The Fifth Circuit Court of Appeals upheld a decision that
found that a mandatory arbitration clause used by 24 Hour Fitness was illusory
because it allowed the company to make changes to the policy retroactively. The
decision in Carey v. 24 Hour Fitness [an enhanced version of this opinion is available to lexis.com subscribers
/ unenhanced version available from lexisONE Free Case Law]is
a victory for employees who have been subjected to unfair arbitration
agreements by their employers.
The plaintiff in Carey was a former sales representative
who was employed by the fitness chain in Texas. He filed a class-action suit
against the company in the Southern District of Texas on behalf of employees
who were allegedly denied overtime pay in violation of the Fair Labor Standards
24 Hour Fitness moved to stay the action and compel
arbitration per a provision in the company's Employee Handbook. The provision
stated that "24 Hour Fitness has the right to revise, delete, and add to the"
handbook by giving employees written notice. Judge Nancy Atlas rejected the
company's motion, holding that the agreement was unenforceable under state law.
On appeal, the Fifth Circuit affirmed the lower court's
decision. Citing the Supreme Court's holding in CompuCredit v. Greenwood [enhanced version / unenhanced version], the Fifth Circuit acknowledged
that federal courts were expected to favor arbitration agreements under the
Federal Arbitration Act (FAA). However, as the Supreme Court remarked in AT&T v. Concepcion, federal courts must still look to
state contract law in order to determine whether an arbitration agreement
The Fifth Circuit held that under Texas law arbitration
agreements are invalid unless they specify that unilateral changes made by an
employer will not have a retroactive effect against the employee. Because the
24 Hour Fitness agreement lacked such a restriction, the plaintiff was not
bound by the agreement and could pursue his claims in district court.
The decision follows the Fifth Circuit's holding in Morrison v. Amway [enhanced version / unenhanced version] in 2008, where the Court "refused
to enforce an arbitration agreement that was capable of being retroactively
modified." The Carey court explained that "where one party to an arbitration
agreement seeks to invoke arbitration to settle a dispute, if the other party
can suddenly change the terms of the agreement to avoid arbitration, then the
agreement was illusory from the outset."
The Court distinguished its holding in Carey and Morrison
from its decision in In re Halliburton, where an arbitration agreement was
found to be enforceable even though it allowed for unilateral revisions. In
that case, the agreement included a "savings clause" that provided that such
revisions would not apply to disputes that were already underway.
The Fifth Circuit's decision in Carey offers a silver
lining for plaintiffs after the Supreme Court's decisions in Concepcion and
CompuCredit. Carey demonstrates how plaintiffs can successfully utilize state
laws to defeat unfair arbitration agreements that might otherwise stand under
the FAA. The California Court of Appeal reached a similar outcome in Sanchez v.
Valencia Holding in November 2011, which found that the FAA did not apply to an
arbitration agreement that was unconscionable under state law.
Turner is a third year law student at New York Law School. He is a Notes &
Comments editor of Law Review and a John Marshall Harlan Scholar. Mr. Turner
came in second in the 2011 ABA Torts, Insurance, and Compensation Law Section
Writing contest. He was a 2011 Review Editor of the school's Global Human Rights
Bulletin. Mr. Turner is proficient in French.
Spanier Rodd & Abrams, LLP, located in New York City, is a well-recognized
national class action and complex litigation law firm.
Read more articles by the attorneys of Abbey Spanier LLP
more information about LexisNexis products and solutions connect with us
through our corporate site.