Rejecting a former employee’s assertion that the “excessive” and “prohibitive” costs of arbitration made his employment agreement’s arbitration clause unconscionable, the Tennessee Court of Appeals at Knoxville has affirmed an order directing arbitration in a wrongful termination action brought under the Tennessee Public Protection Act and the Tennessee Human Rights Act. Trigg v. Little Six Corp., No. E2013-01929-COA-R9-CV (Tenn. Ct. App. July 28, 2014).
Darrell Trigg began working for Little Six Corporation as the general manager and chief engineer at its Short Mountain Silica facility in 1987. In 2007, Trigg and Little Six executed an employment agreement. The agreement provided that Trigg would be paid $1,578,599 for his equity interest in Little Six’s businesses. It also provided that Trigg would continue in his position at a salary of $154,472 per year plus benefits (such as a company car and health insurance coverage). In addition, under the agreement, Trigg would receive $50,000 in severance payment at the end of his employment. The agreement also stated that the employment relationship was to be at-will and that either party could terminate the relationship, without cause or reason, with written notice to the other party.
The agreement included an arbitration clause that stated: “Any dispute, controversy, or claim arising out of, in connection, or relating to this Agreement, … which cannot be settled or resolved by mutual agreement, shall be submitted to and resolved by arbitration … conducted before a three (3) member panel in conformance with the rules of the American Arbitration Association then in effect for commercial disputes….”
Finally, the agreement provided that “[t]he expenses of the arbitration shall be borne equally by the parties to the arbitration, provided that each party shall pay for and bear the cost of its own experts, evidence, and counsel,” and the parties would evenly split the AAA fees and the compensation of the three arbitrators.
Little Six terminated Trigg’s employment without cause effective April 30, 2012, and paid him $50,000 pursuant to the employment agreement.
On March 28, 2013, Trigg sued his former employer alleging claims for common law retaliatory discharge, violation of the Tennessee Public Protection Act (also known as the “Whistleblower Act”) and of the Tennessee Human Rights Act.
The agreement stated it was governed by the laws of Tennessee and neither party claimed the Federal Arbitration Act was applicable.
The company filed a motion to compel arbitration. Trigg argued the arbitration clause was unenforceable because the “excessive” and “prohibitive” costs of arbitration were unconscionably high in light of his then-current financial situation. The trial court ruled in favor of the former employer and ordered arbitration, finding the agreement had been freely negotiated and was not unconscionable. Further, the trial court found Trigg’s costs to arbitrate his claims likely would be between $10,000 and $30,000 based on information available from the AAA for claimed damages in the range of two to six million dollars, which should not be a surprise to him as “[i]t’s basically the benefit of the bargain that [he] made.” Trigg appealed.
Tennessee Law on Arbitration
Under Tennessee law, questions of contract formations are decided by the court, not by an arbitrator. The Tennessee Uniform Arbitration Act provides that an agreement to arbitrate is “valid, enforceable and irrevocable save upon such grounds as exist at law or in equity for the revocation of any contract.” The Tennessee Supreme Court stated in Benton v. Vanderbilt Univ., 137 S.W.3d 614 (Tenn. 2004), “In general, arbitration agreements in contracts are favored in Tennessee both by statute and existing case law.” Nevertheless, Tennessee courts have refused to enforce such agreements when they have been found to be unconscionable.
An unconscionable contract is one in which the provisions are so one-sided, under all of the facts and circumstances, that the contracting party is denied any opportunity for meaningful choice. Determination of unconscionability focuses on the relative positions of the parties, the adequacy of the bargaining position, the meaningful alternatives available to the plaintiff, and the existence of unfair terms in the contract.
To determine unconscionability, Tennessee courts must decide on “(1) procedural unconscionability, which is an absence of the meaningful choice on the part of one of the parties and (2) substantive unconscionability, which refers to contract terms which are unreasonably favorable to the other party.”
Further, the party seeking to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive bears the burden of showing the likelihood of incurring such costs.
The appellate court affirmed the judgment and order of the trial court enforcing arbitration.
The Court pointed out that Trigg asserted only that the cost to him in arbitrating his claims is too high under his current financial situation. He did not argue there was procedural unconscionability, recognizing that (1) he was actively involved in bargaining for and negotiating the terms of the employment agreement; (2) he was aware of the arbitration clause, having read it before he signed the agreement; (3) he was given ample time to review the agreement with the benefit of legal counsel before he signed it; (4) he was given seven days to revoke the agreement after he signed it; and (5) as the trial court held, he was a “highly paid, well educated, top level company employee dealing directly with owners of the company.” The employment agreement is not a contract of adhesion and these factors weigh in favor of the Court finding the agreement is not unconscionable.
The Court pointed out that:
The only information plaintiff presented regarding his finances is the following two sentences in his sworn declaration:
Since my termination, I have tried hard to obtain an equivalent position, but in the present labor market, my efforts have been unavailing.
I have established a private engineering practice in which my annual income is about twenty-five thousand dollars ($25,000.00). I have been forced to dip into my retirement savings to make ends meet.
It also pointed out Trigg received significant financial benefits from the employment agreement. Moreover, Trigg had access to the AAA commercial arbitration rules and the applicable fee schedule and did not assert he was unable to pay the expenses or they would work a significant hardship on him. Considering the totality of the relevant, established circumstances, the Court ruled Trigg failed to show the arbitration costs, “imposed by an agreement he freely bargained for, are prohibitively expensive to him” such that he effectively would be precluded from vindicating his rights.
The Court also rejected Trigg’s argument that the arbitration clause was void as against public policy. It ruled that, considering the situation of the parties at the time the contract was made and the purpose of the contract, there was no public policy reason to void the agreement.
While this case is somewhat unusual, involving a highly compensated employee with a previous equity interest in the employer, the Court’s analysis makes clear that Tennessee state law favors arbitration agreements. However, employers seeking to enforce agreements under the Tennessee Uniform Arbitration Act should aware that courts will require those agreements be “freely bargained for” and will examine the totality of the evidence to determine whether an arbitration agreement is unconscionable.