VOL. 34, NO. 1 SUMMER 2008 Employee Relations LAW JOURNAL

When Does an Employee’s Silence Signify Agreement to a Mandatory ?

Howard S. Suskin and Eric J. Schwab

This article examines how courts are responding to the challenge of reconciling mandatory arbitration agreements favored by the Federal Arbitration Act with basic principles of contract law that require of acceptance. After a recent federal circuit court split, pending clarifi cation from the Supreme Court, the authors advise that the safest course for employers seeking to enforce mandatory arbitration agreements for their employees’ disputes is to obtain the employee’s signature on the document and not rely simply on silent acquiescence.

ncreasingly, employers are attempting to implement and enforce Iagreements requiring their employees to resolve their employment disputes through arbitration. Employers commonly use “opt out” proce- dures that allow employees to enroll in mandatory arbitration programs by default, or simply notify their employees that agreeing to arbitrate will be a condition of continued employment. Recently, a split has emerged among federal courts called upon to enforce these types of arbitration provisions against employees. While a majority of courts, invoking the “liberal federal policy favoring arbitration,” have upheld agreements based on an employee’s default or de facto acceptance, a growing number of courts have balked at enforcing mandatory arbitra- tion clauses that were unilaterally promulgated by employers but never actually signed or otherwise explicitly accepted by the employee. The resistance to such arbitration clauses is especially pronounced when those require the employee to waive important substantive rights and remedies. This article examines how courts are responding to the challenge of reconciling mandatory arbitration agreements favored

Howard S. Suskin, a partner in Jenner & Block LLP’s Chicago offi ce, is the chair of the fi rm’s Litigation Practice and co-chair of the fi rm’s Securities Litigation Law Practice. Eric J. Schwab is an associate at the fi rm and a member of the Litigation Practice. The authors may be contacted at [email protected] and [email protected], respectively. Employee Silence and the Mandatory Arbitration Contract by the Federal Arbitration Act with basic principles of contract law that require evidence of acceptance.

THE FEDERAL ARBITRATION ACT’S BIAS TOWARDS ENFORCEMENT

The challenge for courts in determining whether mandatory arbitra- tion clauses for employees are enforceable in the face of objections based on state law contractual principles derives from a policy tension built into the Federal Arbitration Act (FAA). Congress enacted the FAA in 1925 in an effort to overcome “longstanding judicial hostility” to arbitration.1 The FAA requires courts to treat arbitration agreements as “valid, irrevocable, and enforceable, save upon such grounds as exist in law or in equity for the revocation of the contract.” 2 In rulings over the past three decades, the Supreme Court has interpreted this language as expressing Congress’s broad intent to “foreclose” states from attempting to limit or undercut the enforceability of arbitration agreements, either through competing legislation 3 or in the courts.4 When evaluating arbi- tration agreements, courts may apply state law contract principles only to the extent that these “govern issues concerning the validity, revoca- bility, and enforceability of contracts generally.”5 The FAA’s ostensible purpose is thereby “to place arbitration agreements on the same footing as other contracts.”6 Because the Supreme Court has also instructed that the FAA embodies a “liberal federal policy favoring arbitration agree- ments, notwithstanding any state substantive or procedural policies to the contrary,”7 courts deciding the enforceability of arbitration agree- ments must weigh the extent to which the federal policy favoring arbi- tration should be “taken into even in applying ordinary state [contract] law.”8 This policy tension informs even the threshold legal determina- tion of whether the employer and employee have reached a binding agreement to arbitrate. 9 While standard contract law requires , the statutory language of the FAA requires an “agreement in writing” or a “written provision” in an employment contract. 10 And while courts have “readily” agreed that this language means only that the arbitration offer must be in writing but does not imply a signature requirement, 11 courts have disagreed over what exactly constitutes adequate evidence that the employee has accepted the written offer to arbitrate.

MAJORITY VIEW: SILENCE EQUALS ACCEPTANCE

Under the dominant trend followed in the Fifth, Seventh, Ninth, Tenth, and Eleventh Circuits, courts invoke the “course of conduct”

Vol. 34, No. 1, Summer 2008 2 Employee Relations Law Journal Employee Silence and the Mandatory Arbitration Contract rule under state contract law to fi nd that an employee’s inaction may be enough to signal tacit acceptance of a mandatory arbitration clause, as manifested either by failing to “opt out” or else by simply “continu- ing employment.”12 As the Ninth Circuit explained: “As a general rule, silence or inaction does not constitute acceptance of an offer…however, where circumstances or the previous course of dealing between the par- ties places the offeree under a duty to act or be bound, his silence or inactivity will constitute assent.”13 After several earlier rulings that appeared to grant adhesion-style “take-it-or-quit” arbitration contracts less than automatic approval, 14 the Sixth Circuit recently joined the majority of other circuits in upholding an arbitration agreement based on the employee’s acceptance-by-continued employment.15 In this most recent ruling, however, the dissenting judge very pointedly underscored his skepticism towards the notion that an employer could plausibly interpret an employee’s silence or inactivity as acceptance of the employer’s offer by citing an example of such silence taken from an episode of the popular television show The Simpsons : Homer Simpson talking to God: “Here’s the deal: you freeze every- thing as it is, and I won’t ask for anything more. If that is OK, please give me absolutely no sign. [no response] OK, deal. In gratitude, I present you this offering of cookies and milk. If you want me to eat them for you, please give me no sign. [no response] Thy will be done.” 16

THE GROWING MINORITY VIEW: SILENCE DOES NOT EQUAL ACCEPTANCE

On the basis of similar (albeit more conventionally expressed) con- tract law principles, courts in the First, Second, and Third Circuits have rejected the views of the majority circuits and refused to regard arbitra- tion agreements that rely on unilateral offers and tacit acceptance as presumptively valid and enforceable. 17 As one New York district court, invoking “time honored” principles of contract law, recently declared: “[N]o unilateral conduct of the offeror, regardless of how extensive or well-intentioned, can ever be the basis for the creation of a binding agreement in the face of an offeree’s utter silence and inaction.” 18 Underlying this divergence of opinion among the judicial circuits is a basic legal question: what constitutes adequate proof that the employee was aware that a certain course of conduct would be understood as binding acceptance of the employer’s offer—in other words, what constitutes “minimally suffi cient notice of the contractual nature of the [arbitration offer]”?19 Here the signature comes back into play, as most courts are willing to deem an employee’s signed acknowledgement of receipt of the arbitration policy or “opt out” materials, or even just a signed employment application referencing such a policy, to be suffi - cient evidence that the employee had suffi cient notice that continuing

Employee Relations Law Journal 3 Vol. 34, No. 1, Summer 2008 Employee Silence and the Mandatory Arbitration Contract to work or failing to opt out would be taken as a binding agreement to arbitrate. 20 Yet, even where the employee has not signed any acknowl- edgement or receipt, courts may still fi nd that the employee agreed to arbitration simply by continuing to work if the employer offers evidence that the employee was otherwise on notice of the terms of the offer, or else if the employee simply fails to deny being on notice.21

THE JUDICIAL SPLIT OVER WHETHER NOTICE IS SUFFICIENT

The determination of whether notice was adequate may depend on how the court allocates the burden of proof, and courts have taken different approaches on that issue. 22 For example, the Seventh Circuit, citing its own precedent holding that the party opposing arbitration has the burden of challenging the existence of an agreement, ruled that an employee who offered an affi davit denying that she ever received or read a brochure announcing the employer’s binding arbitration pro- gram, failed to carry her burden of proof, where the employer provided several affi davits stating that it had included the brochure in every employee’s paycheck.23 As the court explained, “The issue then is not whether [the employee’s] denial of having received notice of the policy is suffi cient to avoid arbitration, but whether she produced suffi cient evidence to raise a factual issue concerning whether she and Pinkerton are bound by a contract to arbitrate.”24 By contrast, a New York district court invoked Supreme Court dicta to the effect that arbitration should be limited to those disputes that parties have agreed to arbitrate, implicitly shifting the burden to the employer: “[A]n employee cannot be compelled to arbitrate a dispute in the absence of an agreement to do so.”25 Similarly, other courts have invoked state contract law to place the burden on the employer seeking to compel arbitration, requiring “clear and unmistakable” evidence of the employee’s agreement to arbitrate.26 Thus, even the purely factual question of notice forces courts to weigh the federal pro-arbitration con- tract policy against state-by-state rules on basic contract formation—and any other state policies that inform those state rules. In another example, the First Circuit in Campbell directly challenged the invocation of the “liberal” federal pro-arbitration policy in holding that courts seeking to enforce an arbitration agreement in a dispute arising under a federal discrimination statute must undertake a “supplemental” inquiry alongside the standard contract analysis, to determine whether arbitration would be “appropriate” for adjudicating the claim. 27 In that case, the employer had sent an email to all employees announcing its new mandatory arbitration policy and providing a link to a brochure and an employee handbook, which explained that continued employ- ment under the policy meant an employee agreed to be covered and

Vol. 34, No. 1, Summer 2008 4 Employee Relations Law Journal Employee Silence and the Mandatory Arbitration Contract to waive the right to a judicial forum. But the plaintiff-employee argued that he received numerous emails daily and that the employer’s email had not been fl agged as urgent or requiring a response or otherwise indicating that this email could change the terms of the employment contract.28 Ruling that an employer must communicate to its employees “some minimal level of notice suffi cient to apprise those employees that continued employment would effect a waiver of the right to pursue a claim in a judicial forum,” the court held that the email announcement failed to provide employees with “minimally suffi cient notice” that the email was contractual in nature. 29 Although the court admitted the facts in Campbell presented a “close case” and that email notice might suffi ce in other circumstances,30 other courts in the First, Second, and Third Circuits have invoked Campbell in holding various forms of notice-by-mail insuffi cient. In Skirchak (which like Campbell was decided under Massachusetts law) the court refused to enforce an arbitration agreement based on the employer’s company- wide email, which, although the employee admitted he opened it, provided “confusing and technical” information about the contractual nature of the arbitration agreement.31 Similarly, in Hudyka (ruling under Pennsylvania law) the court found that no agreement was ever reached where the employer sent multiple emails announcing the arbitration program but was unable to prove that the employee ever actually opened those emails, let alone read them, and where the emails them- selves provided “ambiguous and confl icting” information about the con- tractual and exclusive nature of the arbitration policy. 32 And in Capone , a Connecticut federal district court found that a company that sent all its employees a copy of its new mandatory arbitration policy, emailed them an announcement, posted the policy on the company Web site and also distributed bulletins explaining the policy, nonetheless “fail[ed] to notify employees of the consequences of an arbitration agreement” because none of the communications specifi ed that the employees would be required to waive their right to a judicial forum. 33

COURTS CONSIDER ISSUES OF TOO

Another line of cases in California has begun to test the limits of the presumptive preclusion of state-law based restrictions on arbitration contracts in the face of the FAA’s “liberal” pro-arbitration policy. The Ninth Circuit affi rmed a district court’s holding that arbitration agreements based on adhesion contracts (“take-it-or-quit-working”) were procedur- ally unconscionable because they denied the employee a “meaningful opportunity to negotiate,” and also raised a “rebuttable presumption of substantive unconscionability” to the extent that the coverage provided under such contracts was “typically and grossly one-sided.” 34 More recently, the California Supreme Court ruled that arbitration agreements requiring employees to waive the option of class arbitration were

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inconsistent with those employees’ “unwaivable statutory rights” to the extent they would prevent employees from seeking class adjudication for minimum wage or overtime violations, where individual enforcement is unlikely to be effective. 35 The California court further held that an employee’s signature acknowledging receipt of mandatory arbitration materials, including information about a 30-day “opt out” period, was not suffi cient to prove notice and thus to disprove procedural unconscion- ability, where the materials themselves presented a “markedly one-sided” explanation of the benefi ts of arbitration and there was a “likelihood that employees felt at least some pressure not to opt out.” 36 Although thus far limited to state contract law rules in California, Connecticut, New Jersey, Pennsylvania, and Massachusetts, these deci- sions may indicate a broader trend of courts pushing back against adhe- sion-type employee arbitration agreements. The cases raise concerns about procedural suffi ciency and unconscionability based upon the adequacy of notice and the employee’s ability to “opt” in or out, as well as concerns about substantive unconscionability related to the one-sided waiver of specifi c rights.

CONCLUSION

Eventually, it may be up to the US Supreme Court to weigh concerns about adequacy of acceptance, notice, and unconscionability against the FAA’s “liberal” pro-arbitration policy. Pending clarifi cation from the US Supreme Court, however, the safest course for employers seeking to enforce mandatory arbitration agreements for their employees’ disputes is to obtain the employee’s signature on the document and not rely simply on silent acquiescence.

NOTES

1. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991). 2. 9 U.S.C. § 2. 3. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Co., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983); Southland Corp. v. Keating, 465 U.S. 1, 16, 79 L. Ed. 2d 1, 104 S. Ct. 852 (1984); Perry v. Thomas, 482 U.S. 483, 489, 96 L. Ed. 2d 426, 107 S. Ct. 2520 (1987). 4. Circuit City Stores v. Adams, 532 U.S. 105, 120, 149 L. Ed. 2d 234, 121 S. Ct. 1302 (2001). 5. Perry at 492 n.9. 6. Gilmer , 500 U.S. at 33. 7. Perry at 489, quoting Moses H. Cone Mem’l Hosp. at 24 (1983). 8. Cooper v. MRM Inv. Co., 367 F.3d 493, 498 (6th Cir. 2004) (citation omitted). But see Dumais v. Am. Golf Corp., 299 F.3d 1216, 1220 (10th Cir. 2002) (“The presumption in favor

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of arbitration is properly applied in interpreting the scope of an arbitration agreement; however, this presumption disappears when the parties dispute the existence of a valid arbitration agreement.)” citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944–945, 131 L. Ed. 2d 985, 115 S. Ct. 1920 (1995); Moses H. Cone Mem’l Hosp . , at 24–25. 9. May v. Higbee Co., 372 F.3d 757, 763 (5th Cir. 2004), citing AT&T Techs., Inc. v. Commc’ns Workers, 475 U.S. 643, 648, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986) (“[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed to submit.”). 10. 9 U.S.C. §§ 2–4. 11. Caley v. Gulfstream Aerospace Corp., 428 F.3d 1359, 1369 (11th Cir. 2005); see also Tinder v. Pinkerton Sec., 305 F.3d 728, 736 (7th Cir. 2002) (“Although § 3 of the FAA requires arbitration agreements to be written, it does not require them to be signed.”). 12. May , 372 F.3d at 764 (continuing employment after notice of offer constitutes assent); Tinder, 305 F.3d at 734 (by remaining employed past effective date of arbitration program, employee agreed to arbitrate); Circuit City Stores, Inc. v. Najd, 294 F.3d 1104, 1109 (9th Cir. 2002) (assent inferred from failure to opt out); Crawford v. U.S. Auto. Assoc. Ins., No. 06-CV-00380, 2006 U.S. Dist. Lexis 46433, at *3s (D. Colo. July 10, 2006) (by continuing to work after learning of the arbitration policy, plaintiff “implicitly admit[ted]” she knew and accepted its terms); Caley , 428 F.3d at 1375 (act of continued employment constitutes acceptance). 13. Najd at 1109 (internal citations omitted). See also Hicks v. Macy’s Dept. Stores, No. C 06-02345, 2006 WL 2595941, at *3 (N.D. Cal. Sept. 11, 2006) (employee who admitted reading opt-out materials and did not opt out agreed to arbitrate). 14. See Morrison v. Circuit City Stores, 317 F.3d 646, 668 (6th Cir. 2003) (enforcing arbitration agreement but imposing a “knowing and voluntary” standard for agreements to arbitrate involving waiver of legal rights); Cooper, 367 F.3d at 503–504 (reversing district court’s invalidation of arbitration agreement based on “take-it-or-leave-it” offer, but remanding for determination whether employee signed contract knowingly and voluntarily); Lee v. Red Lobster Inns, 92 Fed. Appx. 158, 162 (6th Cir. 2004), citing Restatement (Second) of Contracts § 69, cmt. a (1981) (“The mere receipt of an unsolicited offer does not impair the offeree’s freedom of action or inaction or impose on him any duty to speak.”); Walker v. Ryan’s Family Steak Houses, 400 F.3d 370, 381 (6th Cir. 2005) (citingMorrison and Cooper to invalidate arbitration agreement based on “take- it-or-leave-it” offer because employee did not “knowingly and voluntarily consent to arbitration”). 15. Seawright v. Am. Gen. Fin. Servs., No. 07-5091 (6th Cir. Nov. 13, 2007). 16. Id. at *11, n.1 (Boyce, J., dissenting), citing The Simpsons: And Maggie Makes Three (Fox television broadcast, Jan. 22, 1995). 17. Campbell v. General Dynamics Gov’t Sys., 407 F. 3d 546 (1st Cir. 2005). See also Capone v. Electric Boat Corp., No. 3:06-CV-1249, 2007 WL 1520112, (D. Conn. May 18, 2007); Hudyka v. Sunoco, Inc., 474 F. Supp. 2d 712 (E.D.Pa. 2007); Molloy v. American Gen’l Life Co., No. 05-4547, 2006 U.S. Dist. LEXIS 49850 (D.N.J. July 21, 2006). 18. Manigault v. Macy’s East, No. CV-06-337, 2007 WL 2421826, at *8 (E.D.N.Y. Aug. 28, 2007) (refusing to enforce arbitration contract based on employee’s failure to “opt out”), citing 1 Arthur Linton Corbin & Joseph M. Perillo, Corbin on Contracts (revised ed. 1993) § 3.18. But see DuBois v. Macy’s East, No. 06 CV 6522, 2007 WL 3193169 (E.D.N.Y. July 13,

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2007) (enforcing arbitration agreement under same conditions and under circumstances virtually identical to Manigault ). 19. Campbell at 547; see also Garrett v. Circuit City Stores, 338 F. Supp. 2d 717, 720 (N.D. Tex. 2004) (“In order to demonstrate acceptance, an employer must prove that the employee continued working for the employer after being notified that the employer was modifying the parties’ agreement.”). 20. See Najd at 1109 (“The acknowledgment form that Najd signed clearly set out in writing the significance of his failure to opt out and described in detail the mechanism by which he could express his disagreement.”); Garrett at 719 (“Plaintiff acknowledged, in writing, his receipt of the [dispute resolution program materials], but did not opt out of the arbitration provision within the thirty day time frame.”); Wright v. Circuit City Stores, 82 F. Supp. 2d 1279, 1284–1285 (N.D. Ala. 2000) (employee’s “signed receipt” of [arbitration policy] materials and opt-out instructions meant that employee’s silence created “an assumption equivalent to acceptance”) (internal quotation omitted); Michalski v. Circuit City Stores, 177 F.3d 634, 636 (7th Cir. 1999) (under Wisconsin contract law, employee’s signed receipt of [arbitration policy] materials meant that employee who failed to opt out was bound by mutual promise contained in those materials); May , 372 F.3d at 764 (“By signing the Acknowledgment Form, May indicated that she had received the Rules, but the signature did not all by itself bind May to the arbitration program. Rather, May become bound through her subsequent conduct…[by] continuing employment”) (internal citation omitted). 21. Crawford at *31 (employee who stated she did not want to have to quit working to avoid arbitration program “implicitly admit[ted]” she knew and accepted its terms); Hicks at *3 (employee who admitted reading opt-out materials and did not opt out agreed to arbitrate); Caley at 1364 n.1 (where employees did not dispute receiving sufficient notice of program terms, continuing employment was deemed acceptance); Capone at *5 (although employer mailings provided inadequate notice, employee who learned about [arbitration policy] after filing complaint but continued reporting to work had agreed to arbitrate). 22. Although the Supreme Court has assigned the burden of proof to a party resisting arbitration based on the argument that the claims at issue are unsuitable for arbitration or precluded by another federal statute, or that arbitration would be prohibitively expensive, see Green Tree Fin. Corp.-Alabama v. Randolf, 531 U.S. 79, 91–92, 148 L. Ed. 2d 373, 121 S. Ct. 513 (2000), the Court has been silent on the issue of who bears the burden of proving that a valid contract to arbitrate exists in the first place. 23. Tinder at 731 and 736. 24. Tinder at 735, citing Saturday Evening Post Co. v. Rumbleseat Press, 816 F.2d 1191, 1196 (7th Cir. 1987). See also Nguyen at *9, citing Chastain v. Robinson-Humphrey Co., 957 F.2d 851, 855 (11th Cir. 1992) (“A party cannot place the making of the arbitration agreement in issue simply by opining that no agreement exists. Rather, that party must substantiate the denial of the contract with enough evidence to make the denial colorable.”) 25. Manigault at *3, citing First Options of Chicago , 514 U.S. at 943. 26. See Hudyka at 716 (“Agreements to arbitrate in Pennsylvania are upheld only where it is clear that the parties have agreed to arbitrate their disputes—employment and otherwise—in a clear and unmistakable manner. Any waiver of an employee’s statutory right to a judicial forum to assert employment claims must be clear and unmistakable.”)

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(internal citations omitted); Molloy at *11 (“New Jersey law requires that, to enforce a waiver-of-rights agreement—such as the agreement to arbitrate here—an employer seeking enforcement must show some unmistakable indication that the employee affirmatively had agreed to arbitrate his [or her] claims.”) (internal citation omitted). 27. Campbell , 407 F.3d at 553–554, citing Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 19–20 (1st Cir. 1999). 28. Id. at 549–550. 29. Id. at 555 and 547. 30. Id. at 559. 31. 432 F. Supp. 2d at 175. 32. 474 F. Supp. 2d at 719. 33. 2007 WL 1520112 at *4 (holding that, despite insufficient notice, the employee later learned about the program and thus had implicitly agreed to arbitrate by continuing employment). 34. Ingle v. Circuit City Stores, 328 F.3d 1165, 1172 and 1174 n.10 (9th Cir. 2003). 35 Gentry v. Sup. Ct., 42 Cal. 4th 443, 450 (2007). 36. Id. at 470 and 472; see also Murphy v. Check ‘N Go, No. A114442, 2007 WL 3016414 (Cal. App. Oct. 17, 2007) (citing Ingle and Gentry in finding that an arbitration agreement actually signed by the employee was nonetheless procedurally unconscionable because the employer failed to disprove that the employee felt required to sign the agreement, which was sent by inter-office mail, and also substantively unconscionable because the agreement’s class-action waiver was “patently one-sided” in that it denied a remedy that was of value only to employees, not employers.).

Reprinted from Employee Relations Law Journal Summer 2008, Volume 34, Number 1, pages 47-56, with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New York, NY, 1-800-638-8437, www.aspenpublishers.com

Employee Relations Law Journal 9 Vol. 34, No. 1, Summer 2008