Avoiding Illusory Arbitration Clauses

     In Carey v. 24 Hour Fitness, USA, Inc., 10-20845, 2012 WL 205851 (5th Cir. Jan. 25, 2012), the United States Court of Appeals for the Fifth Circuit found an arbitration agreement to be illusory because one party to the agreement retained the unilateral right to modify or terminate the arbitration provision at any time.

      In this case, Carey (the “plaintiff”) was a sales representative for 24 Hour Fitness, USA, Inc. (the “defendant”).  In consideration for continued employment, the plaintiff signed an acknowledgement of the defendant’s employee handbook (the “handbook”). The handbook provided that all employment-related disputes (including class-action claims) would be “resolved only by an arbitrator through final and binding arbitration” under the the Federal Arbitration Act.   

     The acknowledgement signed by the plaintiff included a “change-in-terms” clause.  The change-in-terms clause stated:  

I acknowledge that, except for the at-will employment, [the defendant] has the right to revise, delete, and add to the employee handbook. Any such revisions to the handbook will be communicated  through official written notices approved by the President and CEO of [the defendant] or [his/her] specified designee. No oral statements can change the provisions of the employee handbook.

     After his employment ended, the plaintiff filed the the underlying lawsuit (as a class action) alleging violations of the Fair Labor Standards Act.  Specifically, the plaintiff alleged that the defendant failed to pay adequate compensation for overtime work.  In response to the lawsuit, the defendant moved to compel arbitration. And, in reply, the plaintiff argued that the arbitration agreement was illusory because the defendant retained the right to unilaterally amend or terminate the agreement.  

     The district court agreed with the plaintiff and denied the defendant’s motion to stay and compel arbitration.  The defendant appealed. 

     On appeal, the Fifth Circuit Court affirmed the district court’s ruling and held that the arbitration agreement’s change-in-terms clause was illusory.  Specifically, in its analysis of the issues, the Fifth Circuit cited Texas case law:  “[A]n arbitration clause is illusory if one party can ‘avoid its promise to arbitrate by amending the provision or terminating it altogether.’”  “[Or] put differently,” continued the Court, “where one party to an arbitration agreement seeks to invoke arbitration to settle a dispute, if the other party can suddenly change the terms of the agreement to avoid arbitration, then the agreement was illusory from the outset.”

*     *     *

Additional Arbitration Cases:

Morrison v. Amway Corp., 517 F.3d 248 (5th Cir.2008).

Torres v. S.G.E. Mgmt., LLC, 397 Fed.Appx. 63, 68 (5th Cir.2010) (unpublished)

In re 24R, Inc., 324 S.W.3d 564 (Tex.2010)

In re Halliburton Co., 80 S.W.3d 566 (Tex.2002)