The Missouri Supreme Court Invalidates an Employment Contract Arbitration Clause for Lack of Consideration

On August 19, 2014, the Missouri Supreme Court sustained the trial court’s denial of an employer’s motion to compel arbitration in the case of Carla Baker v. Bristol Care, Inc. d/b/a Bristol Manor, et al., No. SC93451. The Court ruled: 1) that because the arbitration agreement did not specifically call for arbitration of agreement “formation” issues determination of these issues was not limited to arbitration, and, 2) because continued at-will employment and mutual promises to arbitrate were insufficient consideration to support formation of the arbitration agreement the Court properly denied the motion to compel arbitration.

Employers in Missouri seeking to arbitrate employment disputes should be aware that if all aspects of the dispute are to be submitted to arbitration, including whether an agreement to arbitrate has been legally formed, language to this effect needs to be included in the agreement with the employee. Additionally, “continued at-will employment” and “mutual promises to arbitrate” may not be sufficient consideration to support an arbitration agreement if issues of contract formation are determined by Missouri state courts.

Facts

Employee Baker was promoted by employer Bristol from an hourly position to a salaried managerial position. In conjunction with this promotion, the employer drafted and the parties executed both an Employment Agreement and an Arbitration Agreement.  Importantly, the Employment Agreement could be terminated by the employee with 60 days’ notice or by the employer: 1) at the employer’s sole option with five days’ notice, 2) without notice if the employer paid the employee five days’ compensation, 3) without notice if, in the employer’s opinion, the employee violated certain conditions of the employment agreement, or 4) without notice for “dishonesty, insubordination, moral turpitude or incompetence.”

The Arbitration Agreement called for all legal claims between the employer and employee to be subject to binding arbitration. The Arbitration Agreement indicated that consideration for the Arbitration Agreement consisted of “continued employment” and “mutual promises to resolve claims through arbitration.”

Interestingly, the Arbitration Agreement also contained the following language:

“This Agreement is not, and shall not be construed to create, a contract of employment, express or implied, and does not alter Employee’s status as an at-will employee. Notwithstanding this Agreement, either Employee or Company can terminate the employment . . . at any time, for any reason, with or without cause at the option of the Employee or the Company.”

Lastly, but perhaps most importantly, the Arbitration Agreement contained language that the employer could “amend, modify or revoke” the Arbitration Agreement upon 30 days’ written notice to the employee.

Shortly thereafter, employee Baker was terminated from her position. She subsequently joined a class action for payment of unpaid overtime. Employer Bristol filed its motion to compel arbitration and the Circuit Court denied the motion resulting in the appeal.

Contract Formation Issues Which Are Not Stipulated for Arbitration In an Arbitration Agreement Are Not Preempted by Federal Law

As an initial matter, the Court ruled that the Circuit Court, rather than an arbitrator, properly decided issues of the “formation” of the Arbitration Agreement. Employer, relying upon Rent-A-Center v. Jackson, 130 S. Ct. 2772 (2010), argued that the Arbitration Agreement stipulated exclusive authority to decide issues of “applicability and enforceability” by an arbitrator. The Court distinguished the Arbitration Agreement from the agreement in Rent-A-Center, noting that the agreement in the U.S. Supreme Court case additionally included language granting the exclusive authority to resolve not only issues of interpretation, applicability and enforceability of the agreement, but also issues of formation of the agreement at issue in that matter. The Bristol Arbitration Agreement, significantly, did not contain this language.

The Court found that employee Baker’s argument that there was no consideration supporting the Arbitration Agreement raised issues of contract formation, rather than issues of applicability or enforceability, and “State courts are permitted to apply state law defenses to the formation of the particular contract at issue,” Brewer v. Missouri Title Loans, 364 S.W.3d 486, 492 (Mo. banc 2012); Robinson v. Title Lenders, Inc., 364 S.W.3d 505, 510 (Mo. banc 2012), without running afoul of Federal preemption.

“Continued At-Will Employment” and “Mutual Promises to Arbitrate” Are Insufficient Consideration to Support an Arbitration Agreement

Noting that consideration “consists either of a promise (to do or refrain from doing something) or the transfer or giving up of something of value to the other party,” Morrow v. Hallmark Cards, Inc., 273 S.W.3d 15, 25 (Mo. App. 2008), the Court observed that Missouri appellate courts, unlike various other state and federal courts, have ruled that continued at-will employment is insufficient consideration to support an agreement to arbitrate because the employer is not making any legally enforceable promise that it is not already legally obligated to perform. See, e.g., Whitworth v. McBride & Son Homes, Inc., 334 S.W.3d 730, 741 (Mo. App. 2011); Frye v. Speedway Chevrolet Cadillac, 321 S.W.3d 429, 438-439 (Mo. App. 2010); Morrow, 273 S.W.3d at 26.

Additionally, the Court ruled that the employment and arbitration agreements at issue in this matter did not convert employee Baker’s status from an employee at will, noting that the key factors for determining whether an employee remains “at-will” are whether the agreement at issue contains an indefinite duration and an employer option to terminate employment at any time without cause. The Court ruled that the clauses in the employment agreement allowing employer Bristol to terminate employee Baker for any reason with five days’ pay evidence these key indicators of an employment at-will relationship. In the event this wasn’t enough, the Court also noted the specific clause in the Arbitration Agreement noting that the relationship between Baker and Bristol remained “at-will.”

Additionally, the Court ruled that, because the bilateral agreement to arbitrate was “illusory” no agreement to arbitrate was formed. Citing Morrow v. Hallmark Cards, Inc., 273 S.W.3d 15, 25 (Mo. App. 2008), the Court noted that a promise is “illusory” when one party retains the unilateral right to amend or change the agreement. Because Bristol retained the right to amend the agreement and this apparently included the right to amend the agreement retroactively, the mutual promise to arbitrate was deemed illusory and insufficient as consideration to support an agreement to arbitrate.

Conclusion

This ruling is notable in part because it may provide an avenue to distinguish federal law preempting state laws which invalidate arbitration agreements on public policy grounds. Employers wishing to rely upon arbitration agreements to settle disputes will need to carefully mirror the language in Rent-A-Center calling for the exclusive authority of arbitration to determine not only issues of interpretation, applicability and enforceability, but also issues of formation.