Arbitration Agreements: Kentucky District Court says Agreement to Arbitrate Claims is Valid
As discussed in previous issues of Kentucky Employment Law Letter, employers and employees continue to enter into binding arbitration agreements under which both sides agree to resolve any disputes arising out of the employment relationship before an arbitrator. Usually, that means the employee doesn’t have the option of seeking a judicial remedy. But if you’re thinking about entering into an arbitration arrangement with your employees, you should proceed cautiously. Read on to learn more about some of the potential pitfalls that may result when litigating the validity of an arbitration agreement.
Andres Jaramillo was employed by Thomas and King, Inc., from August 2003 until fall 2007. On or about September 17, 2004, Jaramillo’s supervisor presented him with a document titled “Thomas & King Policy Sheet.” The document contained several paragraphs describing various company policies and procedures. To the left of each paragraph was a space for the employee’s initials.
One of the paragraphs was titled “agreement for dispute resolution program.” The agreement stated that Thomas and King had adopted a dispute resolution program incorporating binding arbitration as the sole and exclusive method for resolving claims. The company was permitted to change or delete provisions of the program at any time, but it wasn’t permitted to eliminate the right to binding arbitration. Furthermore, the agreement didn’t alter Jaramillo’s at-will status.
Jaramillo was eventually terminated. Thomas and King asked the U.S. District Court for the Eastern District of Kentucky to make a declaratory judgment (a ruling on the rights of each party in a dispute) that the agreement signed by Jaramillo was a valid and enforceable contract. Jaramillo filed a counterclaim requesting relief under Title VII of the Civil Rights Act of 1964 and KRS 344.04 for unlawful termination. The employer asked the court to either dismiss the case or rule on the pleadings and dismiss Jaramillo’s counterclaims, arguing that the policy sheet and agreement precluded any legal action in a court of law.
To determine whether Jaramillo was required to submit his claims to arbitration, the court considered whether a valid agreement to arbitrate existed between the parties and whether Jaramillo’s claims fell within the scope of that agreement. The Federal Arbitration Act (FAA) expresses a strong public policy favoring arbitration, including arbitration of employment disputes. The validity of an arbitration clause is a matter of contract law, and state law should be reviewed when determining which state law applies. Absent a showing of fraud, mistake, or some other grounds on which a contract may be voided, most courts will enforce a contractual agreement to arbitrate.
Jaramillo argued that he wasn’t given sufficient time to review the document and that the policy didn’t apply to him because he wasn’t a manager. Essentially, he argued that the agreement wasn’t valid because:
- there was no mutual consent or “meeting of the minds”;
- it wasn’t supported by additional consideration (something of value); and
- it was an unconscionable contract of adhesion (a legally binding agreement between two parties in which one side has all the bargaining power and uses it to write the contract primarily to its advantage).
The court easily rejected each of his arguments.
Regarding Jaramillo’s first argument, there was no dispute that he initialed the agreement and signed the policy sheet, both of which included statements that he understood the terms and consented to arbitrate any disputes. Moreover, while the FAA requires a written agreement, it doesn’t require that the agreement be signed by either party.
On Jaramillo’s second point, the court found that a promise made by an employee in exchange for continued employment is a promise supported by consideration. The court cited Kentucky case law, which states that when an employee agrees to new terms of employment, the continued employment of the worker constitutes consideration of the agreement as if the employee had been newly hired.
Finally, Jaramillo attempted to argue that the contract was an unconscionable contract of adhesion. The court first noted that there is a “take it or leave it” aspect to adhesion contracts. Even though Jaramillo may have been able to argue that he would have been terminated had he not signed the contract, a contract isn’t enforceable simply because it may be an adhesion contract. It also has to be an unconscionable contract or one, as the court noted, that “no man in his senses not under delusion would make, on the one hand, in which no fair and honest man would accept on the other.”
The court rejected Jaramillo’s argument that the contract was unconscionable, citing that it contained clear language that an ordinary person could understand. Additionally, Jaramillo’s education level — two college degrees — suggested that he was capable of understanding the agreement. Based on all of those facts, the court granted Thomas and King’s request for dismissal.
In most cases, agreements to arbitrate are enforceable. Any agreement should have language similar to the one in this case. Importantly, courts will frequently refuse to enforce arbitration agreements if using the process is financially burdensome to employees or if you or the employee fail to comply with obligations under the agreement. Failure of an employer to invoke arbitration can, in some circumstances, also constitute a waiver. Arbitration agreements should be periodically reviewed by counsel to ensure that they are enforceable in the jurisdictions in which you do business.
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Copyright 2009 M. Lee Smith Publishers LLC
KENTUCKY EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Kentucky employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.