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Arbitrary Illusions: Fifth Circuit Throws a Wrench in Established Texas Arbitration Law

On Behalf of | Apr 13, 2016 | Firm News

A recent Fifth Circuit case has cast doubt on Texas arbitration law and has many employers and attorneys worried about the validity of existing arbitration agreements.

The Case

Nelson v. Watch House Int’l, L.L.C., 2016 US. App. LEXIS 3959

The Facts

Watch House International, L.L.C. employed Michael Nelson from March 2010 until March 2014. Shortly after Nelson’s initial job offer in 2010, Watch House sent Nelson his employee handbook, which included a copy of the “arbitration plan.”

The plan included the following clause:

This Agreement may not be altered except by consent of the Company and shall be immediately effective upon notice to Applicant/Employee of its terms, regardless of whether it is signed by either Agreeing Party. Any change to this Agreement will only be effective upon notice to Applicant/Employee and shall only apply prospectively. (Emphasis added.)

Watch House subsequently fired Nelson after he complained to his supervisor that his co-workers were harassing him because of his religion and his interracial marriage. Nelson filed suit against Watch House, alleging that Watch House violated Title VII of the Civil Rights Act of 1964 and Chapter 21 of the Texas Labor Code.

Relying on the arbitration plan within the employee handbook, Watch House moved to compel Nelson to arbitration. The district court granted Watch House’s motion and dismissed Nelson’s suit in favor of arbitration.

The Fifth Circuit Court’s Holding

On appeal, the Fifth Circuit held that the arbitration clause was illusory, and thus unenforceable, because the arbitration clause allowed Watch House to amend or terminate the arbitration plan without requiring Watch House to give Nelson “advance notice of termination.” According to the Fifth Circuit, an employer may retain the power to unilaterally amend or terminate an arbitration agreement “so long as that power (1) extends only to prospective claims, (2) applies equally to both the employer’s and employee’s claims, and (3) so long as advance notice to the employee is required before termination [of the prior arbitration agreement] is effective.”

While Watch House’s arbitration agreement met the Fifth Circuit’s first two requirements, the agreement did not provide advance notice of termination. So, the Fifth Circuit determined that Watch House’s arbitration plan was illusory and unenforceable, removed the case from arbitration, and sent the case back to the District Court for further litigation.

Takeaways & Practical Tips

  • Practically speaking, the Fifth Circuit’s holding will affect almost all arbitration agreements because the vast majority of employers retain the ability to amend or terminate their plans.
  • Employers should review and revise all plans to ensure
    • Amendments extend only to future claims;
    • The arbitration agreement applies equally to claims made by both the employer and the employee; and
    • The employer gives at least ten days’ advance notice of the arbitration plan’s termination.
  • While employers may have wiggle room with the length of the advanced notice, requiring a full ten days’ notice ensures compliance with the Fifth Circuit’s holding.


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