WEST VIRGINIA SUPREME COURT FINDS ADR AGREEMENT IT CAN LIVE WITH
In an important win for employers seeking to resolve disputes with former employees outside of the circuit courts, the West Virginia Supreme Court of Appeals recently upheld a circuit court decision that compelled a former employee to submit his wrongful termination dispute to alternative dispute resolution (“ADR”) rather than pursue the claim in court. Although the West Virginia Supreme Court often finds ADR agreements to be unenforceable, it’s important to note why they found this one was acceptable.
The employer in this case had offered its employees a Short Term Incentive Plan (“STIP”) for some time. Participating employees could receive cash bonuses for meeting specified performance targets. But beginning in 2007, employees had to sign an ADR Agreement in order to participate in the program. The Agreement mandated arbitration for “any claim that is related in any way to an individual’s employment with Equitable [now EQT] that is recognized in the federal or state courts where the employee works.” Toney, an employee of EQT, signed the Agreement and collected bonuses totaling nearly $60,000 over the following five year period until his employment was terminated.
Following his discharge, Toney brought suit alleging wrongful termination. In the lower court, EQT successfully moved for dismissal and to compel arbitration based upon the Agreement. The circuit court found that the ADR Agreement was enforceable and therefore, the parties were obligated under the Federal Arbitration Act to arbitrate the disagreement according to the terms of the Agreement.
On appeal, Toney challenged the enforceability of the Agreement on three grounds. First, he argued that the arbitration clause was unenforceable for lack of adequate consideration because he was already participating in STIP when he signed the ADR Agreement and did not receive anything new in exchange for signing the Agreement. Second, Toney contended that participation in STIP was based on an illusory promise—EQT’s promise to pay the STIP was not guaranteed but was based on its complete and sole discretion. Finally, Toney alleged that the Agreement was unenforceable because it was an unconscionable contract of adhesion for the same reasons as his first two arguments. The Supreme Court agreed with the trial court and rejected each of Toney’s assignments of error.
First, the Court held that the ADR Agreement was supported by adequate consideration. By signing the Agreement, both the employer and employee were subject to the arbitration ruling. This dual sacrifice of the right to be heard in court was sufficient consideration to support the Agreement.
The Court moved through Toney’s second and third arguments with relative ease. The promise of STIP eligibility for signing the Agreement was not an illusory promise because the employer did not promise that employees who signed the ADR Agreement would receive STIP bonuses in perpetuity but would instead remain eligible to participate in the program. EQT’s promise of future eligibility for STIP was merely a statement of contingency, not an illusory promise. Toney signed the Agreement and remained eligible for, and in fact, received, bonus payments over the subsequent years.
Finally, the ADR Agreement was not an unconscionable contract of adhesion. The Court noted that one who claims a contract is unconscionable must prove both procedural unconscionability—based upon inequalities between the parties and unfairness in the bargaining process—and substantive unconscionability—which involves unfairness in the contract itself, such as when a contract term is so one-sided it has an overly harsh effect on the disadvantaged party. The Court found no procedural unconscionability, noting that Toney had an associate degree, a responsible position within the company, and the opportunity to ask questions about the Agreement prior to signing it. Similarly, the Court found no substantive unconscionability because Toney offered no evidence on that issue; he merely repackaged his argument about the alleged lack of consideration.
The Court’s holding offers employers both comfort and some guidance about ADR Agreements. First, no sweeteners for signing the Agreement, such as additional payments, are necessary. The mutual promises to give up the chance to go to court are enough consideration. Second, employers can make continuing eligibility to participate in an existing program contingent on signing an ADR Agreement. Finally, it is reassuring that the Court found no unconscionability because the employee had an associate degree and the ability to ask about the Agreement prior to signing it. This sets the bar fairly low for establishing the sophistication necessary for making an ADR provision binding on a party. If you have specific questions about the use of ADR Agreements, you should contact your legal counsel for advice.