In a recent decision, the Missouri Court of Appeals for the Western District held that a provision requiring arbitration of disputes in an employer-employee agreement was not enforceable. See Telissah Johnson v. Menard, Inc., WD84128 (Mo. App. W.D. July 27, 2021).
This is a somewhat novel decision in that courts have tended to enforce such arbitration provisions over the years (despite challenges like the one brought in this case), often citing prior precedent favoring enforcement of private agreements, including arbitration agreements. Some background will help understand the Court of Appeals’ recent decision.
Telissah Johnson (“Johnson”) worked as an at-will employee for Menard, Inc. (“Menard”) for less than two months. When she started with Menard, she signed an “Employee/Employer Agreement” (“EEA”) that had a provision requiring arbitration of disputes. The EEA also had a “severability clause” that stated, in relevant part: “…I understand that this Agreement cannot be modified except by the President of Menard, Inc.”
One month after Johnson started at Menard, she made a written complaint of race discrimination to Menard’s HR department. Two weeks later, Menard fired her. Following her termination, Johnson then filed suit in a trial court. In response, Menard filed a motion to compel her to arbitrate her claims, claiming the EEA required her to do so.
The trial court initially granted Menard’s motion to compel arbitration. However, Johnson filed a writ of prohibition with the Court of Appeals, asking the Court to essentially overturn the trial court’s decision to compel arbitration. The Court of Appeals issued a preliminary writ expressing concerns about the enforceability of the arbitration agreement in the EEA and ordering the trial court to reconsider and/or re-explain its initial decision to compel arbitration.
After the case came back down to the trial court for reconsideration and/or re-explanation, the trial court changed its mind and entered an order denying Menard’s motion to compel arbitration. Menard then appealed the trial court’s denial order.
On appeal, the Western District focused on two issues: (1) whether the delegation provision—that is, the contract provision stating who (i.e., a court or an arbitrator) gets to decide whether a given claim should go to arbitration—in the EEA was enforceable; and (2) whether the arbitration agreement was valid.
The Court held the delegation provision to be unenforceable. Notably, the Court agreed that the language of the delegation provision in the EEA provided “clear and unmistakable evidence that the parties intended that threshold questions of arbitrability be determined by the arbitrator.” However, the Court’s analysis did not stop there. The Court noted that, like any other contract, arbitration agreements (including delegation provisions) must be supported by legal consideration to be valid. And here, that was one of Johnson’s challenges: she claimed no legal consideration supported it.
The Court then cited a recent Missouri Supreme Court decision—Soars v. Easter Seals Midwest, 563 S.W.3d 111 (Mo. banc 2018)—for the proposition that “[a] delegation provision is a separate and distinct agreement and must be examined separate from the underlying arbitration agreement.” The Court then noted long-standing contract law and reasoned that the exchange of promises (i.e., a bilateral contract) may provide the legal consideration necessary to enforce an agreement. In other words, if one party promises to arbitrate claims in exchange for the other party’s promise to do the same, legal consideration is present and the agreement is valid.
But this is where the Court found issue with Menard’s EEA. Noting that promises must be binding (and not merely illusory) for a valid bilateral contract to exist, the Court turned to the specific language of the EEA. Looking at the severability clause, the Court noted “[t]his provision vested Menard, through its president, the unlimited and unilateral right to modify any part of the EEA, including the delegation provision, at any time and without notice to Johnson. In fact, under the auspices of this unqualified power, Menard could eliminate the delegation clause.” As a result, the Court refused to enforce it and affirmed that the trial court had authority to determine the threshold issue of arbitrability.
The Court then addressed the validity of the arbitration agreement itself. Put simply, the Court concluded that, “like the delegation provision, the arbitration agreement as a whole is founded on Menard’s illusory promise to arbitrate disputes, and, as such, it lacks consideration and is unenforceable.”
It would be unsurprising if Menard attempted to appeal this case to the Missouri Supreme Court. Only time will tell if that happens (or whether the Missouri Supreme Court would accept such an appeal). Nonetheless, in the meantime, this decision is a clear signal for employers in Missouri to carefully review arbitration agreements or arbitration provisions within employment agreements to make sure that legal consideration exists to support their enforcement. Reserving the ability to unilaterally modify such agreements or provisions at any time without any notice to the other party will likely be closely scrutinized by Courts and/or result in enforcement issues. Contact us today to discuss this case and what it may mean for you.