Fifth Circuit Nuances Validity and Delegation in Employment Arbitration Clauses | Practical Law

Fifth Circuit Nuances Validity and Delegation in Employment Arbitration Clauses | Practical Law

In Kubala v. Supreme Prod. Servs., Inc., the US Court of Appeals for the Fifth Circuit held, in a Fair Labor Standards Act (FLSA) collective action, that a delegation clause almost identical to the clause in Rent–A–Center was valid and therefore required the arbitrator to decide on threshold arbitrability. The court held that the delegation clause governed despite the fact that the suit was filed before the arbitration policy was presented to the employee on a "take it or leave it" basis. Kubala provided no evidence to counter the employer's claim that it had no notice of the lawsuit prior to issuance of the policy, and the case was submitted to arbitration to determine questions of arbitrability.

Fifth Circuit Nuances Validity and Delegation in Employment Arbitration Clauses

Practical Law Legal Update w-002-8828 (Approx. 5 pages)

Fifth Circuit Nuances Validity and Delegation in Employment Arbitration Clauses

by Practical Law Labor & Employment
Published on 27 Jul 2016 • USA (National/Federal)
In Kubala v. Supreme Prod. Servs., Inc., the US Court of Appeals for the Fifth Circuit held, in a Fair Labor Standards Act (FLSA) collective action, that a delegation clause almost identical to the clause in Rent–A–Center was valid and therefore required the arbitrator to decide on threshold arbitrability. The court held that the delegation clause governed despite the fact that the suit was filed before the arbitration policy was presented to the employee on a "take it or leave it" basis. Kubala provided no evidence to counter the employer's claim that it had no notice of the lawsuit prior to issuance of the policy, and the case was submitted to arbitration to determine questions of arbitrability.
On July 20, 2016, in Kubala v. Supreme Prod. Servs., Inc., the US Court of Appeals for the Fifth Circuit held, in an FLSA collective action, that a delegation clause almost identical to the clause in Rent–A–Center was valid and therefore required the arbitrator to decide on threshold arbitrability. The decision also reiterates that in Texas, an at-will employee who continues working with notice of a new arbitration policy is deemed to have accepted the policy as a matter of Texas law This rule applies even though the employee received notice after filing suit but before the employer became aware of the lawsuit. ( (5th Cir. July 20, 2016)).

Background

Ted Kubala was employed by Supreme Production Services, Incorporated (Supreme Production). He and other employees were paid a base salary and an hourly bonus for time spent working in oilfields. On March 9, 2015, Kubala brought an FLSA collective action against Supreme Production, claiming that he and similarly situated workers were improperly denied overtime pay.
On March 11, 2015, allegedly before Supreme Production received notice of the FLSA suit, Supreme Production announced a new arbitration policy (policy) to govern all employment-related disputes, including in relevant part any claims under the FLSA. The policy:
  • Contained a "delegation clause" stating that any disputes about the interpretation or applicability of the policy are to be resolved in the first instance by the arbitrator.
  • Indicated that:
    • an employee's assent to the arbitration agreement was a necessary condition of employment; and
    • its effective date would be the earlier of the date on which the employee signed the policy or March 13, 2015.
Kubala did not sign the policy.
Relying on the policy (and specifically the delegation clause), Supreme Production moved for the district court to either:
  • Dismiss Kubala's claims.
  • Compel arbitration.
Kubala opposed the motion, which the district court denied, holding that there was no arbitration agreement because nothing in the policy indicated an intent to arbitrate preexisting disputes. The district court did not address Supreme's contention that the delegation clause transferred the power to decide threshold arbitrability issues to the arbitrator.
Supreme appealed to the Fifth Circuit.

Outcome

The Fifth Circuit reversed the district court and remanded, directing the district court to compel arbitration, and holding that:
  • There was a valid agreement to arbitrate.
  • The arbitration agreement contained a valid delegation clause requiring the arbitrator to decide threshold arbitrability issues.
The Fifth Circuit noted that:
  • Under the US Supreme Court's Rent–A–Ctr., W., Inc. v. Jackson:
    • delegation clauses are enforceable and transfer the court's power to decide arbitrability questions to the arbitrator. Therefore, a valid delegation clause requires the court to refer a claim to arbitration to allow the arbitrator to decide gateway arbitrability issues; and
    • if the party seeking arbitration points to a delegation clause, the court's analysis is limited. After finding that there is in fact a valid agreement, the court's only question is whether the purported delegation clause demonstrates an intent to have the arbitrator decide whether a claim must be arbitrated. If there is a valid delegation clause, the motion to compel arbitration should be granted in almost all cases.
      (561 U.S. 63, 68–69 (2010).)
  • Under Texas law arbitration agreements between employers and their employees are broadly enforceable (In re Poly–Am., L.P., 262 S.W.3d 337, 348 (Tex. 2008)).
  • Texas law allows an employer to impose the addition of an arbitration agreement to an existing employment agreement, as a term of continued employment, as long as it provides notice. An at-will employee who continues working with notice of a new arbitration policy is deemed to have accepted the policy as a matter of law. (In re Halliburton Co., 80 S.W.3d 566, at 568–69 (Tex. 2002).)
The Fifth Circuit found that:
  • The district court erred by engaging in close contract interpretation at the first step of analysis, which should focus only on contract formation. It is obvious that the parties validly formed a contract to arbitrate some set of claims.
  • Supreme provided notice of the policy in a meeting at which the policy was explained and employees (including Kubala) were informed that acceptance was a condition of continued employment. Kubala continued to work after the March 13 date of deemed acceptance. This is a nearly identical match for the facts in Halliburton. The fact that Kubala had filed suit prior to the notice of the arbitration policy was not relevant to the determination, and Kubala provided no evidence to counter the employer's argument that it had no notice of the lawsuit prior to issuance of the arbitration policy.
  • The delegation clause in the policy reads:
    "The arbitrator shall have the sole authority to rule on his/her own jurisdiction, including any challenges or objections with respect to the existence, applicability, scope, enforceability, construction, validity and interpretation of this Policy and any agreement to arbitrate a Covered Dispute."
  • The delegation clause in the policy is almost identical to the clause in Rent–A–Center (561 U.S. at 66, 130 S.Ct. 2772). It inevitably follows that the clause in this case is a valid and enforceable delegation clause.

Practical Implications

This decision provides guidance on what constitutes a valid delegation clause in an arbitration agreement and suggests that even when an employee has filed a lawsuit, if the employer did not receive notice of the lawsuit, an arbitration policy issued after the lawsuit was filed may still withstand legal scrutiny. Employers may not want to rely too heavily on this unique decision, but it demonstrates a rare instance in which a newly issued arbitration policy was enforced with respect to a pending claim.