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Acquiring company’s offer of continued employment sufficient consideration to create valid arbitration agreement

By Marjorie Johnson, J.D.

Two employees who were fired by a company months after it acquired their former employer were required to arbitrate their employment-related claims since they had signed enforceable mandatory arbitration agreements. In a pair of companion cases that had reached opposite results at the district court level on the company’s motion to dismiss and to compel arbitration, the First Circuit affirmed as to one and reversed and remanded as to the other, ruling that the acquiring company’s promise of continued employment was sufficient consideration under Rhode Island law (Britto v. Prospect Chartercare SJHSRI, LLC and Conduragis v. Prospect Chartercare, LLC dba Chartercare Health Partners, November 30, 2018, Thompson, O.).

Continued employment. These cases were brought in two separate district courts by medical center employees who had signed mandatory arbitration agreements with the joint venture company that had acquired their employer. The Britto plaintiff was a 54-year-old African-American employee who had worked at the medical center for decades, while the Conduragis plaintiff was hired just a few months before the acquisition. During the transition, they each received letters from the acquiring company outlining the terms for their continued at-will employment and explaining that the company could “change the terms of [their] employment, including compensation and benefits, at any time.”

Arbitration agreement. The letters also instructed them to sign an arbitration agreement that was included in one’s letter and attached via a hyperlink to an intranet site in the other’s. The agreement provided that any employment-related related claims would be subject to mandatory arbitration and that both the employee and the company were waiving their right to a trial by jury. Both employees signed their letters and arbitration agreements and retained their positions. However, things did not go well for either of them as they were both eventually fired for unrelated reasons.

Separate lawsuits. They brought separate federal lawsuits challenging their terminations. The Britto plaintiff, who was purportedly replaced by a younger, non-African-American worker, asserted violations of the ADEA, Title VII, and state ant-bias laws. The Conduragis plaintiff claimed violations of the FMLA and its state-law counterpart. The employer moved to dismiss and compel arbitration.

One court refuses to enforce the agreement. The district court hearing the Conduragis case was the first to decide the issue and denied the company’s motion. The judge ruled that the employee was not required to arbitrate his FMLA claims since the acquiring company’s promise of continued employment was insufficient consideration to establish the existence of a valid arbitration agreement. The company’s purported “mutual” agreement to arbitrate was also deemed illusory since the company retained the right to alter the employee’s terms and conditions of employment at any time.

The other court compels arbitration. Declining to follow the Conduragis court’s lead, the Britto court held that a valid and enforceable arbitration agreement existed. In addition to finding that collateral estoppel did not apply, the judge rejected the employee’s assertion that the agreement was still unenforceable for lack of legal consideration. Unlike the Conduragis court, the Britto court concluded that the arbitration agreement was separate from the offer letter, so its “reservation of rights” did not cover the arbitration and the company’s promise to arbitrate was not illusory. The court also rejected the Conduragis court’s reliance on a Rhode Island trial court’s decision and instead relied on a Rhode Island Supreme Court case, Oken v. Nat’l Chain Co., which found that continued employment can constitute sufficient consideration.

Continued employment was valid consideration. Affirming the Britto court’s order compelling arbitration, the First Circuit explained that the parties spent much time debating whether the court correctly rejected the employee’s “multistep illusory consideration claim.” He had argued that the company’s offer letter’s rights reservation, which gave it “unfettered discretion to change employment terms,” covered the arbitration agreement. Thus, because the arbitration promise was illusory, the agreement was unenforceable for lack of consideration.

However, the First Circuit found that even assuming arguendo that the offer letter and the arbitration agreement must be read together, the Britto court properly ruled that the promise of continued employment provided sufficient independent consideration to make the agreement enforceable. In so ruling, the appeals court found that the Brito court properly followed the reasoning from state’s highest court in Oken—that the continuation of employment was sufficient consideration to support the modified employer-employee agreement—and squarely rejected the Conduragis court’s reliance on a contradictory Rhode Island trial court decision.

Not unconscionable. The First Circuit also rejected the Britto plaintiff’s assertion that the agreement was unenforceable because it was procedurally unconscionable. In particular, he pointed to the company’s “procedure,” which entailed telling him to “immediately” sign key documents at the end of a five-minute meeting, without a lawyer present, and without explaining the papers’ “significance” or seeing if he understood their terms. However, he was required to also prove that the agreement was substantively unconscionable, which he failed to do.

Handbook didn’t change things. In reversing the Conduragis court’s denial of the company’s motion to compel arbitration, the First Circuit also rejected the employee’s request to supplement the record with pages from the employee handbook which he claimed “reinforced” the view that the employer retained the right to change the terms and conditions of his employment at any time, including the arbitration. Because consideration of the handbook would make no difference to the result, his motion in this regard was denied and the case was remanded with instructions for the district court to grant the company’s motion to dismiss and compel arbitration.