Court voids signed arbitration agreement under employee handbook

Carry: Courts often take a dim view of employee arbitration clauses and may invalidate one if it is part of an employee handbook or other document that undermines its status as a separate contract.

An arbitration agreement contained in the employee handbook of Nationwide Motor Sales Corp. failed because the signature page said Nationwide could unilaterally change its terms, the U.S. 4th Circuit Court of Appeals has ruled.

Five former Nationwide employees sued the company and its owners in federal district court, alleging fraudulent payment practices that reduced sales commissions and employees’ final paychecks. Nationwide has requested arbitration and the dismissal or stay of proceedings.

Nationwide’s employee handbook contained a section titled “Agreement to Refer All Employment Disputes to Arbitration”. The first four paragraphs of the arbitration agreement set out the intention to arbitrate employment-related claims and specified the rules and procedures that would apply.

The fifth and final paragraph of the arbitration agreement provided for an acknowledgment confirming that the employee had read and understood each of the four articles of the agreement. It also contained a modification clause stating that the employee understands that the employer has the right, from time to time, to develop and apply new policies or procedures and to change, abolish or modify the policies, procedures or existing benefits, with or without notice. .

Plaintiffs opposed Nationwide’s motion to compel arbitration claiming that the arbitration agreement was invalid. They argued that the agreement was an illusory promise because Nationwide reserves the right to change, abolish or modify the manual’s policies, procedures and benefits. Under Maryland law, a promise to arbitrate is illusory and therefore cannot constitute consideration necessary to support a binding contract if the employer reserves the right to alter, amend, modify or revoke the arbitration clause at any time, with or without notice.

Nationwide countered that the modification clause was outside of the arbitration agreement itself and did not apply to the agreement because it only referred to policies, procedures and benefits, not “agreements”. .

The district court denied Nationwide’s motion, finding that the arbitration agreement was illusory because of the modification clause. Nationwide filed an interlocutory appeal, which stayed the case to seek appellate review of the denial of its motion, with the 4th Circuit.

On appeal, the 4th Circuit recognized that under Maryland law, the arbitration agreement could survive if severed from the acknowledgment containing the modification clause or if supported by a separate consideration. In an earlier case, the 4th Circuit upheld an arbitration agreement that an employer had circulated along with a related policy on resolving internal disputes.

In this case, the policy allowed the company to modify its internal dispute resolution program, of which arbitration was the third step. However, since the arbitration agreement was signed separately and complete on its own, any changes to the internal dispute resolution program did not affect the arbitration agreement, which remained enforceable.

Regarding Nationwide’s policies, however, the 4th Circuit determined that the acknowledgment is part of the arbitration agreement. The fifth paragraph of the arbitration agreement incorporated the receipt by stating that the employee’s signature on the receipt confirmed that the employee had read and understood each of the previous four articles of the agreement. In addition, the receipt specifically identified the Arbitration Agreement as one of the sections of the manual to which the receipt specifically applied. The modification clause did not specifically refer to “agreements”, but it was clear that it broadly applied to the terms of the manual.

Since the Arbitration Agreement and Nationwide’s Acknowledgment were not signed separately and did not contain a clause specifying that they were separate from each other, the modification clause applied to the entire manual, including the agreement.

The 4th Circuit thus upheld the district court’s decision denying Nationwide’s motion to compel arbitration.

Coady v Nationwide Motor Sales Corp.4th Cir., n° 20-2302 (April 25, 2022).

Jeffrey Rhodes is an attorney at McInroy, Rigby & Rhodes LLP in Arlington, Virginia.