A New Jersey court recently used the so-called contract “disclaimer” language in an employer’s handbook to preclude the employer from enforcing a mandatory arbitration program contained in that same handbook. The court’s decision must of course be considered by employers who wish to enforce alternate dispute resolution procedures without falling into the same trap. However, as also shown herein the decision appears contrary to federal policy, enforced by a series of U.S. Supreme Court decisions that strongly favor enforcement of arbitration agreements.

As background, in New Jersey, as in most states, employment is presumed to be “at will,” meaning that either the employer or the employee can freely terminate the employment relationship without a reason (cause) to do so. Under certain circumstances, however, express promises contained in an employer handbook can result in contractually binding terms and conditions of employment. There is a simple way to avoid any such binding effect. The employer can include in the handbook a “disclaimer,” that is, language denying that it is making any promises or expressing any intent to be bound by statements in the document. See, e.g., Woolley v. Hoffmann-La Roche, 99 N.J. 284, 309 (N.J.), modified, 101 N.J. 10 (1985).

The Morgan Case

In a recent case, an employer’s disclaimer language came back to haunt it. In Morgan v. Raymours Furniture Co., N.J. Super. ___ (App. Div. Jan. 7, 2016), the New Jersey Appellate Division held that the presence of language stating that nothing in the handbook was contractually binding against the employer meant that the employer could not enforce a mandatory arbitration procedure also included in the handbook.

The handbook disclaimer read:

Nothing in this Handbook or any other Company practice or communication or document, including benefit plan descriptions,creates a promise of continued employment, [anemployment contract, term or obligation of any kind on the part of the Company (emphasis supplied by Court).

In addition, the court noted that when electronically acknowledging receipt of the handbook, an employee signified only that he or she "received a copy of the Associate Handbook" (emphasis added by Court), and, further, that he or she:

… understand[s] that the rules, regulations, procedures and benefits contained therein are not promissory or contractual in nature and are subject to change by the company (emphasis supplied by Court).

The appellate court felt that the employer wanted to have the benefit of a contract binding the employee on the subject of arbitration but avoid a contract when other parts of the handbook were at issue. The court held that this “proposition [is] to be rejected if for no other reason than it runs counter to the ancient English proverb: ‘wolde ye bothe eate your cake, and haue your cake?’ [John Heywood, Dialogue of Proverbs (1546)], as well as its corollary, which may have originated with Aesop, ‘sauce for the goose is sauce for the gander.’" The court felt that any such result would be inequitable.

The appeals court did not quote any part of the language of the mandatory arbitration procedure. Significantly, the trial court – in language also not referenced by the appeals court – had ruled that the arbitration program clearly would have been enforceable if the language of the program had been placed outside the handbook in a standalone document. Nevertheless, the appeals court determined that because the arbitration program was contained in an employee handbook, in light of the language of the disclaimer and the acknowledgement, the employee had not “clearly and unambiguously waive[d] his right to sue defendants in court.”

At first, the court’s decision appears reasonable, especially its “can’t have your cake and eat it, too” justification, and employers would be well advised to carve out mandatory arbitration programs from disclaimer language.

A more searching scrutiny of the decision in Morgan, however, reveals that the bases for the court’s decision are contrary to well-established federal law protecting the right of parties, including employers, to enforce arbitration agreements. A petition for certification already has been filed by the employer (and other defendants), which will provide the state supreme court with an opportunity to correct the lower court’s approach.

The Appellate Division Opinion Runs Counter to Federal Law 

Federal law strongly favors the enforcement of arbitration agreements. The Federal Arbitration Act, 9 U.S.C. §1 et seq. (FAA), which reflects the “liberal federal policy favoring arbitration,” pre-empts state law, and state court opinions applying state law, that run counter to the federal policy of upholding arbitration agreements. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011); DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 468 (U.S. 2015). Indeed, when a state action can be seen as making it more difficult to enforce an arbitration agreement than other types of contracts, federal law steps in to protect arbitration. Imburgia, 136 S. Ct. at 471.

The court’s decision in Morgan follows precisely the approach the U.S. Supreme Court forbids. Moreover, it ignores the so-called “severability doctrine,” an arbitration-friendly doctrine that the supremacy of federal law requires state courts to apply to enforce arbitration programs of the type facing the court in Morgan.

The Handbook’s Disclaimer Cannot Bar Enforcement of the Arbitration Agreement

The first problem with the court’s Morgan decision is what it fails even to address: the federal arbitration “severability doctrine.” Federal law requires enforcement of an arbitration agreement without regard to the validity of an overall document in which the arbitration agreement is contained (such as a handbook); instead, severance of the arbitration provision is mandated.

This is explained by the Supreme Court’s decision in Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63 (2010):

[The FAA’s] § 2 states that a “written provision” “to settle by arbitration a controversy” is “valid, irrevocable, and enforceable” without mention of the validity of the contract in which it is contained. Thus, a party's challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate. “[A]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.” Id. at 70-71 (citation omitted; emphasis supplied).

The appellate court in Morgan failed to address the severability doctrine, let alone seek to explain why it did not apply. This issue alone calls the appellate court’s ruling into serious question.

As noted above, so far as the trial court was concerned there was no question that the arbitration provision was intended by its terms to be – and legally was – binding on both the employer and the employee. Pursuant to the severability doctrine, the fact that the arbitration provision was contained in a larger document (the handbook) does not preclude its enforcement.

Moreover, the language of the handbook disclaimer certainly appears to be intended simply to state that nothing in the handbook was designed to impose a promise of continued employment or other benefit of employment obligation on the employer, again allowing the separate mandatory arbitration program to bind both, as intended.

As for the electronic acknowledgment provision quoted above, the appeals court ruled that language “which stated only that the employee ‘received’ and ‘underst[ood]’ the contents of the company handbook or rules and regulations” could not constitute a clear “waiver of the right to sue that might be found within those materials.” The problem with this analysis is that since the arbitration procedure clearly did contain within it a waiver of the right to sue in favor of mandatory arbitration (as the trial court found), the appeals court’s conclusion that mere acknowledgment of the contents of that document was unavailing also runs counter to the well-established principle that a party that signs a document is legally bound to its terms, regardless of a later claim that the party neither read nor understood such. The appeals court’s refusal to apply that maxim to an agreement that deals with arbitration also runs counter to federal law, which requires that contracts to arbitrate be placed on the same footing as all other types of contracts. Imburgia, 136 S. Ct. at 471; see also id., citing Perry v. Thomas, 482 U.S. 483, 493, n. 9 (1987) (noting that the Federal Arbitration Act preempts decisions that take their “meaning precisely from the fact that a contract to arbitrate is at issue”).

Conclusion

Employers seeking to establish mandatory arbitration programs must take the Morgan decision into account and draft disclaimer language that does not undermine arbitration. However, it is hoped that the state Supreme Court will take the opportunity to reverse the appellate decision opinion and bring state law on arbitration in line with controlling federal law.

While Morgan is a New Jersey decision, rulings in other states have also limited am employers ability to enforce an arbitration agreement in employee handbooks under some circumstances.