Third Circuit Rejects Employee’s Unconscionability Arguments in Compelling Arbitration

In Quilloin v. Tenet HealthSystem Phila. Inc., the Third Circuit reversed the Eastern District of Pennsylvania’s denial of a motion to compel arbitration, finding error in the district court’s conclusion that genuine disputes of material fact might render the parties’ arbitration agreement unconscionable and unenforceable under Pennsylvania law.

Janice Quilloin was employed by Hahnemann University Hospital during two separate stints. At the beginning of each, she signed a one-page “Employee Acknowledgement” form providing that arbitration would be the sole and exclusive remedy for any dispute with her employer. During her second stint, Quilloin filed a putative collective action under the Fair Labor Standard Act and a class action under state law against Tenet Healthcare Corporation and two of its subsidiaries.

The District Court denied a motion to stay or dismiss the action and compelling arbitration, finding that genuine issues of material fact existed as to whether the arbitration agreement was substantively and procedurally unconscionable under state law. The District Court found that the agreement might be substantively unconscionable in one of three ways: (1) by prohibiting the recovery of attorneys’ fees, (2) by precluding class arbitrations, or (3) by allowing Tenet to “run out the clock” on the statute of limitations by requiring the parties to engage in several procedures before seeking arbitration. With respect to procedural unconscionability, the District Court simply deferred ruling on the issue until the issues of substantive unconscionability were ripe for resolution.

The Third Circuit reversed the District Court and compelled arbitration, finding that no substantive or procedural unconscionability existed which rendered the arbitration agreement unenforceable. The Third Circuit agreed with the District Court that the agreement was ambiguous as to the recovery of attorneys’ fees but found that such ambiguity did not warrant denial of Tenet’s motion to compel arbitration. Rather, the issue of attorneys’ fees, which the court stated was not truly a question of arbitrability, was for the arbitrator to decide. Consequently, the court found that the ambiguity concerning the availability of attorneys’ fees required it to compel arbitration, stating “rather than speculate as to whether a certain interpretation of an ambiguity might render an arbitration agreement unenforceable, the proper course is to compel arbitration.”

On the issue of class waiver, the court found that, even if the arbitration agreement was construed to preclude class arbitrations, any state law declaring such a class waiver to be unconscionable would be preempted by the Federal Arbitration Act under the Supreme Court’s decision in ATT Mobility LLC v. Concepcion. Thus, the existence of a class waiver would not be a valid basis for finding the arbitration agreement unconscionable.

The court rejected the third possible basis for substantive unconscionability—the possibility of Tenet’s “running out the clock”—finding that there was no danger that Tenet could do so because Quilloin was always free to move to compel arbitration if she thought the statute of limitations on her claims was in danger of expiring. The court also noted that there was nothing unconscionable about a process that allows an employer the full amount of time under the law to respond to an employee’s grievance, even if the employer is given merely guidelines, rather than strict rules, on responding.

Finally, the court ruled that there was no genuine dispute as to procedural unconscionability, which requires a showing that the party lacked a meaningful choice in entering the agreement. Although Quilloin was the weaker party to the agreement, the court concluded that she did not lack a meaningful choice inasmuch as she was college educated and had signed the same agreement during her first stint with the hospital. Thus, the arbitration agreement could not have been an unfair surprise to her when she signed it the second time.

Consistent with federal policy favoring arbitration, Quilloin v. Tenet HealthSystem Philadelphia, Inc. suggests that Third Circuit courts will not hesitate to compel arbitration, despite potentially unconscionable clauses in the arbitration agreement, if the question is one for the arbitrator in the first instance, and will continue to follow the Supreme Court’s AT&T Mobility LLC v. Concepcion decision in favoring arbitration agreements over state laws barring class action waivers.

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