In a recent ruling, the Fifth Circuit Court of Appeals reversed a district court’s refusal to enforce an arbitration agreement’s “delegation clause” requiring the determination of arbitrability to be decided by an arbitrator. Whether the arbitration agreement applied to an employee’s pre-existing Fair Labor Standards Act (FLSA) claim was a legitimate question, the court found but one that should be answered by an arbitrator and not a judge. Kubala. v. Supreme Production Services, Inc., No. 15-41507, Fifth Circuit Court of Appeals (July 20, 2016).
Ted Kubala, an oilfield hand, filed an FLSA suit against his employer, Supreme Production Services, Inc. Two days after the initiation of the suit, Supreme began requiring its employees to execute an amended employment agreement that required arbitration of all employment disputes, including FLSA claims, and included a “delegation clause,” permitting only the arbitrator to decide threshold questions regarding the arbitration clause’s enforceability. The amendment conditioned future employment on signing the new agreement, as permitted by Texas law. In other words, it was what is commonly referred to as a “take it or leave it” agreement. Supreme claimed that it did not have notice of Kubala’s suit when it announced its new arbitration policy and there was no evidence to the contrary, as noted by the Fifth Circuit.
The Southern District of Texas denied Supreme’s motion to dismiss based on the existence of the arbitration agreement, holding that there was no language in the policy making it applicable to pre-existing disputes. Supreme appealed, asserting that the district judge erred in not deferring to the delegation clause. Without such delegation, deciding arbitrability is typically a role performed by a court.
The Fifth Circuit began its opinion by noting that courts are limited in their analysis of the merits of a case involving an arbitration agreement with a delegation clause to determining whether the contract requiring arbitration was validly formed and whether the clause allows the court, or only an arbitrator, to decide questions of arbitrability. Thus, the Fifth Circuit found, the district court had erroneously proceeded to the issue of contract enforceability before resolving the issue of whether a valid contract existed.
Next, the court noted a line of cases from the Texas Supreme Court declaring that, under the state’s at-will employment doctrine, an employee may accept modified terms of his or her employment by receiving notice of the new terms and continuing to perform work. As precedent had directly applied this rationale to a case regarding the addition of an arbitration clause to an existing employment agreement, the only questions at issue were whether Supreme had provided adequate notice to Kubala and whether Kubala continued to work for Supreme afterward. The court found that Supreme had met its burden of proving both of these issues in the district court.
Since a valid arbitration agreement with a delegation clause existed, the court held that the parties were required to refer the matter to an arbitrator for a determination of arbitrability on the FLSA claim. Accordingly, the court remanded the case with instructions to the district court to refer the case to arbitration.