It’s a rare day when a Texas state court or federal court sitting in Texas refuses to enforce an arbitration agreement. The Texas law is well-developed on this issue and the table is heavily tilted in favor of arbitration. Consequently, most employer arbitration programs in Texas are enforced. However, a recent opinion from the Fifth Circuit Court of Appeals gives hope to those who wish to avoid the confines of arbitration. In Nelson v. Watch House International, LLC, the plaintiff sought to avoid the mandatory arbitration of his race discrimination claim arguing that the agreement lacked a Halliburton savings clause. A Halliburton-type savings clause in an arbitration clause is one where the employer places some limitations on its right to unilaterally change the arbitration policy but limits that unilateral right only after providing employees advance notice of the change and applying it only prospectively to claims arising after the change. The Fifth Circuit has articulated a three part test for evaluating whether retention of the unilateral right to change the arbitration clause render the agreement illusory. As the Nelson court reiterated:
[Retaining] termination power does not make an agreement illusory so long as that power (1) extends only to prospective claims; (2) applies equally to both the employer’s and employee’s claims, and (3) so long as advance notice to the employee is required before termination is effective.
The Watch House provision failed to provide that the employer give employees advance notice of changes to the arbitration provision before it was effective and was therefore illusory and unenforceable.
If your arbitration provision retains the unilateral right to modify the terms in the future, it needs to have three components. First, it should only apply to claims arising after the change. Second, it must apply to both employee and employer claims. Third, employees must be provided some advance notice prior to implementation of the change. Of course, where the employer retains no right to unilaterally change the policy, a Halliburton-type savings clause may not be necessary.
If you are a Texas employer utilizing arbitration agreements, check your agreements to ensure they contain a savings clause or are otherwise not subject to the same defect as Watch House International’s agreement.
You can download the full opinion in Nelson v. Watch House International, LLC here.
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