Courts Send Signal That Care in Drafting Arbitration Provisions is Key

Two recent decisions, one by the Third Circuit Court of Appeals and the other by the New Jersey Appellate Division, offer some interesting insight into the validity and viability of arbitration clauses that send employment-related disputes and claims out of the court system and into arbitration.

In Moon v. Breathless, the Third Circuit Court held that an arbitration provision in an exotic dancer’s independent contractor agreement did not encompass her statutory FLSA and state wage-and-hour claims. Appellant Alissa Moon (“Moon”), a dancer at Breathless Men’s Club (“the Club”), filed a putative collective and class action against the Club in the District of New Jersey alleging violations of the Fair Labor Standards Act, the New Jersey Wage Payment Law and the New Jersey Wage and Hour Law. The Club moved to dismiss based upon an arbitration provision contained in the Independent Dancer Rental Agreement (the “Agreement”) that Moon signed. The Agreement also contained a provision stating Moon was an independent contractor and not an employee. The District Court denied the Club’s motion to dismiss and directed the parties to engage in limited discovery on whether Moon’s claims were subject to a valid arbitration provision. Following discovery, the District Court found that Moon’s claims fell within the scope of the Agreement’s valid arbitration provision and granted the Club’s summary judgment motion. Moon appealed to the Third Circuit.

On appeal, the Third Circuit applied New Jersey law and considered two questions: (1) whether a court should determine arbitrability, and (2) if yes, whether the parties agreed to arbitrate Moon’s claims. On the first question, the Court began with the presumption under New Jersey law that the court, not an arbitrator, should decide issues of arbitrability unless there is clear and unmistakable evidence that the parties agreed to arbitrate arbitrability. Morgan v. Sanford Brown Inst., 137 A.3d 1168, 1177 (N.J. 2016). Relying on Morgan, the Court found that the parties did not clearly delegate arbitrability to the arbitrator. Likewise, the Third Circuit determined it had the “power to decide the arbitration clause’s scope” after finding that the arbitration provision in the Agreement “f[ell] below the standard set by Morgan” because the arbitration provision “fail[ed] to mention arbitrability, let alone the venue for deciding it” and because “the [d]efendant conceded in the trial court that courts must decide issues of arbitrability.”

On the second question, the Court noted that to cover statutory rights under New Jersey law, an arbitration provision must: (1) “identify the general substantive area that the arbitration clause covers”; (2) “reference the types of claims waived by the provision” but need not identify specific statutory rights; and (3) “explain the difference between arbitration and litigation[.]” The Court examined three decisions from the Supreme Court of New Jersey, each of which addressed the scope of an arbitration provision: Garfinkel v. Morristown Obstetrics & Gynecology Assocs., 773 A.2d 665 (N.J. 2001), Atalese v. U.S. Legal Servs. Grp., 99 A.3d 306 (N.J. 2014), and Martindale v. Sandvik, Inc., 800 A.2d 872 (N.J. 2002). The Third Circuit determined that Garfinkel and Atalese governed Moon’s arbitration provision: “Because the arbitration clause here resembles the arbitration clauses in Garfinkel and Atalese, and because the Supreme Court of New Jersey found the arbitration clauses in Garfinkel and Atalese only applied to contract disputes, we hold that the arbitration clause here does not cover Moon’s claims.” In so holding, the Court distinguished Martindale because the arbitration provision there “lacked reference to a limiting principle, such as reference to an agreement” and because it was “sufficiently clear” that the provision covered statutory rights.

Notably, the Third Circuit rejected the Club’s argument that Garfinkel was distinguishable because it involved employees whereas Moon was an independent contractor, noting that Garfinkel was not limited to the employment context. The Court similarly rejected the Club’s arguments that deciding the arbitration question would force the court to determine the case’s merits and that Moon’s claims arise “under the Agreement” because the Agreement contains an employment provision designating Moon as an independent contractor. The Court explained, “[d]espite the contract’s employment provision, Moon’s claims still arise under the FLSA and New Jersey statutes, not the agreement itself.” Accordingly, the Third Circuit reversed the District Court’s award of summary judgment and remanded the case.

In Dugan v. Best Buy Co., the New Jersey Appellate Division considered whether an employee’s electronic acknowledgement of his employer’s arbitration policy was sufficient evidence of assent to bind the employee. Through its eLearning program, Best Buy circulated its new arbitration policy to its employees. Four screens described the new policy and links at the bottom of each screen gave the employee the opportunity to review the full policy and frequently asked questions concerning the policy. The final screen contained the following language: “As with any other Best Buy policy, by remaining employed, you are considered to have agreed to the policy. The purpose of the eLearning is to ensure you read and understand the policy…I have read and understand the Best Buy Arbitration Policy that takes effect on March 15, 2016.” Below that language was a box containing the words “I acknowledge.” The plaintiff, a Best Buy manager, accessed the eLearning program and clicked on the “I acknowledge” button but testified that he did not read the policy. When he subsequently filed suit over the termination of his employment and alleged age discrimination, Best Buy moved to dismiss the case in favor of arbitration and the trial court agreed.

On the Appellate Division’s de novo review, the court applied contract law principles and focused on whether the employee had assented to the terms of the arbitration policy. After finding that the policy satisfactorily informed employees that they were waiving their right to sue in court, the court determined that the plaintiff had not agreed to the provisions of the policy. The court acknowledged its previous decisions holding that an employee can assent to the terms of a contract by electronically clicking on a website box, but found the Best Buy “I acknowledge” box was insufficient because it did not also include language that the employee agreed to the terms of the policy. The court was not persuaded by the fact that the employee was a manager who was obligated to ensure that his employees completed the eLearning tool. In addition, the court rejected the argument that the plaintiff’s continued employment constituted his assent to the arbitration policy. Once again, the court referenced its prior decisions holding that continued employment could constitute assent, see Jaworski v. Ernst & Young U.S., 441 N.J. Super. 464 (App. Div.), certif. denied, 223 N.J. 406 (2015), but found that the plaintiff’s 3-week employment following acknowledgement of the policy was not long enough to manifest his assent. A concurring opinion, Judge Vernoia disagreed that the court’s previous decisions required that the continued employment be of a longer duration but took issue with the language Best Buy used. Specifically, the fact that Best Buy “considered” the employee to have agreed to the policy was, in Judge Vernoia’s view, insufficient. Instead, Best Buy should have expressly stated that continued employment constituted the employee’s agreement to the arbitration policy.

These two cases address different issues but send the same message to employers: if you are going to use an arbitration agreement or policy, make sure you cross your t’s and dot your i’s in the drafting. The courts will hold the employer accountable, and invalidate the arbitration provision, unless the agreement or policy complies with their decisions.

If you have any questions about this blog or about the arbitration of employment-related claims generally, please feel free to contact a member of the Gibbons Employment & Labor Law Department.

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