A recent case from a California state appeals court reinforces the importance of having counsel review and revise arbitration agreements early and often. In Avery v. Integrated Healthcare Holdiings, the state appellate court affirmed a lower court’s refusal to compel arbitration in an overtime class action involving a hospital management company’s employees, despite several plaintiffs’ acknowledgment that they had signed arbitration agreements.

In this case, Integrated acquired four hospitals where each of the eight named plaintiffs worked. Seven of the eight employees at issue had signed at least two documents purportedly agreeing to submit their employment claims to arbitration through a “Fair Treatment Process” (FTP). The information on the FTP was included in the prior owner’s employee handbook, which Integrated adopted when it acquired the hospitals. Two months after doing so, Integrated sent a letter to employees, reaffirming the FTP, and requested a signed acknowledgement. Five of the eight employees submitted their acknowledgement.

Four years later, one of the plaintiffs filed a wage and hour class action against Integrated on behalf of himself and similarly-situated employees. Four months after the lawsuit was filed, Integrated reissued its employee handbook with an arbitration policy that included a class action waiver. A second wage and hour suit soon followed, which was eventually consolidated with the first. Integrated filed a motion to compel arbitration, which the trial court rejected on the grounds that the company “failed to present sufficient evidence establishing an enforceable arbitration agreement.”

In affirming the lower court’s decision, the appeals court held: (i) the employee handbook containing the arbitration agreement with the class waivers was issued after the plaintiffs’ claims accrued (and, coincidently, after the class action complaint was filed); (ii) Integrated could not prove that the prior employee handbook, which it sought to enforce in the alternative and which also contained an arbitration agreement, was the handbook that was provided to the plaintiffs; and (iii) the Employee Acknowledgment Forms and Applications for Employment signed by the plaintiffs could not be enforced as stand-alone arbitration agreements because they explicitly incorporated and were incomplete without the arbitration provisions of the FTP, as contained in the employee handbook (and a corresponding brochure).

Notably, Integrated amended its employee handbook after the class action complaint was filed to explicitly prohibit class action arbitrations. It then posted the revised handbook on its intranet. The court rejected these changes as binding on the plaintiffs because the changes were made after the plaintiffs’ claims accrued (i.e., the plaintiffs alleged Integrated engaged in the conduct giving rise to their claims before the handbook was amended) and because Integrated failed to take any steps to affirmatively advise its employees of the changes.

In sum, this case turned on drafting and evidentiary issues that can be easily avoided by counsel’s review. Employers are wise to have counsel review and revise their arbitration agreements now, before any possible litigation. This is especially true in light of the current rise in collective and class action claims in the healthcare industry.