The West Virginia Supreme Court Weighs In On The Validity And Enforceability Of Employment Arbitration Agreements

1. State ex rel. Wells v. Matish, 600 S.E.2d 583 (W. Va. 2004)

The Wells decision involved an employer’s successful efforts to compel a reluctant employee to arbitrate his claims pursuant to an arbitration clause contained in an employment contract. This important decision also marked the first time that the West Virginia Supreme Court upheld an arbitration provision in an employment agreement.

In Wells, an employee and his wife entered into similar contracts to work as news anchors at a television station for a term of four years. After working only one year of her four-year contract term, the employee’s wife commenced an unpaid leave of absence to run for a statewide political office. The television station then placed the employee on an involuntary, unpaid leave of absence. The employee sued the television station and its parent company, alleging claims for breach of contract, public policy violations, defamation and wrongful interference with business relations. He also asked the court to examine the validity of the arbitration provision contained in his employment contract:

Any dispute between the parties arising out of or with respect to this Agreement or any of its provisions or Employee’s employment with Employer shall be resolved by the sole and exclusive remedy of binding arbitration. The arbitration shall be conducted in Charleston, West Virginia under the auspices of, and in accordance with the rules of the American Arbitration Association. Any decision issued by an arbitrator in accordance with this provision shall be final and binding on the parties thereto and not subject to appeal or civil litigation.

The television station filed a motion with the trial court to compel arbitration of the employee’s claims pursuant to the FAA. The Court granted the motion and compelled the employee to arbitrate all claims except those alleged against the parent company.

The employee subsequently petitioned the West Virginia Supreme Court for a writ of prohibition seeking to prohibit the lower court from requiring him to submit his claims to arbitration. The employee argued that the arbitration clause should be disregarded for three reasons:

1. the arbitration costs placed an unreasonable financial burden upon him;
2. the television station allegedly induced him to sign the contract by misrepresenting the costs of arbitration during contract negotiations; and
3. an arbitrator cannot decide public policy claims.

The Supreme Court rejected these arguments and upheld the parties’ arbitration provision.

The Supreme Court found that while the employment contract was prepared by the employer, the terms were negotiated between two sophisticated parties. Accordingly, the employment contract was not a contract of adhesion and the arbitration provision was not unconscionable. Next, the Court found that there was no evidence to support the employee’s argument that the cost of arbitration was excessive. The arbitration was to be held in West Virginia and the award would include an assessment of costs in favor of the successful party. Likewise, the Court found no merit in the employee’s claim that the television station misrepresented the costs of arbitration during contract negotiations as several courts have clearly noted the financial savings of arbitrating employment disputes. Finally, the Court rejected the employee’s contention that public policy claims can only be decided by a court, not an arbitrator. The Court pointed out that the American Arbitration Association’s National Rules for the Resolution of Employment Disputes require the use of arbitrators experienced in the field of employment law and that an arbitrator may grant any remedy or relief deemed just and equitable, including any relief available in a court of law. Therefore, the employee would “not forego any substantive rights afforded him under either statutory or common law simply because his claim was arbitrated.”

2. State ex rel. City Holding Co. v. Kaufman , 609 S.E.2d 855 (W. Va. 2004)

In the City Holding case decided several months after Wells, the Court considered whether a binding arbitration clause, which was contained in a severance agreement/release entered into between an employer and former employee, applied to the parties’ dispute over the former employee’s attempted exercise of stock options. The Supreme Court held that the former employee was not required to arbitrate the claims asserted in the lawsuit he filed over the exercise of his stock options because the parties’ agreement contained a “carve-out” provision removing the stock options from the scope of the arbitration clause. As the court explained, “Wells discussed and reiterated the validity and enforceability, in general, of arbitration agreements… [and] [w]hile Wells represents this Court’s holdings on arbitration agreements, it does not automatically validate all arbitration agreements.” Boiled down to its essence, the Court found that a different result was warranted in the City Holding case because the parties’ agreement contained a carve-out provision which was not present in the agreement considered in Wells.

3. State ex rel. Saylor v. Wilkes, 2005 W. Va. LEXIS 32 (May 11, 2005)

In the Wilkes decision issued last month, the Supreme Court considered the enforceability of an arbitration provision contained in a written agreement signed during the job application process. To be considered for employment with Ryan’s Steak House, prospective employees such as the plaintiff were required to sign a “Job Applicant Agreement to Arbitration of Employment-Related Disputes” with a third party named Employment Dispute Services, Inc. (EDSI). Ryan’s had a separate contract with EDSI where, among other things, it paid EDSI to provide arbitration services and train its managers and supervisors on dispute resolution procedures. The plaintiff, who was a former waitress at Ryan’s, sought relief from a trial court ruling compelling her to arbitrate her employment discrimination and constructive discharge claims. As in Wells, the plaintiff filed a writ of prohibition seeking to prevent enforcement of the trial court’s decision.

On appeal, the Supreme Court granted the writ prohibiting enforcement of the trial court’s ruling. First, the Saylor court found that the agreement was an unconscionable adhesion contract because of the gross disparity in bargaining power, lack of meaningful alternatives available to the employee and the omission of critical terms and conditions in the arbitration agreement. The Court cited several facts in reaching this conclusion, such as the plaintiff’s tenth-grade education and EDSI’s ability to unilaterally modify its rules without any notice.

Next, the Court found that the arbitration agreement was unenforceable for lack of sufficient consideration. Because Ryan’s agreement with EDSI did not require it to submit its employment-related claims to arbitration, the Court reasoned that the only possible basis to assert that Ryan’s actions constituted adequate consideration was that it promised to review a candidate’s application if the applicant promised to arbitrate employment disputes. The Court also found that Ryan’s misrepresented that it was obligated to arbitrate its claims under a separate agreement with EDSI, and that misrepresentation also precluded a finding of sufficient consideration. Ultimately, the Court held that “[a]n employer’s promise merely to review an employment application in exchange for a job applicant’s promise to submit employment-related disputes not associated with the application process to arbitration does not represent consideration sufficient to create an enforceable contract to arbitrate such employment disputes.”

Conclusion

In this trilogy of arbitration cases, the Supreme Court has provided some guidance to employers as to the factors that will be examined in order to determine whether an arbitration agreement is valid and enforceable. These factors include:

1. the sophistication of the parties entering into the arbitration agreement;
2. whether the arbitrationagreement was negotiated;
3. the scope of the parties’ arbitration agreement;
4. whether the arbitration agreement is part of an employment contract or an agreement signed during the job application process;
5. whether there is sufficient consideration to support an arbitration agreement (e.g., the parties’ mutual agreement to arbitrate their claims); and
6. whether the arbitration agreement provides for neutral arbitrators, eliminates or restricts employee rights or claims, or requires an employee to bear an unreasonable or disproportionate share of the arbitration costs and fees.

Thus, while the full contours of a valid and enforceable arbitration agreement remain to be fleshed out in further court decisions, it is clear that employers will need to consider these factors in an effort to prepare binding arbitration agreements.

The author presents these materials with the understanding that the information provided is not legal advice. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using these materials should always research original sources of authority and update this information to ensure accuracy when dealing with a specific matter. No person should act or rely upon the information contained in this publication without seeking the advice of an attorney.