Sixth Circuit Rejects Redone Employment Arbitration Agreements (Web)

Walker v. Ryan’s Family Steak Houses Inc. – Arbitration agreement between ADR provider and employee is held unenforceable.  District court holding that contract lacked adequate consideration, looked unconscionable, and otherwise could not be enforced under Tennessee law or the FLSA is affirmed on appeal.
 
Sixth Circuit Rejects Revised Employment Arbitration Agreements with EDSI
 
            On March 9th, 2005, Sixth U.S. Circuit Court of Appeals panel affirmed the denial of employer’s motion to dismiss and petition to compel arbitration.  Plaintiffs, who were employees of Ryan’s Steakhouse, had signed arbitration agreements with Employment Dispute Services Inc., promising to bring any employment disputes against Ryan’s in EDSI arbitration only.  Ryan’s also had an agreement with EDSI, and each EDSI agreement listed the other party as a third-party beneficiary.
 
            In 2000, the Sixth Circuit held that the EDSI agreements were not enforceable because EDSI had not provided adequate consideration for the employees’ promises to submit to arbitration.  Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306.  The court reasoned that since EDSI reserved the right to unilaterally alter the applicable rules and procedures, its promise to provide arbitral services was “fatally indefinite.”  Id. at 315-316.   In response to that holding, EDSI amended its rules to allow employees to choose either the arbitration rules and procedures in place at the time of the dispute, or the rules in effect at the time the employee signed the arbitration agreement.
 
EDSI markets “a private court system for resolving employment-related disputes,” which relies on mandatory arbitration.  For more information, see www.edsiinfo.com.
 
            The March 9th holding rejects this attempt to make EDSI arbitration agreements enforceable under Tennessee law.  However, the Court’s holding relies heavily on the fact that the employees signed the old arbitration agreement, even if the EDSI’s rules and procedures had changed.  Because the old agreement allows EDSI to change its rules, the Court reasoned that EDSI could unilaterally edit or abolish its 2000 amendments and therefore the contract still lacked consideration. 
 
But what about EDSI contracts against employees who signed the amended arbitration agreements?  The court noted that “EDSI is bound by this promise to Plaintiffs only to the extent that Ryan’s is bound to submit to the forum, for without Ryan’s consent EDSI can provide no benefit to Plaintiffs.”  Walker v. Ryan’s Family Steak Houses Inc., 2005 WL 544353, at *7.  Judge Clay, writing for the panel, observed that Ryan’s agreement with EDSI contains a clause allowing Ryan’s to cancel the contract with ten days notice, and may not even obligate Ryan’s to submit to arbitration at all.  Rather, the agreement requires EDSI to provide Ryan’s with “access” to arbitration.   Id. at *8.  Because Ryan’s is not required to submit to the EDSI forum, even the revised employee-EDSI agreements lack consideration.
 
The Circuit expressed additional reservations about the contract’s enforceability.  Noting that Ryan’s annual fee accounted for more than 42% of EDSI’s 2002 gross income, Judge Clay felt that the arbitral panel would be unfairly biased against the employee and therefore prevent Plaintiffs from effectively vindicating their rights under the FLSA.  Id. at *14.  The court also noted that limited discovery (one deposition as of right, and additional depositions only in extraordinary situations) also could significantly prejudice employees and applicants.
 
             Finally, the Court affirmed determinations that the employees did not knowingly and voluntarily waive their right to file suit in federal court, that the contract lacked mutual assent, and that the Arbitration Agreements were unenforceable adhesion contracts.
 
The full opinion can be found at:   Walker v. Ryan's Family Steak Houses Inc.  2005 WL 544353, (6th Cir. 2005).  It is also available at: http://caselaw.lp.findlaw.com/data2/circs/6th/036468p.pdf
 
            The opinion is in line with prior cases refusing to enforce EDSI arbitration agreements:  Walker v. Ryan's Family Steak Houses Inc., 289 F.Supp.2d 916 (M.D.Tenn. 2003); Penn v. Ryan's Family Steak Houses Inc., 269 F.3d (7th Cir. 2001), and Geiger v. Ryan's Family Steak Houses Inc., 134 F.Supp.2d 985 (S.D.Ind. 2001).