Forced to lie in the bed you made: Certain conduct may nullify arbitration agreements

You may be able to dip your toes in the litigation waters, but you may get pushed all the way in.

A U.S. District Court Judge in New York recently ruled that Equity Residential Properties Management Corporation (ERPMC) was barred from compelling a former employee to arbitrate her claims because it had previously refused to comply with the arbitration agreement. The court based its finding on contract law. Let’s take a closer look at its reasoning.

Employer can’t have it both ways

Following a disciplinary write-up, Janice Nadeau requested arbitration pursuant to an agreement she signed at the beginning of her employment at ERPMC. She filed her demand for arbitration with the American Arbitration Association (AAA). The AAA later informed her that ERPMC hadn’t paid the arbitration fee, which it was required to do under the arbitration agreement.

Nadeau was subsequently fired—according to her, in retaliation for her demand for arbitration. ERPMC attempted to settle the claim after her termination, but it never paid the arbitration fee despite her continued insistence that she wanted the matter arbitrated. As a result, the AAA closed its case.

Trouble reared its head after Nadeau filed suit in federal court. In response to her lawsuit, ERPMC asked the court to compel arbitration under the arbitration agreement, but the judge wasn’t having it. The court found that ERPMC had violated the agreement by not paying the arbitration fee. The court noted, “Under New York law, when a party to a contract materially breaches that contract, it cannot then enforce that contract against a non-breaching party.” Ouch.

And another thing . . .

Nadeau’s case should serve as cautionary tale for employers. But breaching the arbitration agreement isn’t the only conduct that may send an employer to court instead of arbitration. Inadvertently waiving your right to arbitration is also something to be wary of.

In a Texas case outside the employment context but directly addressing an arbitration agreement, the Dallas Court of Appeals recently held that a roofing company, Ideal Roofing, went so far into the litigation process that it waived its right to compel arbitration against a homeowner, Mike Armbruster, under an otherwise valid arbitration agreement.

The court began by underscoring the deference normally afforded to arbitration agreements, stating, “The law imposes a strong presumption against the waiver of contractual arbitration rights.” The court then emphasized that when in doubt, the scales should tip in favor of arbitration. But in the case before it, the court found that Armbruster had met his “heavy burden of establishing [that Ideal] substantially invoked the judicial process.”

The court looked to a number of factors to reach that conclusion—namely, the length of time that Ideal knew about the arbitration clause, the amount and type of discovery (pretrial exchange of evidence) already conducted, and how close to trial the company sought arbitration. The court ultimately found that the circumstances of the 19 months of litigation preceding the motion to compel arbitration weighed heavily in the homeowner’s favor, and Ideal had therefore waived its right to arbitration.

Consider yourself warned

Both cases should give you pause if you’re considering giving litigation a shot before agreeing to arbitrate an employee’s claims under a preexisting agreement. You may be able to dip your toes in the litigation waters before making a decision, but if you don’t tread carefully, you may get pushed all the way in.

Jacob M. Monty, the managing partner of Monty & Ramirez, LLP, practices at the intersection of immigration and labor law. He can be reached at jmonty@montyramirezlaw.com or 281-493-5529.