Hadnot v. Bay, Ltd.

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT September 11, 2003

Charles R. Fulbruge III
No. 03–40325 Clerk
Summary Calendar

EDMOND HADNOT,

Plaintiff-Appellant,

versus

BAY, LTD; FELIX CISNEROS; RAYMOND SAENZ; RAUL VELA,

Defendants-Appellees.

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Appeal from the United States District Court
for the Southern District of Texas
--------------------

Before JOLLY, SMITH, and WIENER, Circuit Judges.

WIENER, Circuit Judge.

Plaintiff-Appellant Edmond Hadnot appeals the district court’s

order severing the punitive and exemplary damages prohibition

contained in the arbitration provision of the employment agreement

at issue, and compelling arbitration. Hadnot claims that the

district court erred in holding the arbitration provision of his

employment contract valid and enforceable after striking the ban on

the arbitrator’s authority to award exemplary and punitive damages

as applied to Hadnot’s Title VII claim. We affirm.

I. Facts and Proceedings

Hadnot filed suit in the district court against Defendant-

Appellee Bay, Ltd. (“Bay”) and three of his former coworkers,
alleging intentional infliction of emotional distress by all

defendants and racial discrimination in violation of Title VII by

Bay. Hadnot and Bay had entered into an employment agreement (the

“Agreement”) containing an arbitration provision. The district

court compelled arbitration after invalidating a restriction in the

arbitration provision that excludes punitive and exemplary damages

from the kinds of damages that the arbitrator is authorized to

award. Hadnot timely filed a notice of appeal.

II. Analysis

A. Standard of Review

We review a district court’s grant or denial of a motion to

compel arbitration de novo.1

B. Test for Enforceability of Arbitration Provision

Courts adjudicating a motion to compel arbitration engage in

a two-step process. First, the court asks “whether the parties

agreed to arbitrate [the] dispute.”2 If this question is answered

in the affirmative, the court asks “whether legal constraints

external to the parties’ agreement foreclosed the arbitration”3 of

1
See Webb v. Investacorp, Inc. 89 F.3d 252, 257 (5th Cir.
1996).
2
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,
473 U.S. 614, 626 (1985). In deciding this question, courts
should apply “ordinary state-law principles that govern the
formation of contracts.” First Options of Chicago, Inc., v.
Kaplan, 514 U.S. 938, 944 (1995).
3
Mitsubishi Motors, 473 U.S. at 628.

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the dispute. The district court concluded that the Agreement was

enforceable —— with the exception of its prohibition of the

arbitrator’s awarding exemplary and punitive damages —— and that

Hadnot’s claims fell within its scope. We now turn to Hadnot’s

contentions on appeal.4

C. Consideration

Hadnot asserts that, under Texas law, the Agreement is

unsupported by valid consideration. He contends that the only

possible consideration on the part of Bay is “the consideration of

[Hadnot’s] application for employment, the offer of at will

employment, and the continuation of at will employment.” Hadnot

argues that two recent Texas Supreme Court cases, Light v. Centel

Cellular Company5 and In Re Halliburton Company and Brown & Root

Energy Services,6 stand for the proposition that such factors

cannot constitute consideration in an at-will employment context.

The facts of Light and In Re Halliburton distinguish them from the

instant case, however; and we find the presence of valid Texas

consideration on the part of Bay.

Light dealt with a covenant not to compete. In its discussion

4
Hadnot argues for the first time in his reply brief that
the Agreement was substantively unconscionable. As Hadnot failed
to raise that argument in his initial appellate brief, we decline
to consider it here. See Cinel v. Connick, 15 F.3d 1338, 1345
(5th Cir. 1994) (“An appellant abandons all issues not raised and
argued in its initial brief on appeal.”).
5
883 S.W.2d 642 (Tex. 1994).
6
80 S.W.3d 566 (Tex. 2002).

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of whether there was an “otherwise enforceable agreement” to which

the covenant not to compete was ancillary, the Supreme Court of

Texas noted that “[c]onsideration for a promise, by either the

employee or the employer in an at-will employment, cannot be

dependent on a period of continued employment.”7 The court

reasoned that a promise “that depends on an additional period of

employment is illusory because it is conditioned upon something

that is exclusively within the control of the promisor.”8 In

attempting to apply this reasoning to his own case, Hadnot urges

that the Agreement’s arbitration provision is likewise unsupported

by valid consideration.

The Light court, however, discussed invalidity of

consideration in the context of a “period of continued

employment,”9 using the promise of a raise to an at-will employee

as an example (illusory because the promisor can terminate

employment before giving the raise).10 In contrast, the

consideration here —— the combination of Hadnot’s application and

Bay’s responding offer of employment —— is in no way dependent on

a period of continued employment in the context of a covenant to

arbitrate claims that arise from the period of actual employment,

7
Light, 883 S.W.2d at 644.
8
Light, 883 S.W.2d at 645 n.5.
9
Light, 883 S.W.2d at 644 (emphasis added).
10
Light, 883 S.W.2d at 645 n.5.

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regardless of how long it might continue. Here, the application,

offer, and acceptance all occurred at the “front end” of the

employment relationship. None is dependent on continued

employment, and none is illusory, because any eventual arbitration

will, of necessity, relate to conduct that occurred during the term

of employment —— even if only a day or so —— unlike proscribed

competition which by definition can occur only after employment

terminates.

This was exactly the distinction made by the court in In Re

Halliburton: “[In] contrast [to Light], the [Halliburton Dispute

Resolution] Program is not dependent on continuing employment.

Instead, it was accepted by the employee’s continuing employment.”11

The instant situation is analogous to In Re Halliburton, not

Light. The Agreement was formed when Hadnot signed the document

and began work. Even though Bay could terminate Hadnot at any time

thereafter, the fact remains that Bay had already performed, viz.,

accepted Hadnot’s job application, in exchange for Hadnot’s

agreement to arbitrate any claims arising out of any period of

employment —— even one day. The In Re Halliburton court’s language

accurately sums up the situation presently before us: “Even if

[the] employment had ended shortly thereafter, the promise to

arbitrate would have been binding and enforceable.”12

11
In Re Halliburton, 80 S.W.3d at 569.
12
Id.

5
D. Sequence

Hadnot also claims that he had been offered the job prior to

signing the Agreement, so that Bay’s acceptance of his job

application and offer of employment can only be past consideration,

if they are consideration at all.13 The appropriate question,

however, is whether Bay would have considered Hadnot’s application

and offered him employment had he refused to sign the Agreement,

not whether Bay insisted that he sign the moment that he walked

through the door. It is clear that Bay’s offer of employment was

contingent on Hadnot’s signing the Agreement. Indeed, the

Agreement itself specifies that Bay’s acceptance of Hadnot’s job

application and any offer of employment is “[i]n exchange for” the

willingness of the prospective employee to arbitrate all employment

disputes.

E. Severability of the Punitive Damages Clause

Hadnot also argues that the entire arbitration provision is

void because the restriction of the arbitrator’s power proscribing

any award of exemplary and punitive damages —— which is unlawful in

13
Although Hadnot claims he was “told that [he] had the job
before [signing] any papers,” Bay asserts that Hadnot executed
the Agreement on two occasions, both on submission of his
application and after accepting the offer of employment. The
record supports Bay: There are two signed copies of the Agreement
in the record, respectively dated December 28th and 29th, 2000,
placing both before Hadnot’s employment start date, which he has
indicated was “[o]n or about January 2001.”

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the context of his Title VII claim14 —— is integral to the overall

contract of employment and therefore cannot be severed. We

disagree. The purpose of the arbitration provision is to settle

any and all disputes arising out of the employment relationship in

an arbitral forum rather than a court of law. Even with its

unlawful limitation on the types or permissible damage awards

lifted, so that the decision maker is free to address punitive

damages, the arbitration clause remains capable of achieving this

goal. In fact, the lifting of that illegal restriction enhances

the ability of the arbitration provision to function fully and

adequately under the law.

As a potential arbitrator in this case is now authorized to

award punitive damages, as well as compensatory damages, Hadnot’s

rights under Title VII are fully protected. The severing of such

a prohibition or restriction serves to expand the scope of

arbitration rather than reduce or impair it, thereby freeing that

provision to fulfill its intended function.

III. Conclusion

For the foregoing reasons, the district court’s order voiding

14
As the district court correctly noted, the Agreement’s
ban on punitive and exemplary damages is unenforceable in a Title
VII case. The Supreme Court has held: “By agreeing to arbitrate
a statutory claim, a party does not forego the substantive rights
afforded by the statute; it only submits to their resolution in
an arbitral, rather than a judicial, forum.” Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985).
Because Title VII provides for statutory punitive damages, the
district court found the ban on such damages unenforceable. We
agree with that determination.

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the prohibition of awarding punitive damages and compelling

arbitration is, in all respects,

AFFIRMED.

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