Tag: arbitration

Contractual Arbitration Clauses and Unconscionability – IL 4th Dist. Case Note

Courts generally favor contractual arbitration clauses. The reason is that they (in theory at least) save litigants’ time and money and also reduce court congestion.

Arbitration provisions appear in varied business settings ranging from franchise agreements and personal services contracts to employment agreements and most everything in between.

Willis v. Captain D’s , 2015 IL App (5th) 140234-U examines an arbitration clause in the employment contract context and whether the clause is expansive enough to cover an employee’s sexual harassment claim involving a co-worker.

There, a plaintiff grocery store cashier signed an employment contract that contained broad arbitration language.  Claiming her co-employee sexually harassed her and the defendant did nothing to stop it, the plaintiff filed multiple state court tort claims without first demanding arbitration. The trial court denied the employer defendant’s motion to compel arbitration finding the plaintiff’s assault and battery claims did not arise out of her employment and were beyond the scope of arbitration.  Defendant appealed.

Held: Reversed

In finding that plaintiff’s claims fell within scope of the arbitration clause, the court announced the key rules that govern arbitrability:

– Under the Illinois Uniform Arbitration Act, 710 ILCS 5/1 et seq., parties are bound to arbitrate the issues they agreed to arbitrate;

– A court (not an arbitrator) decides whether a particular dispute is subject to arbitration;

– The two main arbitrability issues are (1) whether the parties are bound by a given arbitration agreement, and (2) whether an arbitration provision applies to a particular type of controversy;

– Where two parties mutually agree to arbitrate, there is sufficient consideration to bind each side to the arbitration provision;

– Inclusion of the phrase “arising out of” or “related to” in connection with an arbitration agreement denotes broad application of the arbitration agreement;

– An arbitration clause will be deemed procedurally unconscionable where it’s difficult to find, read or understand and where a party didn’t have reasonable opportunity to appreciate the clause;

– Substantive unconscionability will negate an arbitration agreement where it’s terms are blatantly skewed in one side’s favor to the exclusion of the weaker contracting party or where arbitrating would impose substantial costs on a party;

– Continued employment after notice of an arbitration agreement is sufficient consideration to enforce the agreement.

(¶¶ 12-32)

Validating the arbitration clause, the court held that it was supported by consideration. It found the employer’s promise to employ the plaintiff and to keep employing her in exchange for plaintiff signing the employment contract was sufficient to bind the plaintiff to the arbitration agreement.

The court also rejected the plaintiff’s unconscionability arguments. On the procedural unconscionability front, the court found that the plaintiff had two separate occasions to review and accept the arbitration agreement (plaintiff was previously hired a few years ago by the same defendant) and the arbitration language conspicuously appeared in all-caps. It wasn’t buried in a maze of fine print.

Substantively, the court found that the plaintiff failed to support her claim that submitting to arbitration was cost-prohibitive – especially since the court filing fee exceeds the contractual arbitration fee.

The court also found that the arbitration agreement encompassed the plaintiff’s claims. While her assault and battery claims were against an individual employee, her remaining claims against the corporate defendant sounded in negligent hiring, retention and supervision. In light of the arbitration clause’s sweeping language, these claims clearly fell within the reach of the arbitration clause.

Take-aways:

– The court (not an arbitrator) determines whether a dispute is subject to arbitration;

– A promise of employment conditioned on employee signing arbitration agreement will likely meet requirements of a valid contract;

– Broad arbitration language that contains “arising out of” and “related to” phrasing will constitute strong support for a broad application of an arbitration clause.

When A Third Party (And Non-Party) Can Enforce An Arbitration Provision

arbitrationThe Northern District compelled arbitration of a multi-count fraud suit filed by a software company against a former salesman and his new employer in Paragon Micro, Inc. v. Bundy, 2014 WL 2441969 (N.D.Ill. 2014).

The ex-employee formed his own company and started steering business from his former employer.  The former employer sued for computer tampering, breach of fiduciary duty, unfair competition, and conversion.

The Independent Contractor Agreement signed by the defendant salesman said “any and all disputes” would be resolved by binding arbitration.  After the plaintiff refused defendants’ demand for arbitration, the defendants moved to compel arbitration.

Result: motion granted.

Reasons:

– The Federal Arbitration Act, 9 U.S.C. § 1 (FAA), reflects a liberal policy favoring arbitration agreements;

– Courts should enforce arbitration clauses unless they are tainted by fraud, duress, unconscionability or other standard contract defenses;

– The FAA permits a court to compel arbitration where there is (1) a written agreement to arbitrate; (2) a dispute covered by or within the scope of an arbitration agreement; and (3) a refusal to arbitrate;

– Federal courts rely on state contract formation rules in deciding whether parties agreed to arbitrate a particular issue and a party can be compelled to arbitrate only those issues he agreed to arbitrate;

– The party opposing arbitration agreement bears the burden of showing why the agreement is unenforceable;

– Any doubts concerning arbitration, should be resolved in favor of it;

– Contractual arbitration provisions survive termination of the contract unless the contract expressly states otherwise;

–   “arising out of”, “relating to” and “any and all” phrasing leads to a strong presumption of arbitrability.

(**3-5, 8).

Application:

The Court held that the contract’s arbitration clause applied to the plaintiff’s various claims against the defendants.  Finding that plaintiff’s Complaint allegations fell within the scope of the arbitration clause, the Court pointed to the arbitration clause’s applicability to “any and all disputes” connected to the individual defendant’s account representative duties.

The Court also found that the corporate defendant – a non-party to the Independent Contractor Agreement – could still enforce the arbitration clause against the plaintiff.

Under Illinois law, a non-party can require arbitration where (1) the plaintiff lodges claims against the non-party that reference a written agreement (that has an arbitration clause); and (2) when the plaintiff’s claims against the third party are factually intertwined with the claims against another party that did sign the contract.

Here, both non-party exceptions applied.  The plaintiff’s claims referred to a written agreement – the Independent Contractor Agreement –  and the allegations directed to the corporate defendant (non-party) were enmeshed with the plaintiff’s claims against the individual defendant (the account rep).

Finally, the court nixed the plaintiff’s waiver argument.  The Court cited case law that suggests that at least a several-month delay – from suit filing to the arbitration demand – is usually required for a party to waive an arbitration provision. (*10).

Afterwords:

This case illustrates that contractual arbitration clauses will be upheld where they are broad and clearly worded.  The presence of “any and all disputes” or “arising out of” verbiage will likely signal all-encompassing arbitration coverage. 

Non-parties can enforce an arbitration clause where they’re third-party beneficiaries of the contract or where the claims against the third party are factually connected to claims against a party that did agree to arbitration.