It is a very common practice for employers to reserve in their arbitration agreements a right to unilaterally amend or terminate a provision upon notice. All Texas employers who do so should pay close attention to those provisions within their own arbitration agreements, as a recent 5th Circuit decision set forth in Nelson v. Watch House International, LLC shows that not everything is bigger in Texas. Indeed, the scope of an employer’s right to unilaterally terminate an arbitration agreement without rendering it illusory is limited.
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Plaintiff Michael Nelson asserted that employees at Watch House International, LLC, his former employer, had harassed him because of his race and religion. Nelson filed suit alleging that he was discharged in violation of Title VII of the Civil Rights Act of 1964 and Chapter 21 of the Texas Labor Code. The employee handbook and arbitration agreement contained therein were sent to Nelson electronically when he was hired. The arbitration agreement contained the following language:
This agreement is issued with the authority of the Company and is binding on the Company. 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.
Watch House moved to compel arbitration, and Nelson opposed the motion on the grounds that the agreement was unenforceable because it was illusory under In re Hallbiburton Co., 80 S.W.3d 566 (Tex. 2002) and Lizalde v. Vista Quality Markets, 746 F.3d 222 (5th Cir. 2014). The district court granted Watch House’s motion to compel and dismissed Nelson’s lawsuit. On appeal, Nelson argued that the arbitration agreement was illusory because it did not include a savings clause regarding existing claims and disputes, and it did not require advance notice of termination.
Under Texas law, an arbitration agreement is illusory if the agreement gives one party free reign to unilaterally terminate its obligation to arbitrate. (See Mendivil v. Zanios Foods, Inc. 357 S.W.3d 827,831 (Tex. App.– El Paso 2012).) Halliburton clarified this general rule by holding that an arbitration agreement that contained a savings clause with a ten-day notice provision and a provision that all amendments apply prospectively was not illusory. Subsequent to Halliburton, the Fifth Circuit established a three-prong test in Lizalde, which provides that an employer’s retention of the termination power in an arbitration agreement does not make the agreement illusory if the power (1) only extends to prospective claims; (2) applies in equal part to both the employer’s and employee’s claims; and (3) requires advance notice to the employee before termination is effective.
The Fifth Circuit concluded that Watch House’s arbitration agreement was illusory because the above-excerpted language did not contain a savings clause requiring advance notice of termination pursuant to Halliburton. The Court’s decision further solidified its three-prong test by explaining that all of the three prongs must be met, thus dismissing Watch House’s argument that the Fifth Circuit’s pre-Lizalde decisions and various decisions out of the Texas Supreme Court only require the agreement to meet the first prong.
What Texas Employers Need to Do Now
Texas employers should review their arbitration agreements carefully if any provision allows the employer to unilaterally modify the terms of the agreement. If so, the agreement must: (1) only apply prospectively; (2) apply equally to the employer’s and employee’s claims; and (3) require advance notice to the employee. It is not sufficient for the agreement to only meet one or two of the prongs; rather, to ensure that its arbitration agreement will be upheld, an employer must verify that any unilateral right to terminate meets all three of the Lizalde prongs. Although Watch House does not state how much notice an employer is required to give, the Halliburton decision affirmed a ten-day notice provision. As such, employers would be wise to stay within those parameters and provide ten or more days of notice in their own notice provisions.