Recently, the Seventh Circuit Court of Appeals vacated a district court ruling that denied the defendant’s motion to refer an employment matter to arbitration – per a signed employment contract. In this case, the district judge perceived several facets of the employment contract to be too favorable to the employer. Regardless, the appellate panel noted that the defendant was willing to change all aspects of the agreement as long as the dispute could be arbitrated. In fact, both parties wanted to continue with arbitration. The Appellate panel suggested the court name an arbitrator and let the process begin.
When a new employee started work at a bar in Urbana, Illinois, she signed a contract with the bar’s owner. Section 8 of that contract provided that “[a]ny controversy, dispute or claim arising out of” her work will be arbitrated. Such a dispute arose, but the employee filed a suit rather than a demand for arbitration. The district judge denied the defendant bar owner’s motion to refer the matter to arbitration and the owner appealed.
In this case, the district judge deemed several parts of the arbitration clause unenforceable because they are unconscionable as a matter of Illinois law. Unconscionability is a defense to arbitration, if it is among “such grounds as exist at law or inequity for the revocation of any contract.” In other words, arbitration is permissible to the extent, and only to the extent, that state law would enforce other equivalent agreements. The district judge thought that Illinois would not enforce this agreement because some provisions in the arbitration clause were too favorable to the defendant bar owner.
The district judge saw multiple lopsided aspects of section 8 of the contract. For instance, the owner gets to choose the arbitrator and the location of the arbitration; the plaintiff employee must bear all costs even if the owner loses on the merits and some state or federal statute requires losers to foot the bill. The district judge added that the agreement’s silence about arbitral procedures might enable the owner’s chosen arbitrator to use biased modes of decision. While the judge recognized that arbitration is not itself unconscionable, he refused to order arbitration once details such as selection and location had been stripped from the clause.
The judge did not find that the contract between employee and bar owner is one-sided; instead he assumed that a rule applicable to a contract as a whole must be true about each aspect of each clause in it. The appellate panel did not agree with this assumption.
Instead, the panel notes that the defendant bar owner accepted the district court’s holding that provisions for selecting an arbitrator, specifying venue, and paying costs are unenforceable. Moreover, the bar owner maintained that its only goal was to arbitrate rather than litigate—that the details don’t matter, so the judge may fill in the blanks. This is the defendant bar owner’s sole argument on appeal.
Section 4 of the Federal Arbitration Act, 9 U.S.C. §4, fills in one blank. It provides that, in the absence of a contrary agreement, the arbitration takes place in the same judicial district as the litigation—here, the Central District of Illinois. Leaving only the choice of arbitrator, who once selected, can fill in the remaining blanks with regard to procedures for proceeding. In the appellate panel’s view, there is mutual assent to arbitration and a federal judge should implement the parties’ decision whenever possible. The judge should name an arbitrator so everything else can take its own course.
The appellate court vacated the district court’s decision and remanded with instructions to name an arbitrator, refer the dispute to arbitration and stay further judicial proceedings.
If you have questions about how this development might affect your organization, please contact Christopher J. Carlos or Caroline K. Vickrey.