Alternative dispute resolution agreements to arbitrate discrimination claims are becoming prevalent within the employment arena. In determining the validity of these agreements, courts assess whether the dispute is arbitrable. In essence, courts ascertain whether a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of that agreement. Courts also investigate the existence of "such grounds as exist at law or in equity for the revocation of any contract."

In consideration of these factors, the United States Court of Appeals for the Fourth Circuit recently found Hooters of America Inc.’s pre-dispute agreement unenforceable and ruled that a former employee did not have to arbitrate her sexual harassment claim under Title VII of the Civil Rights Act of 1964 against a Hooters Restaurant in Myrtle Beach, South Carolina. Hooters of America Inc. v. Phillips, 1999 WL 194438 (4th Cir. April 8, 1999).

The Hooters Myrtle Beach franchise hired Annette R. Phillips as a bartender in 1989. In 1994, Hooters implemented an alternative dispute resolution program. As part of this program, the company conditioned eligibility for raises, transfers, and promotions on signing an agreement to arbitrate employment-related disputes (i.e., federal and/or state law claims of discrimination including sexual harassment, retaliation, or wrongful discharge). The agreement provided that disputes would be resolved pursuant to rules and procedures that the company would promulgate "from time to time" and provide to employees upon written request. Phillips signed the agreement in November 1994 and again in April 1995, when her personnel file was updated. Hooters issued revised arbitration rules in July 1996.

In June 1996, Phillips alleged that a company official sexually harassed her by grabbing and slapping her buttocks. Management ignored her complaint by telling her to "let it go." Afterwards, she quit and threatened Hooters with a Title VII suit. In November 1996, Hooters filed suit seeking to compel Phillips to arbitrate her claim.

The U.S. District Court for the District of South Carolina denied Hooters’ motion to compel arbitration. The district court found that the arbitration agreement was not a valid contract because the parties did not reach agreement on all material terms, that Hooters’ promise to arbitrate was illusory, and that the agreement was unconscionable and void for public policy reasons.

The Fourth Circuit affirmed the trial court’s denial of Hooters’ motion to compel arbitration of Phillips’ claim. The court found that Hooters’ rules and procedures required employees to provide notice of the nature of the claim and the specific acts or omissions involved, but Hooters did not have to respond in writing or provide notice of its defenses. The employee also had to provide a list of all fact witnesses and a brief summary of the facts known to each, but Hooters was not required to do the same. In regard to the selection of an arbitrator, Hooters had the overall control of the list of potential arbitrators. Hooters’ agreement allowed only the company (not the employee) to: (i) expand the scope of arbitration to include matters not related to the employee's claim; (ii) move for summary judgment or record the arbitration hearing; (iii) sue in court to vacate or modify an arbitration award if it can show by a preponderance of the evidence that the arbitrators exceeded their authority; (iv) cancel the arbitration agreement with 30 days of notice; and (v) modify the arbitration rules at any time.

The Fourth Circuit found that Hooters materially breached the arbitration agreement and violated its contractual duty of good faith. The Fourth Circuit reasoned that Hooters’ rules, taken as a whole, were one-sided and that the arbitration agreement was egregiously unfair because it enabled the company to control the selection of arbitrators, provided certain advantages only to Hooters, and placed certain restrictions on only the employee. The court further noted that determining whether or not a binding arbitration agreement exists depends on whether a valid contract was formed and whether or not there exist grounds to revoke the agreement.

Courts continue to struggle with these limits and procedures of alternative dispute resolution. If we can be of any assistance in answering questions about this case, alternative dispute resolution, or labor/employment issues in general, please contact us by telephone or e-mail as set forth below.

The information provided herein is for general guidance on matter of interest only. While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without fist consulting an Epstein Becker & Green, P.C. professional.