Arbitration Under Duress

On April 20, 2007, the Texas Supreme Court issued its per curiam opinion in a mandamus, reversing the decisions of both the trial court and appeal court not to compel arbitration in an employment dispute. In re RLS Legal Solutions, LLC, 2007 Tex. LEXIS 317 (Tex. 2007).

The facts are simple: RLS Legal Solutions LLC ('RLS') employed Amy Cobb Maida ('Maida') as a commissioned-sales representative from 1997 to 2002. During her employment, Maida signed several agreements to arbitrate disputes with RLS, but in 2001, when RLS presented her with yet another arbitration agreement, she initially refused to sign it.

The eight-page, single-spaced agreement presented to Maida in 2001 contained numerous provisions related to her employment, including the term, her compensation and a period of non-competition, and provided that all disputes should be decided by arbitration. The agreement confirmed that the FAA applied to the arbitration provisions at issue. The evidence presented at trial indicated that RLS threatened to withhold Maida's paycheck unless she executed the agreement. RLS paid Maida a base salary every other Friday and a commission once a month by direct deposit to her account. On Nov. 2, 2001, RLS made a $1,416.59 salary payment to her account, but on Nov. 16, 2001, RLS only paid her $2,690.43 for her commission and not the base salary due on that day.

Maida testified that she 'agonized' over the weekend and signed the new agreement on Monday, Nov. 19, 2001, specifically telling RLS that she was signing the agreement under duress. At that time, RLS gave her a check for her salary. RLS contended that it prepared the check Friday but that Maida was not in the office that day to pick it up. Maida disputed this fact. The court took Maida's version of the facts as true and assumed, without deciding, that she made out a case of 'economic duress.' It also found that she presented no evidence that the duress she claimed RLS exerted on her was directed at forcing her to agree to the arbitration provision as distinct from the agreement as a whole.

RLS sought to compel arbitration of the dispute, but the trial court denied the motion. The 9th Court of Appeals in Texas held that the trial court did not abuse its discretion in denying RLS' motion to compel arbitration of the employment dispute on the basis that RLS used economic duress to force the plaintiff to agree to arbitration. The court of appeals found the arbitration agreement to be unenforceable because RLS had withheld wages Maida already earned until she signed the agreement. In other words, this was not an 'all or nothing' deal. Instead, it was a situation where the employer would not pay the employee past wages until she signed the future contract.

The Court's Ruling

The Texas Supreme Court ignored that distinction and instead turned its attention to whether or not Maida objected to the employment agreement in its entirety or just a particular clause (i.e., the arbitration clause). It found that since Maida's 'duress argument' applied to the entire agreement (and not just to the agreement to arbitrate), the arbitrator, and not the courts, must rule on the issue of duress. In other words, in order to have avoided arbitration, Maida would have had to testify that she had no problem with the other terms of her contract with RLS, only that she had a problem with the arbitration provision before a court could rule on the issue. This distinction would allow a court, rather than an arbitrator, to determine in the first instance, whether the arbitration agreement was a valid and binding obligation on the employee.

Fair Decision?

The FAA allows a party to avoid arbitration by claiming that the underlying contract containing an arbitration clause (but not the arbitration clause itself) is void for illegality, and the arbitrator is the proper authority to make this determination. The decision of the Texas Supreme Court is in step with a recent United States Supreme Court decision that ruled an arbitrator, and not a court, must first determine if an underlying contract is illegal and void before enforcing an arbitration clause contained in the contract.

In Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), Buckeye, a payday-loan provider, agreed to loan money to John Cardegna. The loan agreement contained an arbitration clause that compelled the parties to use arbitration, and not the courts, in case of a dispute. Cardegna brought a class action lawsuit against Buckeye for allegedly charging interest rates higher than Florida usury law allows. Buckeye responded by filing a motion to compel arbitration pursuant to the arbitration clause. Cardegna resisted arbitration, maintaining that the arbitration clause was part of an illegal contract and therefore void ab initio ' the clause had never come into existence as a matter of law. The issue before the court was whether a court or an arbitrator should determine whether the underlying contract is void for illegality before enforcing the arbitration clause.

In siding with Buckeye, the 7-1 decision gave authority to resolve disputes with arbitrators and not with judges for all cases, whether challenged in federal or state court: ' ' regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.'

Thus, the trend ' enforced by Buckeye and applied to employer/ employee disputes by In Re RLS ' is to let the arbitrator, not the courts, decide whether or not duress or some other illegality would invalidate the entire agreement. Accordingly, the courts would only have the authority to determine whether the agreement to arbitrate, which is contained in the agreement between the parties, will be enforced.

Conclusion

An alternative to arbitration is a jury trial waiver. While arbitration seems at first instance to be preferable for an employer, there are significant drawbacks. The discovery available to the employee is not, in fact, significantly different from what is provided in state or federal court. The waivers have been upheld in many instances and employers can expect that the law will be followed. See In re Prudential Ins. Co. of N. America, 47 Tex. Sup. Ct. J. 1104 (Tex. 2004), for a discussion of various jurisdictions permitting pre-litigation contractual jury waivers. As many of us have discovered, vacating an arbitration award for 'manifest disregard of the law' is significantly more difficult than obtaining a reversal based on judicial error.

Gary S. Kessler, a member of this newsletter's Board of Editors, is a shareholder of the Dallas firm of Kessler & Collins, P.C. He is a member of the Dallas Inns of Court and is on the faculty of the National Institute of Trial Advocacy.

The use of mandatory arbitration provisions in employment contracts has grown in recent years as employers seek to avoid what is perceived as 'time-consuming' and 'costly' litigation in state or federal courts. Of course, whether or not arbitration actually saves time or money is an issue open for debate. One only has to receive the pre-hearing invoice from three panelists at $500 per hour to question the latter benefit.

The Federal Arbitration Act ('FAA') seeks to ensure the validity and enforcement of arbitration agreements in any 'maritime transaction or a contract evidencing a transaction involving commerce.' 9 U.S.C. ' 1 (2000). This has been held to apply to the employer/employee relationships, paving the way for arbitration agreements to be used to settle disputes between employers and employees. A recent case illustrates what can happen when the employee cries 'foul' and says that her employer forced her to sign the arbitration agreement.

Case in Point

On April 20, 2007, the Texas Supreme Court issued its per curiam opinion in a mandamus, reversing the decisions of both the trial court and appeal court not to compel arbitration in an employment dispute. In re RLS Legal Solutions, LLC, 2007 Tex. LEXIS 317 (Tex. 2007).

The facts are simple: RLS Legal Solutions LLC ('RLS') employed Amy Cobb Maida ('Maida') as a commissioned-sales representative from 1997 to 2002. During her employment, Maida signed several agreements to arbitrate disputes with RLS, but in 2001, when RLS presented her with yet another arbitration agreement, she initially refused to sign it.

The eight-page, single-spaced agreement presented to Maida in 2001 contained numerous provisions related to her employment, including the term, her compensation and a period of non-competition, and provided that all disputes should be decided by arbitration. The agreement confirmed that the FAA applied to the arbitration provisions at issue. The evidence presented at trial indicated that RLS threatened to withhold Maida's paycheck unless she executed the agreement. RLS paid Maida a base salary every other Friday and a commission once a month by direct deposit to her account. On Nov. 2, 2001, RLS made a $1,416.59 salary payment to her account, but on Nov. 16, 2001, RLS only paid her $2,690.43 for her commission and not the base salary due on that day.

Maida testified that she 'agonized' over the weekend and signed the new agreement on Monday, Nov. 19, 2001, specifically telling RLS that she was signing the agreement under duress. At that time, RLS gave her a check for her salary. RLS contended that it prepared the check Friday but that Maida was not in the office that day to pick it up. Maida disputed this fact. The court took Maida's version of the facts as true and assumed, without deciding, that she made out a case of 'economic duress.' It also found that she presented no evidence that the duress she claimed RLS exerted on her was directed at forcing her to agree to the arbitration provision as distinct from the agreement as a whole.

RLS sought to compel arbitration of the dispute, but the trial court denied the motion. The 9th Court of Appeals in Texas held that the trial court did not abuse its discretion in denying RLS' motion to compel arbitration of the employment dispute on the basis that RLS used economic duress to force the plaintiff to agree to arbitration. The court of appeals found the arbitration agreement to be unenforceable because RLS had withheld wages Maida already earned until she signed the agreement. In other words, this was not an 'all or nothing' deal. Instead, it was a situation where the employer would not pay the employee past wages until she signed the future contract.

The Court's Ruling

The Texas Supreme Court ignored that distinction and instead turned its attention to whether or not Maida objected to the employment agreement in its entirety or just a particular clause (i.e., the arbitration clause). It found that since Maida's 'duress argument' applied to the entire agreement (and not just to the agreement to arbitrate), the arbitrator, and not the courts, must rule on the issue of duress. In other words, in order to have avoided arbitration, Maida would have had to testify that she had no problem with the other terms of her contract with RLS, only that she had a problem with the arbitration provision before a court could rule on the issue. This distinction would allow a court, rather than an arbitrator, to determine in the first instance, whether the arbitration agreement was a valid and binding obligation on the employee.

Fair Decision?

The FAA allows a party to avoid arbitration by claiming that the underlying contract containing an arbitration clause (but not the arbitration clause itself) is void for illegality, and the arbitrator is the proper authority to make this determination. The decision of the Texas Supreme Court is in step with a recent United States Supreme Court decision that ruled an arbitrator, and not a court, must first determine if an underlying contract is illegal and void before enforcing an arbitration clause contained in the contract.

In Buckeye Check Cashing, Inc. v. Cardegna , 546 U.S. 440 (2006), Buckeye, a payday-loan provider, agreed to loan money to John Cardegna. The loan agreement contained an arbitration clause that compelled the parties to use arbitration, and not the courts, in case of a dispute. Cardegna brought a class action lawsuit against Buckeye for allegedly charging interest rates higher than Florida usury law allows. Buckeye responded by filing a motion to compel arbitration pursuant to the arbitration clause. Cardegna resisted arbitration, maintaining that the arbitration clause was part of an illegal contract and therefore void ab initio ' the clause had never come into existence as a matter of law. The issue before the court was whether a court or an arbitrator should determine whether the underlying contract is void for illegality before enforcing the arbitration clause.

In siding with Buckeye, the 7-1 decision gave authority to resolve disputes with arbitrators and not with judges for all cases, whether challenged in federal or state court: ' ' regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.'

Thus, the trend ' enforced by Buckeye and applied to employer/ employee disputes by In Re RLS ' is to let the arbitrator, not the courts, decide whether or not duress or some other illegality would invalidate the entire agreement. Accordingly, the courts would only have the authority to determine whether the agreement to arbitrate, which is contained in the agreement between the parties, will be enforced.

Conclusion

An alternative to arbitration is a jury trial waiver. While arbitration seems at first instance to be preferable for an employer, there are significant drawbacks. The discovery available to the employee is not, in fact, significantly different from what is provided in state or federal court. The waivers have been upheld in many instances and employers can expect that the law will be followed. See In re Prudential Ins. Co. of N. America, 47 Tex. Sup. Ct. J. 1104 (Tex. 2004), for a discussion of various jurisdictions permitting pre-litigation contractual jury waivers. As many of us have discovered, vacating an arbitration award for 'manifest disregard of the law' is significantly more difficult than obtaining a reversal based on judicial error.

Gary S. Kessler, a member of this newsletter's Board of Editors, is a shareholder of the Dallas firm of Kessler & Collins, P.C. He is a member of the Dallas Inns of Court and is on the faculty of the National Institute of Trial Advocacy.