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ALTERNATIVE DISPUTE RESOLUTION: Arbitration — the wave of the future?

Oklahoma Employment Law Letter - June 1, 2009

By Paul A. Ross

As the sheer number of employer-employee disputes continues to rise, employers have increasingly turned to pre-employment arbitration agreements in an effort to avoid risky jury trials. Under the typical arbitration program, all employees must agree, as an express condition of their employment, to arbitrate any dispute arising out of the employment relationship instead of pursuing a traditional jury trial.

Proponents of arbitration argue it allows for the resolution of employment disputes in a more business-friendly environment.  A single arbitrator acts as judge and jury, theoretically resulting in a more levelheaded, less emotional evaluation of the facts and law of the case. Arbitration proponents argue that removing the jury from the decision- making process substantially reduces the financial risk to employers, so much so that a company may be more likely to defend the principles of an employment decision rather than settling a meritless claim.

Not surprisingly, employees have resisted arbitration. In fact, diligent employees’ attorneys have been able to invalidate arbitration programs on a variety of grounds in an ongoing effort to preserve jury trials in employment disputes. A string of recent court decisions in Oklahoma highlights the difficulty employers encounter when trying to draft enforceable arbitration agreements.  However, the Oklahoma Court of Civil Appeals made clear in a recent case that correctly drafted arbitration provisions are enforceable in Oklahoma.


COMPANY REQUIRES ARBITRATION

In 2005, Jacob Peel applied for work as a rig hand with Nabors Drilling, USA. As a part of   the application process, he executed an acknowledgment form stating that he had received and read a copy of Nabors’ Dispute Resolution Program (DRP) and that he agreed to be bound by the DRP as a condition of his employment. In 2006, he suffered an on-the-job injury and was fired.

In July 2006, Peel filed suit in federal district court, alleging that Nabors terminated him in retaliation for his workers’ compensation claim. The company asked the court to require him to arbitrate his discharge claim under its DRP.

Peel attempted to attack the validity of the DRP on several grounds. Nevertheless, the trial court twice upheld the validity of the DRP and twice ordered him to submit his claim to arbitration. Peel appealed those decisions, and in April 2009, the Oklahoma Court of Civil Appeals issued a unanimous opinion ordering him to pursue his discharge claim through arbitration rather than a jury trial.


CRAFTING AN ENFORCEABLE ARBITRATION PROGRAM

In a thorough opinion, the court of civil appeals made a number of key rulings in favor of employers with arbitration programs. In the process, the court also distinguished recent Oklahoma case law invalidating arbitration agreements in the employment context.

First, the court rejected Peel’s claim that he had never received or read the DRP. He conceded that he had signed an acknowledgment document in which he represented that he had received and read the terms of the DRP. Despite his signature on that document, however, he claimed that he hadn’t actually ever read or seen the program. The court refused to allow him to contradict his previous written representations.

In short, Peel’s representations on the acknowledgment form were considered controlling, and the court presumed that he was fully aware of the terms of the DRP. In reaching that conclusion, the court distinguished the recent Oklahoma Supreme Court decision in Thompson v. Bar-S Foods, Co. In that case, the supreme court invalidated a pre-employment arbitration program because, among other things, it hadn’t been physically distributed to the affected employees.
 
Second, the court concluded that Nabors’ DRP, unlike arbitration agreements in other cases, was supported by sufficient give-and-take, or “consideration,” to form a mutually binding contract. Both the employer and the employee had given something of value, creating a mutual, rather than a one-sided, promise to arbitrate any legal claims.

In reaching that conclusion, the court expressly recognized a key component of the Nabors DRP — that both the employer and the employee promised to arbitrate any claims against each other. A mutual promise like that provides the clearest evidence of the give-and-take necessary to support a valid contract.

The court also held that Nabors’ right to modify the DRP in the future didn’t invalidate the agreement. In the Thompson case, the employer had withheld, as a part of its arbitration program, the right to change the agreement at any time without notice to employees. The supreme court concluded that the employer therefore really made no promise at all — it could simply retract or change the rules at any time, effectively allowing it to manipulate pending claims. Without an enforceable promise by the employer (in this case, a known set of rules under which to arbitrate a claim), the court refused to enforce the employees’ promise to arbitrate claims and invalidated the arbitration agreement for lack of consideration.

In this case, however, Nabors didn’t go that far. Under its DRP, it could modify the terms of the arbitration program, but only after providing 10 days’ notice and not for claims pending at the time of the change. Because the company couldn’t unilaterally modify the terms of pending claims, the court concluded the agreement should still be enforceable.

Finally, and just as important, the court concluded that Nabors’ DRP was governed by federal law, specifically the Federal Arbitration Act (FAA). The FAA is extremely pro-arbitration, allowing a party to an arbitration agreement to enforce the agreement in federal and state court. Significantly, when it applies and when an otherwise valid contract has been formed, the FAA effectively trumps any state law that would preclude arbitration of the claim.

Under the DRP, Nabors and Peel expressly agreed that the FAA was the controlling law. Thus, Peel was barred from arguing that Oklahoma law requires workers’ comp retaliation claims to be tried in district court.  Simply put, the parties’ agreement to apply the FAA rather than Oklahoma law eliminated that argument. Peel v. Nabors Drilling USA.


THE BOTTOM LINE

Although Peel has requested further appellate review of the court’s decision, this opinion is instructive.  Employers with active arbitration programs — and companies considering such programs — must be aware of the myriad of pitfalls that can invalidate the agreement.  On the other hand, as this decision makes clear, carefully constructed employment-related arbitration programs can be a successful means of avoiding a jury trial on employment claims.


The author may be reached at
paul.ross@mcafeetaft.com