Applying Texas law, the Fifth Circuit recently found that an employer cannot compel arbitration under an agreement that gives the employer the right to unilaterally change the terms of the agreement. Carey v. 24 Hour Fitness, USA, Inc., __ F.3d __, 2012 WL 205851 (5th Cir. Jan. 25, 2012).
The employee in the case brought a class action in federal court, alleging violations of the Fair Labor Standards Act. The employer moved to compel arbitration, based on its employee handbook that provided for mandatory arbitration and provided that the employer “has the right to revise, delete, and add to the employee handbook.”
The district court denied the motion to compel, finding that the arbitration agreement was illusory under Texas law. The Fifth Circuit agreed. It listed the multiple nefarious ways in which an employer could enact a change in the agreement, including after an employee had filed their arbitration demand, and thereby frustrate an employee’s attempt to pursue their claims. “Thus, the fundamental concern driving this line of case law is the unfairness of a situation where two parties enter into an agreement that ostensibly binds them both, but where one party can escape its obligations under the agreement by modifying it.”
So, add “illusoriness” to the list of potential contractual arguments (along with unconscionability and illegality and public policy) that can render an arbitration agreement unenforceable under state law. However, I can’t shake the nagging feeling that a unilateral change provision outside the arbitration agreement should not be considered, given Prima Paint and the severability doctrine, which dictate that the arbitration provisions within a contract be evaluated separately from the rest of the contract.