Reader Bradley Clark, proprietor of the Texas Law Blog, let me know about the recent Fifth Circuit Court of Appeals’ opinion in Carey v. 24 Hour Fitness, USA. Here’s the gist of it:
The district court held that the binding arbitration provision relied upon by 24 Hour Fitness is illusory because 24 Hour Fitness “retain[ed] the unilateral right to modify or terminate the arbitration provision” at any time. For the reasons stated below, we AFFIRM.
In a 2007 blog post (here) I noted the problem with unilaterally amending the terms of a “virtual attachment” to a contract. That blog post dealt with online terms of service mentioned in a contract. By contrast, Carey concerns an employee handbook that provided for arbitration; the plaintiff employee had signed an “acknowledgment” stating that the company was free to amend the handbook. But the same logic applies.
This issue isn’t central to what I do, and others have devoted much thought and many words to it. They might want to add this case to the mix.
This comes up very often in telecom contract negotiations. All telecom vendors, such as AT&T and Verizon, absolutely insists on the unilateral right to amend the agreement via their separately published service guide.
I once represented a Fortune 500 corporate customer of a major telecom vendor that paid over $10 million a year, and the telecom vendor said they would walk on the deal without the unilateral right to amend. I asked them if they could come up with a single example of every exercising the unilateral right to amend outside of minor service level changes, and they could not come up with one.
Not one of my clients ever reported to me that one of their telecom vendors had exercised this right.
It seems like this is an odd legacy of the pre-breakup AT&T monopoly power.
I think these are non-illusory if they are strictly prospective and require some level of notice before they come into effect. If you remove either of those elements, it starts to get problematic.
Chris
I suspect that arbitration law experts would argue that the case was wrongly decided, since the court looked not to the state law of contract formation generally, but to state laws applying just to arbitration clauses, which is something the FAA was specifically designed to trump.
However, that’s not the concern from a contract drafting standpoint, other than to highlight courts’ sensitivity, and often hostility, to arbitration. Evidently, the handbook should have reserved arbitration, as well as at-will employment, from the ability of the company to change (after all, a party can waive a right any time it wants to).