Executive Summary: In a recent case, the Texas Supreme Court upheld the validity of an arbitration clause in a case that had been in litigation for over nine years without the claim ever being heard. See In re Whataburger Restaurants LLC. The lengthy timeline of this case, summarized below, demonstrates the risk of placing binding arbitration agreements within nonbinding documents, which may lead to lengthy court challenges regarding the enforceability of an arbitration clause before any resolution of the underlying dispute.
Timeline:
- In February 2013, Yvonne Cardwell (Cardwell) sued her employer, Whataburger Restaurants LLC (Whataburger) for a workplace injury. Whataburger moved to compel arbitration pursuant to the mandatory arbitration policy contained in its nonbinding Employee Handbook.
- In August 2013, the trial court denied the motion, finding that policy was unconscionable.
- The next stop for this case was in October 2014, when the court of appeals rejected the trial court's unconscionability analysis, reversed its order, and remanded with instructions that the trial court order arbitration.
- However, the court of appeals failed to address Cardwell’s briefing, so in February 2016, the Texas Supreme Court granted Cardwell’s petition for review, reversed the decision, and remanded the case to the court of appeals to either address these arguments or remand the case to the trial court to address them.
- On remand, in July 2017, the court of appeals rejected all of Cardwell’s arguments except one—Cardwell’s contention that the policy was illusory because Whataburger could unilaterally revoke it. The court of appeals did not decide the issue but remanded the case to the trial court to determine whether the contract was illusory.
- The court of appeals mandate was issued in January 2018. Whataburger presented a supplemental motion to compel arbitration addressing the illusory issue.
- The trial court heard oral argument in June 2018 and took the matter under advisement.
- In July 2018, the trial court denied Whataburger’s motion, but Whataburger was never notified that the order had been entered due to a clerical issue.
- When Whataburger finally received notice of the order, it moved for reconsideration, which was denied in May 2019.
- Whataburger then moved for mandamus relief in the court of appeals since the clerical delay cost Whataburger its right to appeal. This motion was denied in January 2021, 18 months after Whataburger filed its mandamus petition.
- After exhausting all other avenues, Whataburger finally filed its mandamus petition to the Texas Supreme Court, which, in April 2022, held that Whataburger had “demonstrated that it lacks an adequate appellate remedy because the clerk’s failure to give notice of the trial court's order deprived it of that remedy.” Additionally, the Court upheld the arbitration agreement and, nine years after the original motion for arbitration was filed, directed the trial court “to promptly issue an order compelling arbitration of Cardwell's claims.”
What Does the Opinion Say?
In the opinion delivered by Chief Justice Hecht, the Texas Supreme Court ultimately found that Whataburger’s arbitration policy was not illusory as would render it unenforceable and that the acknowledgment referring to the arbitration policy did not condition the parties' agreement to arbitrate on Cardwell’s continued, at-will employment.
These findings and what they mean for Texas employers are addressed below.
Under Texas law, When is an Arbitration Policy Illusory?
As demonstrated in the Whataburger case, issues can arise when an employer places binding documents within nonbinding documents and reserves the right to modify or delete binding documents without notice. Cardwell argued that because Whataburger could unilaterally amend the Handbook at any time, the arbitration policy was illusory. Texas courts have generally found an arbitration policy to be illusory when employers retain the unilateral right to amend the policy or avoid it. Texas courts have also found arbitration policies to be illusory when the policy is ambiguous as to the notice requirements to modify or amend the policy. However, the Handbook and policy at issue had important restrictions on Whataburger’s ability to unilaterally change the policy—(1) the Handbook prohibited Whataburger from altering, modifying, or amending it without first providing employees with 30 days' written notice; and (2) the Handbook expressly excluded the arbitration policy from the general rule that Whataburger could unilaterally change it. The policy itself also made clear that Whataburger had no right to unilaterally amend or modify the policy “once the facts giving rise to the legally recognized claim or dispute have occurred.”
The arbitration policy was also found not to be conditioned on Cardwell’s continued, at-will employment. Texas Courts have also generally maintained that agreements dependent on continued at-will employment are illusory because they are easily avoidable by one side terminating the employment relationship. In Whataburger, Cardwell argued that the policy was illusory because it stated that “by accepting or continuing employment,” an employee “shall be required to submit” her claims to arbitration. However, in resolving this issue, the Court looked at the fact that the policy stated that the agreement to arbitrate was not dependent on her employment status and that it extended beyond termination.
What Does this mean for Texas Employers?
This means Texas employers should be careful when placing binding arbitration policies within nonbinding documents. Best practice is to have the company’s arbitration policy in a separate, standalone document signed by the employee. Further, to avoid illusory arbitration policies, employers must ensure that they cannot unilaterally change the policy, especially in avoiding arbitration as to legally recognized claims or disputes. Employers should also provide employees reasonable notice of policy changes and make sure that arbitration policies are not conditioned on continued, at-will employment.
Employers' Bottom Line: In placing mandatory arbitration policies within nonbinding documents, there is room for an employee to argue against the enforceability of an arbitration policy. To avoid any ambiguities and reduce the chance that a court finds an arbitration provision to be illusory, employers should take care in the placement of mandatory arbitration policies. Failing to do so could mean a long, drawn-out court battle on the enforceability of the policy.
If you have any questions regarding this Alert or other labor or employment-related issues, please contact the authors, Rachel Ziolkowski Ullrich, rullrich@fordharrison.com, who is a partner in our Dallas, Texas office, and Jennifer C. Ohn, jcohn@fordharrison.com, who is a senior associate in our Dallas office. Of course, you can also contact the FordHarrison attorney with whom you usually work.