Arbitration Independent Clause

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Can an employer compel arbitration in accordance with an arbitration clause in a contract that

has terminated? The U.S. Court of Appeals for the Sixth Circuit recently answered this question

in the affirmative.

InHuffman v. The Hilltop Cos., LLC,a group of plaintiffs filed a class and collective action

under the Fair Labor Standards Act (FLSA) and Ohios wage and hour law for allegedly unpaidovertime due to their misclassification as independent contractors. Each plaintiff had signed a

professional services contract agreement that contained an arbitration clause. The agreement

ended upon termination of the independent contractor relationship, which preceded their lawsuit.

The agreement contained a survival clause that specifically identified a number of provisions

that survived its expiration. Although the arbitration clause was not included in the list of

provisions in the survival clause, the defendant moved to compel arbitration, arguing that the

arbitration clause survived the termination of the agreement. The district court disagreed and

denied the motion, holding that the survival clause was limited to those provisions specifically

listed.

On appeal, the Sixth Circuit overruled the district court, determining that the arbitration clause

survived the termination of the agreement. The court held that, despite the specific list of

provisions in the survival clause, the language did not constitute a sufficiently clear intention

that the list was exclusive. The court noted that other non-enumerated clauses, such as the non-

competition, severability, and integration clauses, survived contract termination. Without a cl ear

intention to the contrary, the strong federal presumption favoring arbitration embodied in the

Federal Arbitration Act resulted in resolving the doubt as to the parties intentions in favor of

arbitration.

As the Sixth Circuit noted, its decision was consistent with the Supreme Courts decisioninLitton Fin. Printing Div. v. NLRB.The 1991 opinion held, in the context of a collective

bargaining agreement, that the duty to arbitrate does not automatically expire upon the

termination of the agreement and that broadly worded arbitration clauses contain a presumption

of arbitrability if the dispute arose under the agreement. Other circuit and district courts have

reached similar results, finding that arbitration clauses survive contract termination.

Although theHuffman case is a welcome result for employers and consumer financial services

companies that seek broad application of their arbitration agreements, it is not certain that other

courts would reach the same outcome in considering the parties intentions in light of a specific

survival clause that fails to mention the arbitration agreement. We recommend that employers

and other companies review their contracts to confirm that any survivor provisions specificallyreference mandatory arbitration.
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Court Finds Restrictive Arbitration Clause

Unenforceable

ByJessica B. Summers,Associate

For the many companies that utilize arbitration clauses in their independent contractor

agreements or employment agreements, a recent decision from the U.S. District Court for

the Eastern District of Virginia serves as an important reminder of the care that must be

taken in crafting these provisions. Otherwise, what was meant to provide a cost-savings

mechanism for dispute resolution may end up actually increasing litigation expenses

significantly. As this case demonstrates, the litigants spent substantial time (and no doubt

expense) litigating the enforceability of the arbitration provision even before getting to the

merits of the case.

In the case of Winston v. Academi Training Center, Inc. (2013 WL 989999)(memorandum opinion availablehere), the District Court refused to enforce an arbitration

clause contained in the independent contractor agreements between the defendant and the

two plaintiffs. The District Court concluded that, because the arbitration clauses barred any

discovery and required the plaintiffs to pay the costs regardless of the outcome, the clauses

were both counter to federal statute and unconscionable.

This appears to be the first case in which a court within the Fourth Circuit has considered

the enforceability of an arbitration clause containing such a discovery prohibition and a fee

shifting provision. However, it is not the first time that a court within the circuit has declined

to enforce an arbitration clause on the basis that it overly favors the employer and impedes

the legal rights of an employee or independent contractor. The Fourth Circuit itself has

declined to enforce arbitration clauses which require that the arbitrator be selected from a

list produced by the employer or that the arbitration proceed under broad rules set by the

employer.

The ongoing Winston case centers on Fair Claims Act (the FCA) and state law retaliation

claims brought by two independent contractors against Academi Training Center, Inc

(Academi), a government contractor. Both plaintiffs entered into independent contractor

agreements with Academi to provide firearm instruction in relation to a security contract

between Academi and the U.S. Department of State. The plaintiffs and other firearm

instructors were responsible for observing shooters performances and preparing reports

which Academi submitted to the State Department.

Plaintiffs claim to have witnessed other Academi contractors submitting false records and

one of the plaintiffs claims to have been asked to complete a report using made-up

numbers. The plaintiffs reported these incidents to their supervisor and were terminated the

next day with the explanation that they had failed to report the fraud sooner and had
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allegedly participated in the fraud. The plaintiffs filed suit in the District Court claiming

retaliation in violation of the FCA and state law.

In determining whether to enforce the arbitration clauses of the plaintiffs independent

contractor agreements, the Court distinguished between the plaintiffs FCA claims and their

state law claims. The Court recognized that, because FCA claims are subject to the Federal

Arbitration Act, doubts about the enforceability of an arbitration clause as to FCA claims are

generally resolved in favor of arbitration. The Court emphasized however, that an

arbitration clause should not be enforced if such arbitration would deny the plaintiff his or

her rights under the FCA.

The Court identified just such a situation in the Winston case. The Court was particularly

troubled that the arbitration clause did not allow discovery, particularly in light of the fact

that the plaintiffs would need the allegedly falsified documents to prove their claims and

that these documents would be difficult, if not impossible, to obtain in the absence of

discovery. Further, the Court also found that, as applied, the arbitration clause wouldfrustrate Congressional intent by placing the financial burden of the arbitration on the

plaintiff. Counter to the arbitration clauses provision, the FCA, like many of the federal

employment law statutes including Title VII and the ADA, contains a fee shifting provision

which awards attorney fees to successful plaintiffs.

In considering the application of the arbitration provisions to the plaintiffs state law

claims, the Court began by refusing to enforce the forum selection clauses also contained in

the independent contractor agreements. The Court made this decision on the basis that the

clauses called for the application of New York law despite the facts that Academi was a

Delaware corporation headquartered in Virginia, that neither plaintiff was from New Yorkand that the agreements were signed in North Carolina. Applying North Carolina law, the

Court concluded that the same aspects of the arbitration clause that rendered it

unenforceable as to FCA claims would also make the state law claims unfairly difficult to

pursue and thus make the enforcement of the arbitration clause unconscionable.

The Court refused to sever the problematic discovery and fee shifting provisions and

enforce the remainder of the arbitration clauses because both the Fourth Circuit and North

Carolina courts have taken the position that courts should not engage in rewriting

unconscionable contracts.

Winston presents yet another example of what Fourth Circuit courts consider to be

unenforceable arbitration provisions. Employers would be well advised to take this

opportunity to review and revise any of their own arbitration provisions that contain broad

restrictions or limits that could render the provision unenforceable.


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Arbitration Independent Clause

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