Executive Summary: The Fifth Circuit has issued a decision which may affect Texas employers who utilize employment arbitration agreements. In Nelson v. Watch House Int'l, L.L.C., No. 15-10531 (5th Cir. Mar. 2, 2016), the court found an employment arbitration agreement unenforceable where the "savings clause" did not expressly require advance notice to employees of amendments and/or termination of the arbitration agreement.
Federal courts apply ordinary state-law contract principles in determining whether agreements to arbitrate are valid. Texas law has long held that arbitration clauses are illusory – rendering them unenforceable – if one party can avoid arbitration by unilaterally amending the provision or terminating the agreement altogether. The Texas Supreme Court carved out an exception, however, in In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), in which it found an arbitration clause was not illusory because the agreement provided that amendments to the agreement would not apply retroactively (i.e. to disputes arising prior to the amendment), and would not be effective until ten days after notice of the termination was given to employees.
In Watch House, the employer moved to compel arbitration pursuant to its Arbitration Plan when its former employee filed suit for employment discrimination in federal court. The district court held that the arbitration agreement was not illusory under theHalliburton ruling because its savings clause provided that "[a]ny change to this Agreement will only be effective upon notice to the Applicant/Employee and shall only apply prospectively." In reversing the district court's ruling, the Fifth Circuit held that the notice provision did not meet the requirements of Halliburton because the Agreement provided that the changes to the agreement "shall be immediately effective upon notice to Applicant/Employee…" That failure to provide advance notice to employees, the court held, rendered the agreement illusory under Halliburton.
In its previous opinions on the enforceability of arbitration agreements underHalliburton, the Fifth Circuit focused on the limitation of power to make changes to the agreement which would be retroactively effective. Watch House is significant because for the first time, the Fifth Circuit held that an agreement is unenforceable underHalliburton for failure to give advance notice, despite the limitations on the employer's ability to make retroactive changes.
The Bottom Line
Many arbitration provisions provide that the employer reserves the right to unilaterally amend or terminate the provision upon notice. Texas employers should review their employment arbitration agreements, and policies which incorporate arbitration provisions, to ensure they are enforceable under Watch House. Where the employer has the sole power to amend or terminate the arbitration provision, that right will render the agreement unenforceable as illusory if it is not limited so as to provide advance notice to employees, and to apply only to prospective claims (of both employer and employee) which arise after the effective date of the amendment. Though the Fifth Circuit did not specify a minimum period of time that would satisfy the "advance" notice requirement, it would be wise to track Halliburton's ten-day period to ensure enforceability. The same review criteria should be applied to any agreements containing jury waivers, as well as class and collective action waivers.