If an employee signs an arbitration agreement, leaves the company, and is rehired without signing a new agreement, can the initial arbitration provision apply to the second period of employment?
In a question of first impression for the District Court for the Eastern District of Kentucky, Gordon Rees Scully Mansukhani attorneys Craig Snethen, Heather Gwinn Pabon, and Samantha Gerken argued that the Arbitration Agreement's clear language applied to periods of subsequent employment. The agreement applied to:
[N]ot only claims, disputes or issues that relate to or arise out of Associate's current employment with the company, but also any claim, dispute or issues that relate to or arise out of any subsequent employment of Associate by the company, should Associate's current employment with the company be terminated for any reason.
The employee/plaintiff began a term of employment in 2014 when he signed the agreement. The plaintiff then resigned and was rehired a year later. Upon his rehire, the plaintiff was not asked to sign another agreement.
The plaintiff raised what the Court referred to as "a novel (albeit unsuccessful) argument." The plaintiff argued:
- The agreement was a "perpetual contract."
- The agreement lacked consideration.
- The facts of the case did not support the presumption in favor of arbitration.
The employer/defendant argued that the explicit terms of the agreement applied and required this dispute to be arbitrated. Defendant countered each of the plaintiff's novel arguments. Ultimately, the court sided with the employer/defendant, finding the agreement did apply and compelling arbitration.
An Agreement Applied to Subsequent Employment is Not a Perpetual Contract
In evaluating Arbitration Agreements, the United States Supreme Court has articulated a firm, federal policy favoring arbitration for dispute resolution, which "requires a liberal reading of arbitration agreements." Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 23 n. 27, 103 S. Ct. 927 (1983). As with any other contract, the parties' intentions control, but those intentions are generously construed as to issues of arbitrability. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S. Ct. 3346, 87 L. Ed. 2d 444 (1985). Generally, courts should apply state-law principles that govern the formation of contracts to determine whether a party has agreed to arbitrate a dispute. Hardin v. First Cash Fin. Servs., Inc., 465 F.3d 470, 475 (10th Cir. 2006).
In this instance, the plaintiff alleged the agreement was a perpetual contract and thus disfavored by Kentucky state law. The plaintiff alleged that a contract without a definite period of time was perpetual. Because the agreement applied to subsequent employment whenever subsequent employment was entered, the agreement covered no definite period of time. In finding for the defendant, the Court found "the dearth of caselaw" applies this rule to business contracts and specifically distributorship contracts, but not Arbitration Agreements. The Court cited to defendant's reference Bowden v. Delta T. Corp., No. CIV.A.06 345 JBC, 2006 WL 3412307, at *6 (E.D. Ky. Nov. 27, 2006), holding "[t]hat a broadly worded arbitration clause may reach conduct that occurs after the termination of the contract in which the arbitration clause was embedded, [] a well-established proposition."
Further, the Court took notice of the defendant's citation of out-of-circuit decisions holding an Arbitration Agreement may survive termination when allowed by the agreement's express terms. Anderson v. Waffle House, Inc., 920 F. Supp. 2d 685, 693 (E.D. La. 2013); Nelson v. Carl Black Chevrolet of Nashville, LLC, No. 3:17-cv-00687, 2017 WL 3298327, at *5 (M.D. Tenn. Aug. 2, 2017).
An Agreement Applied to Subsequent Employment Does Not Require Subsequent Consideration
The plaintiff argued that under Kentucky law, a prior promise to perform could not constitute new consideration to form a contract. According to the plaintiff, he promised to perform when he signed the initial Arbitration Agreement. Applying the agreement to a subsequent period of employment would require, according to the plaintiff, a new promise in consideration of the subsequent application of the Arbitration Agreement. The Court quickly dismissed this argument, as the plaintiff and defendant had an "exchange of mutual promises" in the initial agreement to resolve disputes by arbitration. New consideration was not required, as the Court held no reason was offered why the defendant "would be required to provide new consideration in 2015 for an agreement that had been in place since May 2014."
An Arbitration Agreement May Be Applied to Subsequent Employment
In this case, the Court upheld the Arbitration Agreement, dismissed the lawsuit, and compelled parties to arbitration. Importantly, in considering this question, the Court relied on the terms of the agreement, which defined "disputes" to include those arising from subsequent employment, which explicitly survived the employer-employee relationship, and which had terms for modification or revocation that the plaintiff employee did not utilize.
Attorneys' Fees and Costs
Before litigation, the defendant's counsel believed that the agreement applied, and that litigation would be in contravention of the agreement. When responding to the plaintiff's complaint, the defendant argued it should be entitled to its fees because the plaintiff's counsel acted "unreasonably and vexatiously" in bringing a case to the Court that should have been brought to arbitration. 28 U.S.C. § 1927. The Court, in this matter, denied fees as the plaintiff "raised a novel (albeit unsuccessful) argument that the arbitration agreement constitutes an impermissible contract in perpetuity under Kentucky law." The Court emphasized that the plaintiff "has not cited any caselaw repudiating an arbitration agreement for the reasons at issue here" but stated, "there does not appear to be any controlling authority on the issue." This victory for the defendant sets another persuasive holding for employers with Arbitration Agreements for subsequent employment; affected employers will be more likely to obtain their fees and costs as courts continue to make this finding.
Arbitration Agreements are potent tools for employers. Applying the agreement to subsequent employment is particularly important in sectors that experience high turnover and rehiring. Successes such as this pave the way for compelling employees to participate in arbitration rather than bringing complaints to the public, expensive and slow-moving court system.
If you have questions regarding these or other employment laws, don't hesitate to contact the Gordon & Rees Employment Law practice group.