Courts Appear to be Trending Away from Enforcement of Arbitration Provisions
Some Texas trial courts and appellate courts appear to be veering away from what was once a tradition of enforcing and broadly interpreting arbitration agreements between parties that were free to negotiate the terms therein. However, a small segment of arbitration agreements that involve employers and employees in a non-subscriber setting have recently been challenged by Plaintiffs, Plaintiffs’ decedents as wrongful death beneficiaries, and others in an attempt to have their day in court. This trend runs counter to the historical practice of courts honoring the agreements made between freely contracting parties and the public policy decision by the courts to have parties settle their disputes in mediation or arbitration if there is an agreement in place to do so.
The Eighth Court of Appeals in El Paso recently issued an opinion in In re: Swift Transportation Company, Inc. (No. 08-08-00348-CV). In this matter, Swift, a non-subscriber to the Texas Workers’ Compensation insurance system, sought to enforce the mandatory arbitration provision in its Injury Benefit Plan. After obtaining benefits from the Plan, Jose Valtierra, a driver for Swift, filed suit against the company alleging that he suffered a broken arm while placing chains on his vehicle’s tires in icy conditions.
The trial court denied Swift’s Motion to Compel Arbitration. The El Paso Court of Appeals denied Swift’s writ of mandamus to force Mr. Valtierra to arbitrate his claim. In issuing its ruling, the Court of Appeals found that the Federal Arbitration Act (FAA), the Texas Arbitration Act (TAA), and the Texas Common Law did not require Mr. Valtierra to assert his claim through arbitration. However, given the basis for the Court of Appeals’ ruling, we anticipate Swift arguing its position to the Texas Supreme Court.
AT WILL ARBITRATION AGREEMENTS NOT APPLICABLE UNDER THE FAA?
In a small segment of commerce, there has been an exception severed out such that when an arbitration agreement is made as part of the “employment contract,” these agreements cannot be enforced pursuant to the Federal Arbitration Act. Specifically, there has been a recent string of cases from various Texas Courts of Appeals that have taken what appear to be standard arbitration agreements between employers and employees and scrutinized them under the FAA, TAA, as well as Texas Common Law. The El Paso Court of Appeals held in the recent Swift Transportation opinion that the mandatory arbitration provision of the Injury Benefit Plan between Swift Transportation Company and its employee Jose Valtierra was not enforceable because it constituted an “employment agreement” that fell within this exception.
Under the FAA, Section 1 is an exemption provision providing that the FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C.A. § 1. The United States Supreme Court has interpreted the phrase “other class of workers engaged in foreign interstate commerce” as exempting from the FAA’s coverage employment contracts of transportation workers “actually engaged in the movement of goods and interstate commerce.” The El Paso Court of Appeals also cited authority which clearly states that truck drivers, such as Swift’s employee Valtierra, are considered transportation workers within the meaning of this exemption to the FAA.
Swift’s sole argument in this regard was that the arbitration agreement contained within their Injury Benefit Plan was not a contract of employment but was rather a separate agreement providing benefits to the employee. This argument was interpreted to mean that Swift was arguing that since its employee was an “at will” employee, the Plan could not be an employment contract. However, the El Paso Court of Appeals disagreed with this argument and stated that, for many years, Texas Courts have considered an employment-at-will agreement to be a contract.
Swift’s interpretation of the “contract of employment” phraseology used in Section 1 of the FAA was found to be unpersuasive. The El Paso Court of Appeals held that Swift’s Injury Benefit Plan was a mandatory company policy that included an arbitration provision. Therefore, the El Paso Court of Appeals held that the Plan itself was an employment contract within the meaning of the FAA and therefore the FAA was inapplicable to the Plan’s arbitration provision.
The lesson to be learned from Swift’s Injury Benefit Plan and its applicability under the FAA is that Courts have held that such a policy may be considered an “employment contract” if it is found to be a mandatory company policy, without which there would be no employment. With respect to workers that are seamen, railroad employees, or those engaged the movement of goods in interstate commerce, such employment contracts are subject to the exclusion under Section 1 of the FAA and will not support compelling the employee to pursue his claims in an arbitration forum.
AT WILL ARBITRATION AGREEMENTS UNDER THE TEXAS ARBITRATION ACT
The Texas Arbitration Act (TAA) is similar to that of the FAA and in the event that an arbitration agreement between a non-subscriber and its employee is inapplicable under the FAA or if its terms specifically delineate that the TAA controls the agreement, there are several pitfalls that should be avoided. In the Swift Transportation case, Swift had its Injury Benefit Plan containing the arbitration provision contained within the materials typically provided to new employees, however, what seems to be a more common mistake than it should be, Swift’s employee had not signed the Injury Benefit Plan which contained the arbitration provision. The TAA specifically provides that an agreement to arbitrate a personal injury claim is enforceable only if each party to the claim agreed to arbitrate on the advice of counsel and the agreement is signed by each party and each party’s attorney. This is a rather burdensome provision that would require every non-subscriber to have counsel available each time a new employee was hired, such that the arbitration agreement could be signed as well as the employee having availability of counsel to digest the arbitration agreement in order to execute it. The FAA does not have this requirement. Therefore, the FAA is generally relied upon more than the TAA to enforce arbitration agreements in the non-subscriber setting.
IF NOT THE FAA AND NOT THE TAA, THEN LOOK TO TEXAS COMMON LAW
The inapplicability of the FAA or the TAA does not automatically render arbitration agreements unenforceable as they may also be enforced under the Texas common law. However, the Texas Courts of Appeals are developing case law to create a serious pitfall in enforcing an arbitration agreement for on-the-job injuries. In the Swift Transportationcase, the employee asserted that Texas Labor Code Section 406.033 renders the requirement for arbitration void. Specifically, Section 406.033 provides that a cause of action may not be waived by an employee before the employee’s injury or death. It goes on to provide that any agreement by an employee to waive a cause of action before the employee’s injury or death is void and unenforceable. The Court of Appeals agreed that this statute prohibited the enforcement of the arbitration provision. Other Courts of Appeals have ruled similarly.
A plain reading of this statutory provision indicates that a claim for negligence or gross negligence, assault or any other complaint involving an employee’s injury or death could not be waived by an agreement. The reasoning behind the statutory provision appears clear and in compliance with most public policy that a person could be taken advantage of by signing away any rights to a claim of negligence or gross negligence causing injury to themselves by an employer and a better negotiating and sophisticated position. The Texas Labor Code provision is silent on whether a person can waive a venue or a forum to launch those complaints against an employer which appears to be the essence of an arbitration agreement itself.
An arbitration agreement involves two or more parties agreeing that any dispute they may have arising out of their relationship would be settled in a form other than a court of law, namely before an arbitrator. Such an agreement clearly does not waive any complaints those parties may have. It simply relocates the forum for those complaints to be heard from a Court of Law to an arbitrator. Nevertheless, the fact that Courts have read into the statute a prohibition against agreeing to pursue a cause of action in a different forum, as opposed to the clear language of the statute that prohibits an employee from waiving a cause of action, has a profound effect on Texas non-subscribers.
It should be noted that the Court of Appeals acknowledged that the FAA ordinarily takes precedence “over state attempts to undercut the enforceability of arbitration agreements.” However, the application of the exclusion under Section 1 of the FAA in theSwift Transportation case removed the FAA from consideration.
ADVICE TO NON-SUBSCRIBERS
It is not uncommon practice for nonsubscribers to have their employees enter into binding arbitration agreements such that any disputes involving injury or death stemming from an on-the-job injury will be settled by the parties in arbitration, thus, saving the employer significant litigation costs as well as time in settling claims with its workers. Based on this recent trend of severing out these arbitration agreements and declaring them unenforceable under the three-step process described above, it is important to ensure that if a particular non-subscriber’s agreement is in fact a mandatory company policy, then the non-subscriber needs to understand that in the current legal climate such an agreement may be tossed out by the courts if it falls under an exclusion from the FAA. In the alternative, if the non-subscriber chooses to proceed under the TAA, they must take the onerous step of having each new employee review and execute the arbitration agreement with advice of counsel and also having that attorney sign the arbitration agreement. This does not appear to be an efficient or common practice but if the non-subscriber is fearful of having their arbitration agreement nullified under the FAA or Texas common law, then perhaps taking that additional step under the TAA is necessary.
Under the common law, these arbitration agreements will likely be enforced despite the current Court of Appeals’ rulings. The cases that have lead to the nullification of the arbitration agreements discussed above, have resulted in a number of appeals to the Texas Supreme Court seeking to reverse the appellate decision interpreting the Texas Labor Code prevision discussed above. As mentioned, the Texas Labor Code simply provides that a cause of action may not be waived in an employment agreement but is silent on whether venue or another form for settling that dispute can be waived. Clearly, the Texas Arbitration Act itself has no such provision excepting non-subscribers and, in fact, the nature of an arbitration agreement itself is to waive a right to have one’s day in Court and instead agreeing to waive a cause of action. Therefore, the Texas Supreme Court will likely reconcile this misinterpretation of the Texas Labor Code and held that the Texas Labor Code does not in fact apply to these non-subscriber agreements to the extent they waive a venue for settling disputes.
There are currently several cases before the Texas Supreme Court that have been accepted for review and a decision is likely to come down in the near future. This decision should clear up this confusion and dictate that the Texas Labor Code provision used by Plaintiffs in these instances has been misinterpreted. However, in the meantime, non-subscribers should be aware of this recent trend and may benefit from a review of company policies to ensure that they comply with this framework.
The Swift Transportation case also mentions another issue that non-subscribers should keep in mind, although the ruling by the Court of Appeals did not focus on it. Swift Transportation did not have an arbitration agreement signed by the employee. Even if the Texas Supreme Court disagrees with the Court of Appeals on the application of Labor Code 406.033, the fact that the arbitration agreement was not signed, along with the employee’s assertion that he was unaware of the requirement for arbitration, may harm Swift Transportation’s attempts to compel arbitration. It is sage advice to obtain a signed agreement from each employee. One of the questions to be considered in enforcing an arbitration agreement is whether there was an actual agreement between the parties. Having a signed agreement with the employees limits their ability to argue that they were not aware of or did not agree to such a requirement. The signed agreement is also one more way to show that the employer is up-front with the employee about their process for taking care of employees that suffer on-the-job injuries.
