Fifth Circuit Decision May Endanger Many Texas Arbitration Agreements

Executive Summary: The Fifth Circuit has issued a decision which may affect Texas employers who utilize employment arbitration agreements. In Nelson v. Watch House Int'l, L.L.C., No. 15-10531 (5th Cir. Mar. 2, 2016), the court found an employment arbitration agreement unenforceable where the "savings clause" did not expressly require advance notice to employees of amendments and/or termination of the arbitration agreement.

Background

Federal courts apply ordinary state-law contract principles in determining whether agreements to arbitrate are valid. Texas law has long held that arbitration clauses are illusory - rendering them unenforceable - if one party can avoid arbitration by unilaterally amending the provision or terminating the agreement altogether. The Texas Supreme Court carved out an exception, however, in In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), in which it found an arbitration clause was not illusory because the agreement provided that amendments to the agreement would not apply retroactively (i.e. to disputes arising prior to the amendment), and would not be effective until ten days after notice of the termination was given to employees.

The Decision

In Watch House, the employer moved to compel arbitration pursuant to its Arbitration Plan when its former employee filed suit for employment discrimination in federal court. The district court held that the arbitration agreement was not illusory under the Halliburton ruling because its savings clause provided that "[a]ny change to this Agreement will only be effective upon notice to the Applicant/Employee and shall only apply prospectively." In reversing the district court's ruling, the Fifth Circuit held that the notice provision did not meet the requirements of Halliburton because the Agreement provided that the changes to the agreement "shall be immediately effective upon notice to Applicant/Employee..." That failure to provide advance notice to employees, the court held, rendered the agreement illusory under...