For decades, employers have operated under the assumption that arbitration clauses in employment contracts favor the employer for various reasons. First, mandatory arbitration removes potentially sensitive cases from the purview of the jury, based on the mindset that juries disfavor the big, bad employer. Second, many believe that arbitrators are more conservative than juries, reducing the likelihood of a windfall award to a plaintiff-employee. And finally (for the purposes of this article, but not exhausting the list of reasons), there is a broad – though not always accurate – belief that arbitration is a simple, inexpensive, and quick way to resolve disputes with former employees.
Generally speaking, the arbitration clause is utilized to require an employee to develop an alternative dispute resolution mechanism than the public forum of litigation. Employers need to be cognizant of the fact that, in most instances, the same arbitration provision that requires an employee to arbitrate claims arising from the employment relationship will, likewise, require an employer to arbitrate its employment-related claims against the employee. But what happens when an employer wants to rescind an employment contract with an arbitration provision and litigate non-contract claims? Unfortunately, for one employer, an employee is getting away with his alleged misconduct because the employer tried to litigate, rather than arbitrate its claims.
What you need to know . . .
Little Colorado Medical Center (the “Medical Center”) operates a 25-bed critical access hospital in Winslow, Arizona. In 2003 it entered into a management services agreement with Northern Arizona Healthcare (“NAH”), which hired Jeffrey Hamblen to be CEO of the Medical Center. Mr. Hamblen’s employment agreement with NAH provided for 6 months’ severance pay in the event of termination. The Medical Center was required to reimburse NAH for Mr. Hamblen’s salary.
A decade later NAH elected to terminate the services agreement and the Medical Center entered into an employment agreement with Mr. Hamblen directly. The employment agreement contained an arbitration provision requiring arbitration of “[a]ny controversy or claim arising out of or relating to” the employment agreement, including “compulsory” or “permissive” counterclaims.
Prior to entering this agreement, Mr. Hamblen allegedly misrepresented to the Medical Center that he would not receive severance from NAH. He also failed to disclose an amendment to the services agreement that required the Medical Center to reimburse NAH for any severance he received.
In early 2014, the Medical Center discovered that Mr. Hamblen had been receiving severance from NAH and that NAH was seeking reimbursement of his severance from the Medical Center. The Medical Center placed Mr. Hamblen on administrative leave pending further investigation. Mr. Hamblen responded that he was electing to terminate his employment agreement for “good reason,” which would allow him to obtain 18 months’ severance pay plus benefits. In response, the Medical center notified Mr. Hamblen that it was rescinding the employment agreement based on his alleged misrepresentation that he would not be entitled to severance pay if the Medical Center hired him directly from NAH. In May 2014, it terminated him for cause.
Arbitration or litigation?
Mr. Hamblen filed an arbitration demand seeking severance pay and other amounts. The Medical Center filed a complaint in superior court against Mr. Hamblen asserting an unjust enrichment claim in connection with the severance Mr. Hamblen received from NAH. In response to the Medical Center’s complaint, Mr. Hamblen moved to compel arbitration, arguing that the Medical Center’s claim was subject to the employment agreement’s arbitration provisions. The Medical Center opposed the motion arguing that because it rescinded the agreement, it was entitled to proceed with its claims in court. The Court granted the motion and the parties pursued their claims in arbitration.
In the arbitration, the Medical Center asserted a variety of claims against Mr. Hamblen and also sought to rescind the employment agreement based on his alleged misrepresentations. After the arbitration hearing, however, the Medical Center withdrew its unjust enrichment claim from consideration by the arbitrator. The arbitrator ultimately entered an award (1) denying Mr. Hamblen’s claim for severance pay because he terminated the agreement without “good reason”; and (2) ruling that the Medical Center was entitled to rescind the employment agreement based on his fraudulent misrepresentations and omissions. The award provided that “[t]his Final Award is in full settlement of all claims and counterclaims submitted to this Arbitration” and that “[a]ll claims not expressly granted herein are hereby denied.”
Pursuing post-arbitration claims . . .
Following the arbitration, the Medical Center sought to confirm the award and lift the stay to proceed on its claim for damages under its unjust enrichment claims it previously asserted in the arbitration. Although Mr. Hamblen objected on the grounds that the Medical Center should not be permitted to reassert its claims because the arbitration award was full and final, the superior court granted the Medical Center’s request on the grounds that the “contract was rescinded” and undone from the very beginning. The case was ultimately appealed to the Arizona Supreme Court.
No remaining claims . . .
The issue before the Arizona Supreme Court was if an arbitrator determines that an agreement was rescinded, may the superior court subsequently rule on claims that would have been subject to the arbitration clause. In a highly technical opinion about arbitration clauses and the “separability” doctrine, the Court determined that unless there is a claim of fraud regarding the actual arbitration clause, an arbitration clause in a rescinded agreement still governs the parties’ dispute. Thus, once the case was properly referred to arbitration, the Medical Center was required to pursue its claims against Mr. Hamblen in arbitration, as its claims arose from the agreement and Mr. Hamblen’s employment. That the Medical Center withdrew its claims from consideration after the arbitration hearing was of no consequence in the Court’s decision.
Words of caution
Quite simply, an arbitration clause within an employment agreement applies equally to employees and employers. Employers should consider the pros and cons of arbitration prior to including an arbitration clause in an agreement. If an employer does not want to be governed by an arbitration clause within an employment agreement, it should not include such a provision therein. Or, at the very least, the arbitration provision should be narrowly-tailored (but not one-sided) to exclude those claims an employer would prefer to litigate rather than arbitrate.
Employers should also keep in mind that arbitration clauses sometimes encourage what is referred to as satellite litigation. This occurs when an employee challenges the conscionability of an arbitration clause. It often results in the parties arguing about whether the claims should be subject to arbitration or permitted to proceed in litigation rather than focusing on the substance of the claims from the outset of the litigation.
Jodi R. Bohr, an attorney with Gallagher & Kennedy, P.A., practices employment and labor law, with an emphasis on litigation, class actions, and HR matters, and is a frequent speaker on a wide range of employment law topics. She may be reached at email@example.com or 602-530-8035