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Court Compels Arbitration where Employer's Right to Modify Terms is not "Unfettered"

ABSTRACT: An arbitration agreement that placed meaningful limits on an employer's right to modify the agreement did not lack consideration, according to the Kansas federal district court.

A number of recent court decisions have invalidated employment arbitration agreements where the employer reserves the right to modify terms. Courts have increasingly held that modification rights make the employer’s promise to arbitrate illusory, and thus, the agreement to arbitrate lacks consideration. Bucking this trend, however, the District of Kansas, in an opinion by Judge Toby Crouse, recently affirmed that an employment arbitration agreement which does not give the employer “unfettered” authority to modify its terms is supported by valid consideration and is enforceable. The Court also held that an arbitration agreement which incorporates AAA delegation rules is a “clear and unmistakable” delegation, giving the arbitrator the authority to rule on his or her own jurisdiction and issues of arbitrability.

The case is Braden v. Optum RX, Inc., in which Baker Sterchi is serving as local counsel for the defendants. Braden sued her former employer and other entities, including UnitedHealth Group (“UHG”), for violations of the Family Medical Leave Act and Americans with Disabilities Act. Defendants moved to compel arbitration, because when Braden began her employment with UHG, she signed an arbitration agreement that was presented to her as a condition of employment. The Agreement covers most arbitrable employment disputes, including disputes arising under the FMLA and ADA. Importantly, the employer reserved “the right to amend, modify, or terminate the Policy effective on January 1 of any year after providing at least 30 days’ notice” to employees on the company intranet. The agreement incorporated the American Arbitration Association (“AAA”) Employment Dispute Resolution Rules, including Section 6 of the AAA Rules which states that “the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” Finally, the agreement also states “continuation of employment with UnitedHealth Group is deemed to be acceptance of this Policy.”

Braden worked for UHG for six years. Toward the end of her employment, a medical condition allegedly caused Braden to exhaust her FMLA leave, and her continued absences were counted as unexcused under UHG’s attendance policy. UHG eventually terminated Braden’s employment for accruing too many unexcused absences.

Braden opposed UHG’s motion to compel arbitration, claiming that the agreement lacked consideration based on the UHG’s ability to modify its terms and challenging the agreement’s delegation provision. She argued that UHG’s promise to arbitrate was illusory because UHG reserved the right to modify or terminate the Agreement. Braden cited cases from several district courts in other jurisdictions (relying heavily on a case from Hawaii) which held that the UHG arbitration provision at issue lacked consideration because UGH’s promise to arbitrate was illusory. As a result, Braden claimed, no valid agreement was ever formed.

The Court granted UHG’s motion to compel arbitration. The Court explained that under Kansas law, if a modification clause provides the employer the “unfettered” right to modify or revoke its promise to arbitrate, then the promise is illusory. However, if the right to modify is “meaningfully limited,” then a promise to arbitrate is not illusory. Additionally, under Kansas law, an arbitration agreement does not require mutuality of obligation between the employer and employee. Rather, a contract is formed as long as both parties retain some valid consideration.

The Court held that UHG’s right to amend the policy is not “unfettered” because UHG was required to provide at least 30 days’ advanced notice and could only modify or terminate the Agreement effective January 1 of the year following notice. As a result of this effective date, UHG was prohibited from immediately terminating the agreement, which could have the effect of cutting off existing claims.

The Court also distinguished the cited cases from Hawaii, pointing out that under substantive law, Hawaii requires “mutuality of obligation” in bilateral contacts. The Court found that because Braden and UHG both promised to submit their grievances to arbitration, there was valid consideration on both sides.

Next, Braden challenged the Agreement’s delegation provision. Under Kansas law, a delegation provision is only valid where there is “clear and unmistakable evidence” of the parties’ intent to delegate to the arbitrator threshold issues of formation, enforceability, and other issues of arbitrability. Rather than separately attacking the delegation provision, Braden argued that because the Agreement as a whole was illusory, so was the delegation provision. Relying on Tenth Circuit precedent, the Court held that the parties had expressly incorporated AAA rules, which constitute “clear and unmistakable evidence” of an agreement to delegate arbitrability issues to the arbitrator.

Finally, Braden argued the rules limiting discovery were unconscionable. The Court found that because the delegation provision was valid, the Court’s role was limited to determining whether a contract was formed. Therefore issues such as unconscionability are left to the arbitrator.

In conclusion, in Kansas, so long as meaningful limits are placed on an employer’s ability to modify an arbitration agreement, courts will compel arbitration. From Braden, and the cases cited therein, drafters should ensure that the modification provisions include, at a minimum:

  • ample notice to employees that changes to the agreement are forthcoming;
  • a date certain on which changes will become effective; and
  • a statement that modification or termination of the agreement will not affect claims already submitted to arbitration.