The Eighth Circuit has issued a reminder to those seeking to bind employees and consumers to arbitrate future disagreements: don’t gloss over contract basics.

In Shockley v. PrimeLending, 929 F.3d 1012, Jennifer Shockley sued her former employer under the Fair Labor Standards Act, alleging she was not paid for all earned wages and overtime pay. PrimeLending moved the district court to compel arbitration based on a mandatory arbitration provision contained in its employee handbook. The district court denied the motion because it found no agreement to arbitrate existed between Shockley and the company. PrimeLending appealed the denial to the Eighth Circuit, which affirmed the district court’s denial for the same reason.

The Court reiterated in the Shockley opinion that arbitration agreements are favored by federal law and are enforced as long as the agreements are valid, and the dispute at issue falls within the scope of the agreement. Whether parties can be compelled to arbitrate any given dispute is a matter of contract law. Thus, while arbitration is preferred, parties may only be compelled to arbitrate if they contractually agreed to be bound by arbitration. A party seeking to compel arbitration must therefore show, as a threshold matter, that a valid and enforceable agreement to arbitrate exists. To do so, the three elements of a contract – offer, acceptance, and consideration – must be proven.

Like most large employers today, PrimeLending made its employee handbook accessible electronically, and as part of Shockley’s required annual policy review, the click of a mouse on the handbook in PrimeLending’s computer network automatically generated an acknowledgement of review. PrimeLending employed Shockley for 13 months. In that time, Shockley completed the policy review process twice. PrimeLending claimed the two e-acknowledgments and Shockley’s continued employment with the company were sufficient to carry its burden to prove Shockley accepted the arbitration provisions contained in the handbook. Both the district court and the Eighth Circuit held these facts were insufficient to prove Shockley accepted any purported offer related to arbitration.

The employment handbook contained two arbitration-related provisions: (1) a “delegation provision”, and (2) a run-of-the-mill arbitration provision. A delegation provision is an agreement to arbitrate threshold issues concerning the arbitration agreement, mainly placing “gateway questions of arbitrability into the hands of an arbitrator.” In other words, a delegation provision is a separate agreement within the agreement to arbitrate, which, if valid, mandates that certain issues be determined by an arbitrator rather than by a judge before the core dispute is arbitrated. When successful, the challenge of a delegation provision renders the remainder of an arbitration agreement open to review by the courts. Accordingly, the Eighth Circuit in Shockley first reviewed the delegation provision contained in the handbook.

The Eighth Circuit assumed, for the sake of discussion, that the delegation provision at issue constituted an offer. And it then reviewed the record to determine whether Shockley accepted the purported offer. Under Missouri law, “mere continuation of employment [does not] manifest the necessary assent to [the] terms of arbitration.” While continued employment may in some circumstances constitute acceptance when the employer informs all employees that continued employment constitutes acceptance, no such message was relayed to PrimeLending employees. Thus, Shockley’s continued employment was not evidence that she accepted the delegation offer contained in the employee handbook. Next, the Court entertained the e-acknowledgments as means of Shockley’s acceptance.

Specifically, the Court explained that acceptance is present when the offeree (here, Shockley) – the person receiving the offer – signifies assent in a “positive and unambiguous” manner generally by affirmative words or action to the terms of the offer. The Court outlined the pertinent facts: Shockley’s initial review of the handbook was not conditioned on her offer of employment, she had no memory of reviewing the handbook, nor did the record establish she actually reviewed the handbook. The Court held that PrimeLending could, at best, show Shockley acknowledged the existence of the arbitration provisions and was thus aware of the terms of her then-employer’s purported contract offer. The Court held that Shockley’s review of the handbook and the subsequent system-generated acknowledgment did not create clear acceptance and therefore no contract was created.

Following review of the delegation provision, the Court turned its attention to the arbitration provision. Because both the delegation and arbitration provisions are grounded in contracts law and involve the same set of facts, the Court succinctly explained that the legal analysis of the arbitration provision was the same as analysis of the delegation provision, and that both analyses suffered from the same fatal flaw. The fact that the Court could not find that Shockley accepted any purported offer was dispositive of both analyses. Thus, PrimeLending failed to meet its burden to prove a valid agreement to arbitrate existed and the Court could not compel Shockley to arbitrate her claims.

The lesson for businesses seeking to compel arbitration of employee or consumer claims is clear: the “offeree” of the arbitration clause should be asked, in the first instance, to affirmatively accept the arbitration clause.