Takeaway: Courts often take a dim view of employee arbitration clauses and may invalidate one if it is included as part of an employee handbook or other document that undermines its status as a separate contract.
?An arbitration agreement contained in the employee handbook of Nationwide Motor Sales Corp. failed because the signature page indicated that Nationwide could unilaterally change its terms, the 4th U.S. Circuit Court of Appeals ruled.
Five former employees of Nationwide sued the company and its owners in federal district court, alleging fraudulent payment practices that reduced employees’ sales commissions and final paychecks. Nationwide moved to compel arbitration and to dismiss or stay the proceedings.
The Nationwide employee handbook contained a section titled “Agreement to Submit All Employment Disputes to Arbitration.” The first four paragraphs of the arbitration agreement stated an intent to arbitrate employment-related claims and specified the rules and procedures that would apply.
The fifth and final paragraph of the arbitration agreement provided an acknowledgement receipt that confirmed that the employee has read and understood each of the four sections of the agreement. It also contained a modification clause that stated that the employee understands that the employer has the right, from time to time, to make and enforce new policies or procedures and to change, abolish or modify existing policies, procedures or benefits, with or without notice.
The plaintiffs argued against Nationwide’s motion to compel arbitration by asserting that the arbitration agreement was invalid. They argued that the agreement was an illusory promise because Nationwide retained the right to change, abolish or modify the handbook’s policies, procedures and benefits. Under Maryland law, a promise to arbitrate is illusory and thus cannot constitute the consideration necessary to support a binding contract if the employer reserves the right to alter, amend, modify or revoke the arbitration clause at any time, with or without notice.
Nationwide countered that the modification clause was outside of the arbitration agreement itself and did not apply to the agreement because it only referenced policies, procedures and benefits, not “agreements.”
The district court denied Nationwide’s motion, finding the arbitration agreement to be illusory due to the modification clause. Nationwide filed an interlocutory appeal, which paused the case to seek appellate reconsideration of the denial of its motion, with the 4th Circuit.
On appeal, the 4th Circuit recognized that, under Maryland law, the arbitration agreement could survive if separate from the acknowledgement receipt that contained the modification clause or if supported by separate consideration. In a prior case, the 4th Circuit had upheld an arbitration agreement that an employer had distributed along with a related policy on internal dispute resolution.
In that case, the policy allowed the company to modify its internal dispute resolution program, of which arbitration was the third step. Nevertheless, because the arbitration agreement was separately signed and complete in itself, any changes to the internal dispute resolution program did not impact the arbitration agreement, which remained enforceable.
With regard to Nationwide’s policies, however, the 4th Circuit determined that the acknowledgement receipt was an integral part of the arbitration agreement. The fifth paragraph of the arbitration agreement incorporated the receipt by stating that the employee’s signature on the receipt confirmed that the employee had read and understood each of the previous four sections of the agreement. Also, the receipt specifically identified the arbitration agreement as one of the handbook sections to which the receipt specifically applied. The modification clause did not specifically reference “agreements,” but it was clear that it applied broadly to the terms of the handbook.
Because Nationwide’s arbitration agreement and acknowledgement receipt were not separately signed and did not contain language specifying that they were distinct from one another, the modification clause applied to the whole handbook, including the agreement.
The 4th Circuit thus upheld the district court’s decision denying Nationwide’s motion to compel arbitration.
Coady v. Nationwide Motor Sales Corp., 4th Cir., No. 20-2302 (April 25, 2022).
Jeffrey Rhodes is an attorney with McInroy, Rigby & Rhodes LLP in Arlington, Va.