collecting cases).

Because the arbitration plan was illusory and Nelson was not bound by the agreement, the United States Court of Appeals for the Fifth Circuit reversed the Northern District of Texas’ order compelling arbitration and remanded the case.

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