Floss v. Ryan's Family Steak Houses, Inc.

GWIN, District Judge.

With these appeals, consolidated for purposes of decision, the Court reviews whether employees effectively waived their rights to bring actions in federal court under the Americans with Disabilities Act, 42 U.S.C. § 12101, et seq. (“ADA”), and the Fair Labor Standards Act, 29 U.S.C. § 201, et seq. (“FLSA”). At the district court, the plaintiffs attempted to sue their former employer, Ryan's Family Steak Houses, Inc. (“Ryan's”). However, when applying for employment at Ryan's, both plaintiffs had signed a form indicating they would arbitrate all employment-related disputes. In both cases, Ryan's filed a motion to compel arbitration.

Finding no valid arbitration agreement, the United States District Court for the Eastern District of Tennessee refused to require Plaintiff-Appellee Kyle Daniels to arbitrate his claim under the ADA. In contrast, the United States District Court for the Eastern District of Kentucky found that Plaintiff-Appellant Sharon Floss was required to arbitrate her dispute and could thus not pursue her claim under the FLSA in federal court.

Ryan's now appeals the district court's refusal to require Daniels to arbitrate his ADA claim. Similarly, Floss appeals the district court's order requiring her to submit her FLSA claim to arbitration. Because we find neither Daniels nor Floss validly waived their right to bring an action in federal court, we REVERSE the district court's order requiring Floss to arbitrate her claim, and AFFIRM the district court's order refusing to require Daniels to submit his claim to arbitration.

In support of its argument that the plaintiffs agreed to waive their right to bring an action in federal court and instead agreed to arbitrate all employment disputes, Ryan's relies upon a document identified as the “Job Applicant Agreement to Arbitration of Employment-Related Disputes.” Ryan's includes this purported agreement in its employment application packet. Only those applicants who sign the agreement are considered for employment at Ryan's. Both Daniels and Floss acknowledge signing the agreement.

The employee's agreement to arbitrate is not with Ryan's. Instead, the agreement runs between the employee and a third-party arbitration services provider, Employment Dispute Services, Inc. (“EDSI”). In the agreement, EDSI agrees to provide an arbitration forum in exchange for the employee's agreement to submit any dispute with his potential employer to arbitration with EDSI. Although Ryan's is not explicitly identified as a party to the agreement, the agreement says the employee's potential employer is a third-party beneficiary of the employee's agreement to waive a judicial forum and arbitrate all employment-related disputes.

The agreement gives EDSI complete discretion over arbitration rules and procedures. The agreement says that all arbitration proceedings will be conducted under “EDSI Rules and Procedures.” The agreement then gives EDSI the unlimited right to modify the rules without the employee's consent.

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

We review de novo a district court's decisions regarding both the existence of a valid arbitration agreement and the arbitrability of a particular dispute. . . .

In deciding whether to compel arbitration of a federal statutory claim, we initially consider whether the statutory claim is generally subject to compulsory arbitration. If the statutory claim is not exempt from mandatory arbitration, we next consider whether the parties have executed a valid arbitration agreement and, if so, whether the statutory claim falls within the scope of that agreement. . . .

Mandatory arbitration of federal statutory claims continues to generate considerable debate among courts and commentators. At bottom, this debate centers on the efficacy of resolving “ public disputes in private fora.” . . .

With its informal nature, arbitration is widely-accepted as a sound method for resolving essentially private disputes, such as those arising from collective bargaining agreements and other contracts. Yet, for some, this informality renders arbitration suspect as a forum for resolving statutory claims, which typically implicate important public interests. As one jurist and commentator has explained:

When public laws are enforced in private fora, however, we have no assurance that the underlying public interests are fully satisfied. This is not to say that private fora are incapable of resolving disputes in a manner protective of the public interest. However, conflicts that are resolved through mediation and arbitration usually are not subject to public scrutiny, so we do not know whether such resolutions are consistent with prevailing interpretations of public law or whether the procedures followed were inequitable. . . .

For a time, skepticism regarding the role of arbitration in resolving statutory claims held sway. This skepticism is perhaps best reflected in the Supreme Court's approach to the mandatory arbitration of statutory claims. The Court rejected arbitration as the lone forum for vindicating claims under Title VII of the 1964 Civil Rights Act and the Securities Act of 1933. . . . In so holding, the Court explained that arbitrators' inexperience with legal concepts coupled with the lack of stringent procedural safeguards rendered an arbitral forum, in the context of the statutory claims at issue, an unsuitable replacement for a court of law. . . .

However, the tide soon turned. In a trio of cases decided in the 1980s, the Supreme Court enforced arbitration agreements covering claims under the Sherman Act, see Mitsubishi Motors Corp., 473 U.S. at 640, 105 S.Ct. 3346, the Securities Act of 1933, see Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 483, 109 S.Ct. 1917, 1921, 104 L.Ed.2d 526 (1989), the Securities Exchange Act of 1934, see Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238, 107 S.Ct. 2332, 2344, 96 L.Ed.2d 185 (1987), and the civil provisions of the Racketeering Influenced Corrupt Organizations Act (“RICO”), see McMahon, 482 U.S. at 242, 107 S.Ct. 2332. These holdings led the Court to declare in 1991 that “[i]t is now well settled that statutory claims may be the subject of an arbitration agreement, enforceable by the FAA.” . . .

The Court addressed its growing acceptance of mandatory arbitration for statutory claims in Gilmer v. Interstate/Johnson Lane Corp., in which the Court upheld the mandatory arbitration of claims under the Age Discrimination in Employment Act, 29 U.S.C. § 621, et seq. . . . In permitting the compulsory arbitration of statutory claims, the Court recognized that by “ ‘agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.’ ” . . . And the Court dismissed generalized attacks on the suitability of arbitral fora as arising from a “ ‘suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants.’ ” . . . Such a suspicion, the Court observed, was “far out of step” with the “current strong endorsement” of arbitration. . . .

Yet not all statutory claims are amenable to mandatory arbitration. . . . In creating a statutory cause of action, Congress may choose to mandate a judicial forum for its resolution. . . . Such an intent is typically evidenced in the statutory text, legislative history, or by an “inherent conflict” between arbitration and the underlying purposes of the statute. . . .

Here, Floss argues that a conflict exists between arbitration and her claim under the FLSA. Specifically, Floss insists that an arbitral forum does not sufficiently allow for the furtherance of the important social policies implicated by the minimum wage provisions of the FLSA. Floss contends that a claim under these provisions involves not only an attempt to receive an individual remedy, but also an effort to promote a minimum standard of living for the nation's lowest paid workers. According to Floss, requiring a party to seek resolution of a minimum wage claim under the FLSA in an arbitral forum will thwart the latter objective.

Floss's argument does not persuade. Though a claim under the FLSA certainly serves a purpose beyond providing relief to an individual claimant, we fail to see how the broader policies furthered by such a claim are hindered when that claim is resolved through arbitration. As the Supreme Court has held, both judicial and arbitral fora “can further broader social purposes.” . . . Indeed, the Court has upheld the compulsory arbitration of various statutory claims that further both individual and societal interests, including claims under the Sherman Act and RICO. Floss offers no compelling reason for drawing a distinction between these statutes and the FLSA.

However, even if arbitration is generally a suitable forum for resolving a particular statutory claim, the specific arbitral forum provided under an arbitration agreement must nevertheless allow for the effective vindication of that claim. Otherwise, arbitration of the claim conflicts with the statute's purpose of both providing individual relief and generally deterring unlawful conduct through the enforcement of its provisions. . . .

Both Floss and Daniels argue that the specific arbitration forum provided by the current version of the EDSI Rules and Procedures does not allow them to effectively vindicate their claims under the FLSA and the ADA. They say the procedures allow for the appointment of a biased and incompetent panel of arbitrators, as well as unduly limit the participants' discovery opportunities.

We have serious reservations as to whether the arbitral forum provided under the current version of the EDSI Rules and Procedures is suitable for the resolution of statutory claims. Specifically, the neutrality of the forum is far from clear in light of the uncertain relationship between Ryan's and EDSI. Floss and Daniels suggest that EDSI is biased in favor of Ryan's and other employers because it has a financial interest in maintaining its arbitration service contracts with employers. Though the record does not clearly reflect whether EDSI, in contrast to the American Arbitration Association, operates on a for-profit basis, the potential for bias exists. In light of EDSI's role in determining the pool of potential arbitrators, any such bias would render the arbitral forum fundamentally unfair. . . .

Moreover, EDSI's current rules require an employee to generally pay one-half of the arbitrators' fees as a condition of pursuing a dispute. Such a fee structure could potentially prevent an employee from prosecuting a federal statutory claim against an employer. Recognizing as much, the District of Columbia Circuit has refused to countenance an employer's requirement that employees submit their disputes to arbitration as a condition of employment absent that employer's agreement to bear the full costs of the arbitrators' fees. . . .

Though we have concerns with both the fee structure and potential bias of EDSI's arbitral forum, we need not decide whether these deficits prevent the arbitration of Floss and Daniels's statutory claims. As explained below, Floss and Daniels are not contractually obligated to submit their federal statutory claims to arbitration in EDSI's arbitral forum. Thus, Floss and Daniels need not establish the unsuitability of EDSI's arbitral forum in order to litigate their statutory claims in federal court.

The Federal Arbitration Act declares that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon grounds that exist at law or in equity for the revocation of any contract.” . . . However, “the FAA was not enacted to force parties to arbitrate in the absence of an agreement.” . . . Indeed, “[t]he sine qua non of the FAA's applicability to a particular dispute is an agreement to arbitrate the dispute in a contract which evidences a transaction in interstate commerce.” . . .

Floss and Daniels say the arbitration agreements they signed as part of their employment applications with Ryan's are unenforceable. In deciding whether the agreements are enforceable, we examine applicable state-law contract principles. . . . Thus, we review both Kentucky and Tennessee law to decide if Floss and Daniels have executed valid arbitration agreements.

Consideration is an essential element of every contract. . . .In other words, a promise is legally enforceable only if the promisor receives in exchange for that promise some act or forbearance, or the promise thereof. . . .

A promise constitutes consideration for another promise only when it creates a binding obligation. Thus, absent a mutuality of obligation, a contract based on reciprocal promises lacks consideration. . . .

Promises may fail to create legally binding obligations for a variety of reasons. . . . Most notably, a promise may in effect promise nothing at all. Such an illusory promise arises when a promisor retains the right to decide whether or not to perform the promised act. FN8 . . . A promise is also illusory when its indefinite nature defies legal enforcement. . . .

=====FOOTNOTE 8=====

Floss insists that the district court erred in determining as a matter of law that she was not fraudulently induced to sign the agreement. Because the agreement is unenforceable on other grounds, we do not address this argument.

=====Footnote End=====

In the purported agreement at issue in this case, EDSI offered its promise to provide an arbitral forum as consideration for Floss and Daniels's promise to submit any dispute they may have with their employer to arbitration with EDSI. In ruling in favor of Daniels, the district court found that EDSI's promise did not create a binding obligation. We agree.

EDSI's promise to provide an arbitral forum is fatally indefinite. Though obligated to provide some type of arbitral forum, EDSI has unfettered discretion in choosing the nature of that forum. Specifically, EDSI has reserved the right to alter the applicable rules and procedures without any obligation to notify, much less receive consent from, Floss and Daniels. EDSI's right to choose the nature of its performance renders its promise illusory. As Professor Williston has explained:

Where a promisor retains an unlimited right to decide later the nature or extent of his performance, the promise is too indefinite for legal enforcement. The unlimited choice in effect destroys the promise and makes it merely illusory. . .

EDSI's illusory promise does not create a binding obligation. The purported arbitration agreement therefore lacks a mutuality of obligation. Without a mutuality of obligation, the agreement lacks consideration and, accordingly, does not constitute an enforceable arbitration agreement.

Ryan's has pursued an acceptable objective in an unacceptable manner. An employer may enter an agreement with employees requiring the arbitration of all employment disputes, including those involving federal statutory claims. Yet an employer cannot seek to do so in such a way that leaves employees with no consideration for their promise to submit their disputes to arbitration. Here, we find that Floss and Daniels did not receive any consideration for their promise to arbitrate their disputes. We thus refuse to enforce their promise in favor of Ryan's.

The judgment of the United States District Court for the Eastern District of Tennessee in case 99-5187 is AFFIRMED, and the judgment of the United States District Court for the Eastern District of Kentucky in case 99-5099 is REVERSED.