Kubala v. Supreme Prod. Servs., Inc.

• Decision Date: 20 July 2016
• Docket Number: No. 15-41507,15-41507
• Citation: 830 F.3d 199
• Parties: Ted L. Kubala, Jr., Individually and on Behalf of All Other Similarly Situated, Plaintiff–Appellee, v. Supreme Production Services, Incorporated, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

830 F.3d 199

Ted L. Kubala, Jr., Individually and on Behalf of All Other Similarly Situated, Plaintiff–Appellee

v.Supreme Production Services, Incorporated, Defendant–Appellant.

No. 15-41507

United States Court of Appeals, Fifth Circuit.

Filed July 20, 2016

Michael A. Josephson, Fibich, Hampton, Leebron, Briggs, Josephson, L.L.P., Richard J. Burch, Matthew Scott Parmet, Esq., Bruckner Burch, P.L.L.C., Houston, TX, David L. Rumley, Wigington Rumley Dunn & Ritch, L.L.P., Corpus Christi, TX, for Plaintiff–Appellee.

Nolan Cornelius Knight, Daniel D. Pipitone, Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, Tracy L. McCreight, Munsch Hardt Kopf & Harr, P.C., Austin, TX, for Defendant–Appellant.

Before HIGGINBOTHAM, SMITH, and OWEN, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Ted Kubala brought a proposed Fair Labor Standards Act (“FLSA”) collective action against his employer, Supreme Production Services, Incorporated (“Supreme”). After the action was filed but, according to Supreme, before it had learned of the suit, the company announced a new policy requiring employees to arbitrate employment disputes, including FLSA claims. The agreement indicated that an employee's continued employment was expressly conditioned on his acceptance of the terms of the agreement; it contained a “delegation clause” that assigned to the arbitrator the power to make gateway determinations as to the arbitrability of a specific claim.

Kubala continued employment and accepted payment for his work. The district court denied Supreme's motion to dismiss or compel arbitration. Because the arbitration agreement is binding and contains a delegation clause transferring the power to decide threshold questions of arbitrability to the arbitrator, we reverse and remand and direct the district court to enter an order compelling arbitration.

I.

Kubala and other employees were paid a base salary and an hourly bonus for time spent working in the oilfields. Kubala's suit, filed March 9, 2015, claimed that he and similarly situated workers were improperly denied overtime pay. The suit is a proposed collective action, but no certification decision was entered before Kubala appealed, so he is the only appellant.

On March 11, 2015—two days after the suit was filed but ostensibly before Supreme received notice—the company held a meeting at which it announced a new arbitration policy to govern all employment-related disputes, including in relevant part any claims under the FLSA. In addition to various substantive terms, the policy contained a “delegation clause” stating that any disputes as to the interpretation or applicability of the agreement are to be resolved in the first instance by the arbitrator. The policy and accompanying presentation indicated that an employee's assent to the arbitration agreement was a necessary condition of employment and that its effective date would be the earlier of the date on which the employee signed the policy or March 13, 2015. Kubala did not sign the agreement after the meeting. Supreme offered evidence indicating that he relented the next day, but the district court never entered a factual finding that Kubala did or did not eventually sign the policy.

Relying on this arbitration agreement (and specifically referencing the delegation clause), Supreme moved for the district court either to dismiss Kubala's claims or to compel arbitration. Kubala opposed the motion, which the court denied. It reasoned that there was no arbitration agreement, because nothing in Supreme's arbitration policy indicated an intent to arbitrate preexisting disputes. The court did not address Supreme's contention that the delegation clause transferred the power to decide threshold arbitrability issues to the arbitrator. Supreme appeals under 9 U.S.C. § 16(a)(1)(C).

II.

We review de novo a ruling on a motion to compel arbitration. Carey v. 24 Hour Fitness, USA, Inc. , 669 F.3d 202, 205 (5th Cir. 2012). Enforcement of an arbitration agreement involves two analytical steps. The first is contract formation—whether the parties entered into any arbitration agreement at all . The second involves contract interpretation to determine whether this claim is covered by the arbitration agreement. Ordinarily both steps are questions for the court. Will – Drill Res., Inc. v. Samson Res. Co. , 352 F.3d 211, 214 (5th Cir. 2003). But where the arbitration agreement contains a delegation clause giving the arbitrator the primary power to rule on the arbitrability of a specific claim, the analysis changes. See First Options of Chi., Inc. v. Kaplan , 514 U.S. 938, 942, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).

Ordinarily this type of dispute involves two layers of arguments—the merits (does Kubala have a right to back pay?) and arbitrability of the merits (must Kubala bring his claim for back pay in arbitration rather than in court?). Id. The presence of a delegation clause adds a third: “Who should have the primary power to decide ” whether the claim is arbitrable. Id. Delegation clauses are enforceable and transfer the court's power to decide arbitrability questions to the arbitrator. Thus, a valid delegation clause requires the court to refer a claim to arbitration to allow the arbitrator to decide gateway arbitrability issues. Rent – A – Ctr., W., Inc. v. Jackson , 561 U.S. 63, 68–69, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010).

Thus, if the party seeking arbitration points to a purported delegation clause, the court's analysis is limited. It performs the first step—an analysis of contract formation—as it always does. But the only question, after finding that there is in fact a valid agreement, is whether the purported delegation clause is in fact a delegation clause—that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated. Id. If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.¹

Supreme contends that the agreement contains a valid and enforceable delegation clause. Thus, this appeal presents two issues: first, whether the parties entered into a valid agreement to arbitrate some set of claims; and second, whether that agreement actually does contain a delegation clause that requires that this claim go to arbitration for gateway rulings on threshold arbitrability issues.

III.

The district court erroneously held that there is no arbitration agreement. The court appears to have thought that the question at the first step of the analysis is whether there is an agreement to arbitrate the claim currently before the court . But as we have explained, the only issue at the first step is whether there is any agreement to arbitrate any set of claims. Determining whether that agreement covers the claim at bar is the second step. Thus, the district court erred by engaging in close contract interpretation at the first step, which focuses only on contract formation. The proper course is to examine only the formation issue, and it is obvious that these parties validly formed an agreement to arbitrate some set of claims.

Whether they entered a valid arbitration contract turns on state contract law. Carey , 669 F.3d at 205. They agree that Texas contract law governs. Arbitration agreements between employers and their employees are broadly enforceable in Texas. In re Poly – Am., L.P. , 262 S.W.3d 337, 348 (Tex. 2008). Kubala was not initially subject to an arbitration agreement; instead, it was imposed while he was already employed on an at-will basis. Therefore, the question is whether the arbitration agreement was a valid modification of the terms of his employment. To demonstrate a modification of the terms of at-will employment, the proponent of the modification must demonstrate that the other party (1) received notice of the change and (2) accepted the change. In re Halliburton Co. , 80 S.W.3d 566, 568 (Tex. 2002). But acceptance need not be anything more complicated than continuing to show up for the job and accept wages in return for work. “[W]hen the employer notifies an employee of changes in employment terms, the employee must accept the new terms or quit. If the employee continues working with knowledge of the changes, he has accepted the changes as a matter of law.” Hathaway v. Gen. Mills, Inc. , 711 S.W.2d 227, 229 (Tex. 1986) (cited in Halliburton, 80 S.W.3d at 568 ).²

Texas law is no different when the modification in question is an arbitration requirement for employment-related disputes. The law allows an employer to impose an arbitration agreement as a term of continued employment so long as it provides notice of the policy; as in Halliburton, see 80 S.W.3d at 568–69, an at-will employee who continues working with notice of a new arbitration policy is deemed to have accepted the policy as a matter of law. Halliburton makes plain that this principle applies where the modification in question is the addition of an arbitration agreement to the existing employment agreement.

Supreme has satisfied this requirement. It provided notice in the form a meeting at which the policy was explained and employees (including Kubala) were informed that acceptance was a condition of continued employment. Kubala continued to come to work after the March 13 date of deemed acceptance. This is a nearly identical match for the facts in Halliburton, in which the court determined that the agreement was valid and binding. See id. at 573. We agree.

Kubala's only responses are unpersuasive. First, adopting the district court's mistaken approach, Kubala attempts to conflate the first two prongs of the contract-formation analysis. He therefore urges that the contract, properly interpreted, does not cover his claim, so there is no agreement to arbitrate. As explained above, these issues of contract interpretation do not factor into the first step, because they do not go to contract formation. Second, Kubala maintains that no contract was formed because he was not given sufficiently advanced notice that the...