June 15, 2014 Top Story

Arbitration Survives Contract's Expiration

Ruling reflects continued federal policy favoring arbitration

Lisa R. Hasday

For the first time, a federal circuit court has examined whether an agreement’s arbitration clause still applies after the agreement expires where the agreement’s survival clause does not specifically list the arbitration provision. The court found that the arbitration clause survived because the parties did not clearly imply that it was to expire with the agreement. Huffman v. Hilltop Cos., LLC.

Strong Presumption Favoring Arbitration

The plaintiffs worked for The Hilltop Companies reviewing mortgage loan files to determine whether foreclosure and other proceedings were lawful. Each employee had signed a company-drafted employment agreement containing 24 paragraphs, including an arbitration clause and a survival clause. The survival clause listed exactly half of the agreement’s paragraphs, but not the arbitration paragraph. After their Hilltop employment ended, the employees filed a class-action lawsuit in the U.S. District Court for the Southern District of Ohio, alleging violations of federal and state fair-wage laws.

Hilltop filed a motion to dismiss and to compel arbitration, arguing that the agreement provided for arbitration of all disputes, even those arising after the agreement’s expiration. The district court denied Hilltop’s motion, relying on principles of contract interpretation to find meaning in the absence of the arbitration clause from the survival clause and to construe ambiguous terms against the drafter’s interests. The district court did not reach a second issue concerning whether the agreement permitted class-wide arbitration.

Reversing the district court, the U.S. Court of Appeals for the Sixth Circuit held that the strong federal policy endorsing arbitration trumped the lower court’s contractual analysis. Rebutting the presumption in favor of arbitration is “difficult” but “not impossible,” the appellate court noted. The U.S. Supreme Court established that parties may do so “expressly or by clear implication." Litton Financial Printing Division v. National Labor Relations Board. The circuit court offered that the “clear implication” standard might have been satisfied if, for instance, the survival clause listed every paragraph of the agreement except for the one concerning arbitration.

The appellate court also ruled that the agreement did not permit class-wide arbitration. “I was surprised they did not remand that to the district court to make that decision,” remarks Alan G. Crone, Memphis, TN, cochair of the Employment Law Subcommittee of the ABA Section of Litigation’s Class Actions and Derivative Suits Committee. “Having said that, I think that the ruling is consistent with the rest of the court’s ruling and is probably consistent with the growing trend toward eliminating class-action treatments from the arbitration context,” says Crone.

A Holistic Approach

In finding that the parties did not clearly imply that the arbitration clause was to expire, the Sixth Circuit examined the contract as a whole. The court determined that the paragraphs specified in the survival clause did not constitute an exhaustive list. The court observed that the agreement’s non-compete clause was not included in the survival clause although the non-compete paragraph stated that employees would not serve certain clients for one year after the agreement’s expiration.

Moreover, neither the agreement’s severability clause nor its integration clause was listed in the survival clause, the court noted. The severability clause provided that the agreement would be enforceable even if any provision was found invalid. The integration clause provided that the agreement superseded the parties’ prior communications. Any conclusion that these clauses were not meant to survive would be “illogical,” the court reasoned.

The court found unpersuasive the plaintiffs’ argument that they did not knowingly consent to arbitration because the agreement did not expressly indicate that they were waiving their right to a jury trial. Circuit precedent did not support that argument, the court determined, except in an inapplicable case where the employees lacked high school educations and were provided false information.

Lessons Learned

“This case is a good example of the trend that federal courts will enforce arbitration clauses unless it’s somewhere clear that the parties didn’t mean to have an arbitration clause survive,” explains Crone. “Courts are not unhappy to get cases off their calendar when they can be resolved in another forum,” adds Neal M. Eiseman, New York, NY, cochair of the Arbitration Subcommittee of the Section of Litigation’s Alternative Dispute Resolution Committee.

Still, employers should list arbitration clauses in survival clauses, or include a survivability element to the arbitration clause itself, if they desire post-expiration arbitration, Crone advises. “A different panel of Sixth Circuit judges would have decided the case differently,” he cautions. “I’m sure somewhere there’s a lawyer who is breathing a deep sigh of relief that leaving the arbitration paragraph out of the survival clause didn’t come back to haunt him or her,” says Crone.

From the employees’ perspective, this case emphasizes the importance of expressly cancelling arbitration clauses when that is the intended result, Eiseman concludes. But doing so is not always easy, says Crone. Arbitration clauses are sometimes included in employment applications or posted on websites that are referred to in agreements, Crone explains. “I have so many clients with no more recollection of signing these than they do for what they had for breakfast on their first day of work,” Crone laments. “You just want the J-O-B; you’re not concerned with what you’ll deal with when your rights are violated down the road,” says Crone.

Lisa R. Hasday is an associate editor for Litigation News.

Keywords: arbitration, class action, employment agreement, Sixth Circuit, survival clause

This article presents the views of the author alone and not necessarily those of her employer, the U.S. Department of Justice.

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