Case: 10-20845 Document: 00511735820 Page: 1 Date Filed: 01/25/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 25, 2012
No. 10-20845 Lyle W. Cayce
Clerk
JOHN CAREY, Individually and On Behalf of Other Employees Similarly
Situated,
Plaintiff–Appellee
v.
24 HOUR FITNESS, USA, INCORPORATED,
Defendant–Appellant
Appeal from the United States District Court
for the Southern District of Texas
Before SMITH, PRADO, and ELROD, Circuit Judges.
EDWARD C. PRADO, Circuit Judge:
Appellant 24 Hour Fitness, USA, Inc. appeals the district court’s denial of
its motion to stay proceedings and compel arbitration of Appellee John Carey’s
claim. The district court held that the binding arbitration provision relied upon
by 24 Hour Fitness is illusory because 24 Hour Fitness “retain[ed] the unilateral
right to modify or terminate the arbitration provision” at any time. For the
reasons stated below, we AFFIRM.
I. FACTUAL AND PROCEDURAL BACKGROUND
Carey is a former sales representative for 24 Hour Fitness. In January
2005, during Carey’s period of employment, 24 Hour Fitness issued an employee
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handbook (the “Handbook”). One of the sections in the Handbook, entitled
“Arbitration of Disputes,” provided that all employment-related disputes,
whether initiated by an employee or by 24 Hour Fitness, would be “resolved only
by an arbitrator through final and binding arbitration.” It specified that
disputes under the Fair Labor Standards Act (“FLSA”) were among those subject
to the mandatory arbitration policy and provided that disputes cannot be
brought as class actions or in representative capacities. The policy also
expressly invoked the Federal Arbitration Act (“FAA”) as its governing
authority.
Carey signed the Employee Handbook Receipt Acknowledgment (the
“Acknowledgment”), indicating that he had received the Handbook. The
Acknowledgment reiterated the arbitration policy: “I agree that if there is a
dispute arising out of my employment as described in the ‘Arbitration of
Disputes’ policy, I will submit it exclusively to binding and final arbitration
according to its terms.” The Acknowledgment also stated that the terms of the
Handbook are subject to change (“Change-in-Terms Clause”):
I acknowledge that, except for the at-will employment, 24 Hour
Fitness 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 24 Hour Fitness or their specified designee.
No oral statements can change the provisions of the employee
handbook.
After Carey’s employment ended, he filed this class action against 24 Hour
Fitness, alleging that it had violated the FLSA by failing to adequately
compensate him and other similarly-situated employees for overtime work. 24
Hour Fitness moved the district court to stay its proceedings and to compel
arbitration of Carey’s claim. In his response to that motion, Carey argued that
the arbitration agreement was illusory because 24 Hour Fitness retained the
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right to unilaterally amend the agreement.1 The district court agreed with
Carey, holding that the arbitration agreement was illusory. It therefore denied
24 Hour Fitness’s motion to stay and compel arbitration. 24 Hour Fitness timely
filed this appeal.
II. JURISDICTION AND STANDARD OF REVIEW
Carey brought a complaint under the FLSA, so the district court had
jurisdiction under 29 U.S.C. § 216(b) and 28 U.S.C. § 1331. This court has
appellate jurisdiction under the FAA, specifically 9 U.S.C. § 16(a)(1)(A) and (B),
which allows litigants to bring an interlocutory appeal of an order refusing a
stay or denying a petition to compel arbitration.
This court reviews the grant or denial of a motion to compel arbitration de
novo. Morrison v. Amway Corp., 517 F.3d 248, 253 (5th Cir. 2008).
III. DISCUSSION
In ruling upon a motion to compel arbitration, the court first determines
whether the parties agreed to arbitrate the particular type of dispute at issue.
JP Morgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596, 598 (5th Cir. 2007).
Answering this question requires considering two issues: “(1) whether there is
a valid agreement to arbitrate between the parties; and (2) whether the dispute
in question falls within the scope of that arbitration agreement.” Id. (internal
quotation marks omitted). Carey does not argue that his FLSA claim falls
outside the scope of the arbitration agreement. Rather, he challenges the first
issue, claiming that the agreement to arbitrate is illusory and invalid.
The FAA reflects a “‘liberal federal policy favoring arbitration.’”
CompuCredit Corp. v. Greenwood, —S. Ct.—, No. 10-948, 2012 WL 43514, at *3
(Jan. 10, 2012) (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24 (1983)). However, the “federal policy favoring arbitration does not
1
Carey also argued below that the arbitration agreement violated the Dodd-Frank Act
of 2010, an argument he has abandoned on appeal.
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apply to the determination of whether there is a valid agreement to arbitrate
between the parties.” Morrison, 517 F.3d at 254 (internal quotation marks
omitted). Given the “fundamental principle that arbitration is a matter of
contract,” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745 (2011)
(internal quotation marks omitted), to determine whether an agreement to
arbitrate is valid, courts apply “ordinary state-law principles that govern the
formation of contracts.” Morrison, 517 F.3d at 254 (internal quotation marks
omitted). Both parties agree that Texas law applies.
Under Texas law, an arbitration clause is illusory if one party can “avoid
its promise to arbitrate by amending the provision or terminating it altogether.”
In re 24R, Inc., 324 S.W.3d 564, 567 (Tex. 2010). Put differently, 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. The crux of this
issue is whether 24 Hour Fitness has the power to make changes to its
arbitration policy that have retroactive effect, meaning changes to the policy that
would strip the right of arbitration from an employee who has already attempted
to invoke it. See Torres v. S.G.E. Mgmt., LLC, 397 F. App’x 63, 68 (5th Cir. 2010)
(unpublished) (summarizing several Texas and Fifth Circuit cases as
“suggest[ing] that the lack of a notice window before any elimination of the
[arbitration] clause becomes effective and the ability to amend the agreement
retroactively so as to avoid any promise to arbitrate are factors indicating that
the agreement may be illusory” (emphasis added)).
Our decision in Morrison v. Amway Corp. is instructive. In that case,
applying Texas law, we refused to enforce an arbitration agreement that was
capable of being retroactively modified. 517 F.3d at 257. Morrison involved a
dispute arising out of a distributorship agreement. Id. at 250–51. The
distributorship agreement required all distributors to comply with certain “Rules
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of Conduct” as they were “amended and published from time to time in official
Amway literature.” Id. at 253 (internal quotation marks omitted). Contained
within the Rules of Conduct was an arbitration provision. Id. at 257. We
concluded that there was “nothing in any of the relevant documents which
preclude[d] . . . eliminating the entire arbitration program or its applicability to
certain claims or disputes so that . . . mandatory arbitration would no longer be
available even as to disputes which had arisen and of which Amway had notice
prior to publication [of the change].” Id. Because Amway was able to amend its
policy and thus renege on its promise to arbitrate even in the context of disputes
already underway, we held that its agreement to arbitrate was illusory. Id.
In reaching this conclusion, we distinguished the facts in Morrison from
those in In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002). In that case, a
Halliburton employee argued that a mandatory arbitration provision was
illusory because Halliburton had retained the right to modify or discontinue the
program. Id. at 569. In holding that the arbitration agreement was not illusory,
the Texas Supreme Court focused on two key provisions: one stated that “no
amendment shall apply to a Dispute of which the Sponsor [Halliburton] had
actual notice on the date of amendment”; the other stated that any termination
of the arbitration program “shall not be effective until 10 days after reasonable
notice of termination is given to Employees or as to Disputes which arose prior
to the date of termination.” Id. at 569–70 (internal quotation marks omitted).
Because of these provisions, the court held that “Halliburton cannot avoid its
promise to arbitrate by amending or terminating it altogether.” Id. at 570. It
was the absence of such a “Halliburton type savings clause[]” that caused the
Morrison court to hold that the arbitration provision at issue was illusory. 517
F.3d at 257; see also In re Odyssey Healthcare, Inc., 310 S.W.3d 419, 421, 424
(Tex. 2010) (holding that an arbitration clause in a workers’ compensation plan
was not illusory where, although the employer reserved the right to “amend,
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modify, or terminate the Plan at any time,” it also provided that “no such
amendment or termination will alter the arbitration provisions . . . with respect
to . . . an Injury occurring prior to the date of such amendment or termination”).
Carey argues that the arbitration clause in the Handbook is illusory
because the Change-in-Terms Clause would allow 24 Hour Fitness to
unilaterally avoid its promise to arbitrate by modifying the Handbook. The
Acknowledgment gives 24 Hour Fitness the “right to revise, delete, and add to
the employee handbook” in which the arbitration provision is located. As in
Morrison, there is no “Halliburton type savings clause” in the Acknowledgment
that limits 24 Hour Fitness’s ability to make retroactive modifications to the
arbitration provision. If a 24 Hour Fitness employee sought to invoke
arbitration with the company pursuant to the agreement, nothing would prevent
24 Hour Fitness from changing the agreement and making those changes
applicable to that pending dispute if it determined that arbitration was no longer
in its interest. In effect, the agreement allows 24 Hour Fitness to hold its
employees to the promise to arbitrate while reserving its own escape hatch.
24 Hour Fitness argues that its Acknowledgment should not be read to
allow retroactive changes in its arbitration policy when it does not expressly
provide for retroactivity. This argument ignores this court’s holdings in Torres,
397 F. App’x at 68, and Morrison, 517 F.3d at 257, in which silence about the
possible retroactive application of amendments to the arbitration policy was
interpreted to allow amendments to apply retroactively.
24 Hour Fitness also argues that the Change-in-Terms Clause does not
allow it to unilaterally modify the Handbook. Because the Change-in-Terms
Clause contains a provision relating to notice (“Any . . . revisions to the
handbook will be communicated through official written notices approved by the
President and CEO of 24 Hour Fitness . . .”), 24 Hour Fitness argues that any
change would not become binding upon Carey until he (1) received notice of that
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change and (2) accepted the change by continuing his employment. It concludes
that it therefore lacks the power to unilaterally modify the arbitration clause
without obtaining Carey’s assent.
Although 24 Hour Fitness is correct that it is necessary for an employer
seeking to change the terms of an employment contract to prove notice and
acceptance of those changes, it does not follow that these two steps are sufficient
to make a contract non-illusory. Halliburton makes this clear. In that case, the
court discussed the proposition that an employer must give notice and obtain its
employees’ acceptance of any changes to the terms of employment. 80 S.W.3d
at 568. It also held that Halliburton had satisfied these requirements and that
the plaintiff had accepted its imposition of a dispute resolution program as a
matter of law. Id. at 569. If notice and acceptance were all that were required
to make an arbitration agreement non-illusory, the court could have answered
the question of illusoriness at once upon finding that Halliburton had satisfied
those requirements. Instead, later in the opinion, the court embarked upon a
completely separate discussion of whether the arbitration agreement was
illusory. Id. at 569–70. Nowhere in that discussion did the court suggest that
its earlier holding—that notice and acceptance of the change had occurred—was
sufficient to answer that question, or even that it factored into the inquiry at all.
Id. Instead, the court’s analysis of whether the agreement was illusory dealt
exclusively with the savings clause preventing any changes from having
retroactive effect. Id. 24 Hour Fitness has not argued that the notice and
acceptance requirements would prevent it from retroactively eliminating its
arbitration policy, which is the critical inquiry for determining whether an
agreement is illusory.
24 Hour Fitness cites several cases in support of its argument that an
arbitration agreement is not illusory so long as the party reserving the right to
change its terms must provide notice of any changes. See, e.g., Zamora v. Swift
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Transp. Corp., 319 F. App’x 333, 334 (5th Cir. 2009) (unpublished) (affirming in
a one-page opinion the district court’s holding that an arbitration agreement was
illusory because the employer “reserved the right to revoke or modify the
agreements at any time without notice”); J.M. Davidson, Inc. v. Webster, 128
S.W.3d 223, 229–31 (Tex. 2003) (suggesting that if an employer’s reservation of
the right to unilaterally modify any personnel policy without notice applied to
its arbitration agreement that the agreement would be rendered illusory).
However, both Torres and Morrison hold that notice is insufficient when
retroactive amendment is possible. In Torres, we considered an arbitration
provision to which amendments would become binding “upon notice” “or by
publication.” 397 F. App’x at 66. Despite the fact that notice was being
provided, we held that because amendments became effective immediately and
because there was no savings clause excepting pending disputes from
amendment, the agreement was illusory. Id. at 68. Similarly, in Morrison,
amendments to the arbitration provision were to be “published . . . in official
Amway literature.” 517 F.3d at 254. Despite this provision for notifying its
distributors of changes to the arbitration agreement, we still held that the
agreement was illusory: “While it is inferable that an amendment thus
unilaterally made by Amway to the arbitration provision would not become
effective until published, there is nothing to suggest that once published the
amendment would be inapplicable to disputes arising, or arising out of events
occurring, before such publication.” Id.
Our conclusion that notice and acceptance are not sufficient to render an
arbitration provision non-illusory is bolstered by Weekley Homes, LP v. Rao, 336
S.W.3d 413 (Tex. App.—Dallas 2011, pet. denied). In that case, an employer
sought to compel arbitration of an employee’s lawsuit based upon an arbitration
provision contained within the employee handbook. Id. at 415. The employee
argued that the arbitration provision was illusory because the handbook stated
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that the policies contained therein were “not to be interpreted as a promise by
the Company that any particular situation will be handled in the express
manner set forth in the text.” Id. (internal quotation marks omitted). The court
noted the proposition that a “party asserting a change to an at-will employment
contract must prove two things: (1) notice of the change, and (2) acceptance of
the change.” Id. at 418 (internal quotation marks omitted). The court also
stated that “by continuing to work for an employer after receiving the notice, or
past the effective date of the arbitration policy if one is provided, an employee
accepts the agreement to arbitrate as a matter of law.” Id. at 418–19. In
addition, the employee conceded that he had received the handbook and an email
“confirm[ing] that [he] underst[oo]d and agree[d] to abide by the policies and
procedures” contained in the handbook. Id. at 417. Despite the evidence of
notice and acceptance, the court nevertheless held that the agreement to
arbitrate was illusory. Id. at 421. The court stated:
[W]e cannot agree with the Weekley Parties’ contention that . . . the
promise to arbitrate is not illusory because the Handbook states
that employees will receive notification of any changes. While there
is no question that the Handbook states employees will be notified
if the Handbook’s policies are modified, it does not state that any
modifications will only apply prospectively. The plain language of
the modification provision gives Weekley Homes the unilateral
power, at any time, to elect not to enforce any policy or provision in
the Handbook.
Id. (internal citations omitted).
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We find the reasoning in Weekley Homes compelling,2 and confirmed by our
interpretation of Halliburton, a case cited favorably by virtually all of the courts
addressing the issue of whether arbitration agreements are illusory.3
Halliburton held that the arbitration agreement at issue was not illusory
because Halliburton could not “avoid its promise to arbitrate by amending the
provision or terminating it altogether.” 80 S.W.3d at 570. Thus, the
fundamental concern driving this line of case law is the unfairness of a situation
where two parties enter into an agreement that ostensibly binds them both, but
where one party can escape its obligations under the agreement by modifying it.
Requiring notice alone does not fully address this concern: if an employer
provided for 10-day notice of any change to its arbitration provision, this could
still arguably allow it to avoid its promise to arbitrate as to claims that were
already in progress, unless there were some provision preventing changes from
applying to in-progress disputes. This concern is heightened under the facts
2
The cases relied upon by 24 Hour Fitness do not persuade us. 24 Hour Fitness argues
that In re Dillard Department Stores, Inc., 198 S.W.3d 778 (Tex. 2006), establishes that an
employer has no power to unilaterally modify the terms of employment, since the employee
must be notified of and accept any modifications for them to be effective. However, the critical
distinction between Dillard and this case is that there was no express reservation of Dillard’s
right to amend the arbitration agreement. Id. at 781; see also Morrison, 517 F.3d at 256 n.10
(rejecting a similar argument concerning Dillard). Dillard is therefore inapposite. The same
can be said for D.R. Horton, Inc. v. Brooks, 207 S.W.3d 862 (Tex. App.—Houston [14th Dist.]
2006, no pet.), relied upon by 24 Hour Fitness for the proposition that notice is all that is
required to keep an arbitration agreement from being illusory. See id. at 869. D.R. Horton
is distinguishable because there the court found that the arbitration agreement was not
subject to the change-in-terms provision. Id. at 868–69. The language relied upon by 24 Hour
Fitness is dicta, id. at 869, that we decline to follow here. Finally, 24 Hour Fitness cites to
Iberia Credit Bureau Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004). State
contract law governs whether an arbitration agreement is valid, Morrison, 517 F.3d at 254,
and in Iberia this court was applying Louisiana law. 379 F.3d at 172. While notice may be
sufficient under Louisiana law, id. at 173–74, this court has concluded that it is not sufficient
under Texas law in Torres and Morrison.
3
See, e.g., Torres, 397 F. App’x at 66; Morrison, 517 F.3d at 254–55; Odyssey
Healthcare, 310 S.W.3d at 424; In re Dillard Dep’t Stores, Inc., 198 S.W.3d 778, 782 (Tex.
2006); J.M. Davidson, 128 S.W.3d at 228; Weekley Homes, 336 S.W.3d at 418–21; D.R. Horton,
207 S.W.3d at 869.
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presented here, because 24 Hour Fitness does not provide a definite notice
window. Indeed, it appears that amendments could become binding almost
instantaneously upon “official written notice.”4
IV. CONCLUSION
For the foregoing reasons, we hold that the arbitration agreement
contained in the 24 Hour Fitness employee handbook was illusory. Therefore,
Carey is not bound by the provision and 24 Hour Fitness cannot compel
arbitration to go forward. The judgment of the district court is AFFIRMED.
4
24 Hour Fitness argues that both Torres and Morrison are distinguishable because
they provided for amendments that would be automatically binding upon notice. 24 Hour
Fitness argues that its amendments would not be automatically binding, because employees
have the opportunity to accept the changes by continuing to work, or rejecting the changes by
quitting. We do not find this distinction meaningful. Although 24 Hour Fitness’s
Acknowledgment does not use the phrase “automatically binding,” neither does it provide a
quantifiable notice window before amendments take effect. Cf. Halliburton, 80 S.W.3d at
569–70 (providing a 10-day notice window in addition to a savings clause); Odyssey, 310
S.W.3d at 424 (providing a 14-day window and a savings clause); In re AdvancePCS Health
LP, 172 S.W.3d 603, 605 (Tex. 2005) (providing a 30-day window and a savings clause).
Absent a notice window, 24 Hour Fitness certainly seems to have the power to make its
amendments binding upon notice. In addition, as Carey points out, “[t]here is no language in
the agreement or related documents suggesting that, if Mr. Carey did quit in response to a
notice of amendment, he could avoid application of the amendments to disputes arising before
notice of the amendment,” which as discussed above is the critical issue.
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