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Arbitration Agreement Not Binding on Employees Who Kept Working But Expressly Rejected Arbitration Clause: Third Circuit
Practical Law Legal Update w-004-0908 (Approx. 5 pages)
Arbitration Agreement Not Binding on Employees Who Kept Working But Expressly Rejected Arbitration Clause: Third Circuit
by Practical Law Labor & Employment
| Published on 25 Oct 2016 • USA (National/Federal) |
In Scott v. Education Management Corp., the US Court of Appeals for the Third Circuit vacated a district court's dismissal of claims alleging discrimination in violation of the Age Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act of 1964 (Title VII), and Pennsylvania state discrimination law, and held that assent to a contract cannot be implied between parties when the terms of the contract has been expressly rejected by a party.
On October 18, 2016, in Scott v. Education Management Corp., the US Court of Appeals for the Third Circuit vacated a district court's dismissal of claims alleging discrimination in violation of the ADEA, Title VII, and Pennsylvania state discrimination law, and held that assent to a contract cannot be implied when a party has expressly rejected the terms of the contract. ( (3d Cir. Oct. 18, 2016).)
Background
Two admissions employees (Scott and Jones) of the Art Institute of Pittsburgh, an Education Management Corporation (EDMC), received subpar job evaluations. In August 2012, they filed complaints with the EEOC, alleging that the evaluations were unfairly based on racial and age discrimination.
In September and October 2012, EDMC instituted an alternative dispute resolution (ADR) policy that required binding arbitration to resolve all work-related disputes. Once Scott and Jones learned of the company-wide arbitration policy, they called EDMC's policy illegal, and amended their EEOC complaints to allege that the policy was instituted as retaliation for their initial EEOC filings.
The EEOC determined that there was insufficient evidence to pursue the cases. Scott and Jones filed district court claims, alleging discrimination and retaliation in violation of Title VII, the ADEA, and Pennsylvania common law. The claims were dismissed because they fell within EDMC's policy requiring mandatory arbitration. The employees appealed.
Outcome
The Third Circuit vacated the district court's dismissals and remanded the matter. The court noted that:
- "A party cannot be compelled to submit a dispute to arbitration unless it has agreed to do so" (Century Indem. Co. v. Certain Underwriters at Lloyd's London, 584 F.3d 513, 524 (3d Cir. 2009)).
- A federal court must consider any challenge to the validity of an arbitration agreement before ordering compliance with the agreement (Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 71 (2010)).
- Although the Federal Arbitration Act (FAA) reflects a strong federal policy in favor of arbitrating disputes, that presumption does not apply to the issue of whether the parties have a valid arbitration agreement (Alexander v. Anthony Int'l, L.P., 341 F.3d 256, 263 (3d Cir. 2003); Kirleis v. Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 160 (3d Cir. 2009)).
- Under Pennsylvania law, a valid contract exists if:
- both parties manifest intention to be bound by the agreement;
- the agreement's terms are sufficiently definite to be enforced; and
- consideration is exchanged.
- District courts within the Third Circuit have held that an employee's continued employment after receipt of a policy can constitute his acceptance of the policy's terms (Alexander v. Raymours Furniture Co., , at *5 (E.D. Pa. Aug. 13, 2014); Bauer v. Pottsville Area Emergency Med. Servs., Inc., 758 A.2d 1265, 1269 (Pa. Super. Ct. 2000)).
- Pennsylvania law requires parties to clearly and unmistakably agree to arbitrate before an arbitration agreement will be upheld (Emmaus Mun. Auth. v. Eltz, 204 A.2d 926, 927 (Pa. 1964); Quiles v. Fin. Exch. Co., 879 A.2d 281, 287 (Pa. Super. Ct. 2005)).
The Third Circuit found that:
- The outcome in Scott is not controlled by the validity of the legal theory that an employee's continued work constitutes his implied assent to new employment terms.
- While Scott and Jones continued working after the ADR policy was implemented, they also voiced specific objections to the policy and supplemented their EEOC complaints to allege that the policy was implemented as retaliation for their initial EEOC filings.
- A party's assent to a contract cannot be implied when the party has expressly rejected the terms of the contract.
- Pennsylvania's law that requires explicit agreement between parties for the formation of an enforceable arbitration contract applies to Scott (Kirleis, 560 F.3d at 163).
- Masoner v. Education Management Corporation, relied upon by the district court, was distinguishable from Scott because in Masoner, the plaintiff employee agreed to abide by the ADR policy and did not challenge the policy's terms (18 F. Supp. 3d 652 (W.D. Pa. 2014)). In contrast, Scott and Jones both presented explicit disagreement with EDMC's policy.
Practical Implications
In Scott, the Third Circuit made it clear that for an arbitration agreement to be valid, both parties need to consent to it. Assent cannot be implied when one party has voiced rejection of the terms of the agreement. Employers should obtain an explicit agreement from all parties involved before attempting to recognize the parties' implied assent to the terms of an arbitration agreement. The court also noted that under Pennsylvania law, any argument that an employee has impliedly agreed to arbitrate his claims must fail because there is no explicit assent.