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Fourth Circuit Affirms Limits on Forced Arbitration for Employment Disputes

On April 25, 2022, the Fourth Circuit Court of Appeals in Coady v. Nationwide Motor Sales Corp. held that a group of employees had the right to take their employment dispute to court, rather than being forced to pursue their claims through private arbitration, because the arbitration provision in their employment handbook could not be enforced. Michael Coady and three other employees sued their employer, Nationwide Motor Sales, alleging that Nationwide failed to pay them owed wages. Nationwide attempted to prevent these employees from taking their claims to court by invoking an arbitration clause in its employment manual. As all too many employees have learned, attempting to bring claims to arbitration relegates them to a private, confidential forum that is frequently weighted in favor of employers.

In rejecting Nationwide’s arbitration provision, the Fourth Circuit reaffirmed the principle that employers cannot force employees into private arbitration when the employment contract reserves for themselves an unlimited, unilateral right to modify an arbitration agreement between them. The Court of Appeals held that, because a provision in the employment handbook reserved for the employer the right to “enforce, change, abolish or modify” the terms at any time with or without notice also applied to the arbitration provision in that handbook, the arbitration provision was illusory and void. [1] In other words, by reserving the right to make changes without notice, Nationwide did not bind or obligate itself to anything; it only offered the illusion of a promise, which is unenforceable and void. The Fourth Circuit’s decision in Coady is in line with the court’s two-decade old decision holding that arbitration agreements are illusory when an employer has the ability “in whole or in part” to modify the arbitration provision without notice to its employees. [2]

Although federal courts interpret contracts – including whether a provision is illusory or otherwise invalid – under the relevant state contract law, there is a consensus among federal courts on this issue: arbitration agreements are void and unenforceable when the employer has unfettered right to alter it without notice. [3] Indeed, most courts – federal and state – will find arbitration agreements that give an employer an unlimited right to modify the agreement to be illusory and unenforceable. [4] In such circumstances, an employee has the right to pursue their claims against their employer in the public court process, rather than being forced into private, confidential arbitration. Courts are only willing to permit an employer to reserve for itself the right to unilaterally modify an arbitration agreement when it gives notice to its employees that it is changing the agreement. [5]

The Coady case illustrates how employers attempt to give themselves plenary power to prohibit their employees from being able to go to court and enforce their rights.

Correia & Puth represents employees confronting discrimination and retaliation in the workplace. If you have experienced workplace discrimination or retaliation and are concerned that an arbitration provision applies to you, please contact us today.

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[1] Coady v. Nationwide Motor Sales Corp., No. 20-2302, 2022 U.S. App. LEXIS 11173 (4th Cir. Apr. 25, 2022).

[2] Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 939 (4th Cir. 1999) (interpreting South Carolina contract law).

[3] The U.S. Courts of Appeals for the Fifth, Sixth, Seventh, Tenth, and Eleventh circuits have reached conclusions similar to the Fourth Circuit. See Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202, 209 (5th Cir. 2012) (interpreting Texas contract law); Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306, 315-16 (6th Cir. 2000) (Kentucky and Tennessee); Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126, 1133 (7th Cir. 1997) (Indiana); Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th Cir. 2002); Douglas v. Johnson Real Estate Investors, LLC, 470 Fed. Appx. 823, 826 (11th Cir. 2012) (Massachusetts). The Ninth Circuit has also invalidated similar arbitration provisions on the grounds of unconscionability. See Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. 2003) (California).

[4] Michael L. DeMichele and Richard A. Bales, Unilateral-Modification Provisions in Employment Arbitration Agreements, 24 Hofstra Lab. & Emp. L.J. 63, 74 (2006) (“Where an employer can modify arbitration procedures at any time, without notice, and effective immediately, most courts will hold that the unlimited right to modify creates an illusory promise to arbitrate”).

[5] See, e.g., Canales v. Univ. of Phx., Inc., 854 F. Supp. 2d 119, 124 (D. Me. 2012) (“[T]he right of an employer to amend employee policies upon thirty-days notice is ordinary”).

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