Nelson v. Watch House Int'l, L.L.C., 15–10531.

• Decision Date: 02 March 2016
• Docket Number: No. 15–10531.,15–10531.
• Parties: Michael NELSON, Plaintiff–Appellant v. WATCH HOUSE INTERNATIONAL, L.L.C., Defendant–Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

815 F.3d 190

Michael NELSON, Plaintiff–Appellant

v.WATCH HOUSE INTERNATIONAL, L.L.C., Defendant–Appellee.

No. 15–10531.

United States Court of Appeals, Fifth Circuit.

March 2, 2016.

Rory Divin, Esq., Brittani Wilmore Rollen, McDonald Sanders, P.C., Fort Worth, TX, for Plaintiff–Appellant.

Judith Sadler, Law Offices of Judith Sadler, P.C., Houston, TX, Defendant–Appellee.

Before STEWART, Chief Judge, and OWEN and COSTA, Circuit Judges.

CARL E. STEWART, Chief Judge:

Plaintiff–Appellant Michael Nelson ("Nelson"), a former employee of Defendant–Appellee Watch House International, L.L.C. ("Watch House"), appeals the district court's order granting Watch House's motion to compel arbitration and dismissing Nelson's claims. The district court held, inter alia, that the parties' arbitration agreement was not illusory under In re Halliburton Co., 80 S.W.3d 566 (Tex.2002). Because we conclude that the parties' agreement contains no Halliburton -type savings clause that requires advance notice before termination is effective, we REVERSE and REMAND.

I.

On March 18, 2010, Watch House offered Nelson a position as a Recurrent Training Instructor for the Federal Air Marshal Program at Dallas, Texas. That same day, Watch House sent Nelson an electronic copy of its employee handbook, entitled, "Employee Handbook, Safety, Arbitration Plan and Drug/Alcohol Policy." Pertinent here, the employee handbook contained Watch House's Arbitration Plan (the "Arbitration Plan" or the "Plan"), which included the following language:

As a condition for reviewing your application for employment and if employed, continued employment ... [Company] and the Applicant/Employee designated below mutually agree to arbitrate claims relating to his/her being considered for employment and subsequent employment, if any, as specified below.

The Company and Applicant/Employee each voluntarily promise and agree to submit any claim covered by this agreement to binding arbitration. We further agree that arbitration pursuant to this agreement shall be the sole and exclusive remedy for resolving any such claims or disputes....

It is mutually agreed that this document shall govern and apply to the resolution of all claims and/or disputes between and among Applicant/Employee and the Company ... concerning: (1) Any federal, state, or local laws, regulations, or statutes prohibiting employment discrimination (such as, without limitation, race, color, sex, national origin, age, disability, religion) and harassment ... [and] (4) Any claim for failure to hire or wrongful discharge of any kind....

This agreement is issued with the authority of the Company and is binding on the Company. This Agreement may not be altered except by consent of the Company and shall be immediately effective upon notice to Applicant/Employee of its terms, regardless of whether it is signed by either Agreeing Party. Any change to this Agreement will only be effective upon notice to Applicant/Employee and shall only apply prospectively.

Watch House employed Nelson from March 31, 2010, until March 12, 2014. Nelson alleges that, during this time, his coworkers harassed him based on his religion and his race. Nelson specifically alleges that his coworkers made racial comments based on his being in an interracial relationship, which he eventually reported to his supervisor. About fifteen days after reporting the racial comments, Watch House terminated Nelson.

Nelson filed suit in federal district court, alleging, inter alia, that he was discharged in violation of Title VII of the Civil Rights Act of 1964 and Chapter 21 of the Texas Labor Code. Watch House moved to compel arbitration pursuant to the Arbitration Plan. Nelson opposed that motion, primarily arguing that: (1) he did not fall within the Plan's definition of "employee," because he did not sign the Plan and the Plan defines "employee" as "the individual whose signature is affixed hereto;" and (2) the Plan was unenforceable because it was illusory under, inter alia, In re Halliburton Co., 80 S.W.3d 566 (Tex.2002), and Lizalde v. Vista Quality Markets, 746 F.3d 222 (5th Cir.2014).¹ The district court disagreed, granting Watch House's motion to compel and dismissing Nelson's lawsuit without prejudice.

Nelson timely appealed. On appeal, Nelson raises three arguments: (1) that the Arbitration Plan is illusory because it fails to include a savings clause related to existing claims and disputes and requiring advance notice of termination;² (2) that Nelson does not fall within the Plan's definition of "employee" and so is not bound to arbitrate; and (3) that the district court abused its discretion in considering inadmissible evidence in ruling on Watch House's motion. Because we agree with Nelson's first argument, we need not reach the latter two issues.

II.

We review de novo the district court's grant of Watch House's motion to compel arbitration. Lizalde, 746 F.3d at 225. We first consider whether Watch House and Nelson agreed to arbitrate this particular type of dispute. See, e.g., Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th Cir.2012). This requires that we ask two questions: "(1) whether there is a valid agreement to arbitrate between the parties; and (2) whether the dispute in question falls within the scope of that arbitration agreement." Id. (quoting JP Morgan Chase & Co. v. Conegie ex rel. Lee, 492 F.3d 596, 598 (5th Cir.2007) ). Nelson does not challenge that his employment-related claims fall within the scope of the Arbitration Plan. Rather, he challenges the first question, arguing that the Plan is illusory and, therefore, unenforceable.

Though the Federal Arbitration Act "reflects a liberal federal policy favoring arbitration," id. at 205 (internal quotation marks and citation omitted), that policy "does not apply to the determination of whether there is a valid agreement to arbitrate between the parties," Morrison v. Amway Corp., 517 F.3d 248, 254 (5th Cir.2008). Instead, "to determine whether an agreement to arbitrate is valid, courts apply ordinary state-law principles that govern the formation of contracts." Carey, 669 F.3d at 205 (internal quotation marks and citation omitted).

Both parties agree that Texas law governs. Under Texas law, an arbitration agreement, "like other contracts," must be supported by consideration. Lizalde, 746 F.3d at 225 (quoting Mendivil v. Zanios Foods, Inc., 357 S.W.3d 827, 831 (Tex.App.–El Paso 2012) ). Though a mutual agreement to arbitrate claims is sufficient consideration to support an arbitration agreement, the agreement is illusory "[w]here one party has the unrestrained unilateral authority to terminate its obligation to arbitrate." Id.; see also Carey, 669 F.3d at 205 ("Under Texas law, an arbitration clause is illusory if one party can ‘avoid its promise to arbitrate by amending the provision or terminating it all together.’ " (quoting In re 24R, Inc., 324 S.W.3d 564, 567 (Tex.2010) (per curiam))).

This is not to say, however, "that if a party retains any ability to terminate the agreement, the agreement is illusory." Lizalde, 746 F.3d at 226. In Halliburton, the seminal Texas case, an employee argued that an arbitration agreement was illusory because it purported to grant an employer the unilateral right to terminate or modify an arbitration agreement. See 80 S.W.3d at 569–70. In concluding that the arbitration agreement was not illusory, the Texas Supreme Court relied upon two key provisions—the agreement provided that "no amendment shall apply to a Dispute of which ... [employer] had actual notice on the date of amendment" and that "termination shall not be effective until 10 days after reasonable notice of termination is given to Employees or as to Disputes which arose prior to the date of termination." Id. at 569–70. Because of these two provisions, the Texas Supreme Court held that the employer could not "avoid its promise to arbitrate by amending or terminating [the arbitration agreement] altogether." Carey, 669 F.3d at 206 (quoting Halliburton, 80 S.W.3d at 570 ); see also In re 24R, Inc., 324 S.W.3d 564, 567 (Tex.2010) (explaining that the Halliburton court "held that because the [arbitration agreement] contained a ‘savings clause’—including a ten-day notice provision and a provision that any amendments would only apply prospectively—that prevented the employer from avoiding its promise, the arbitration agreement was not illusory" (citing Halliburton, 80 S.W.3d at 570 )).

Following Halliburton, we have had several occasions to consider whether parties' arbitration agreements were illusory. See, e.g., Sharpe v. AmeriPlan Corp., 769 F.3d 909, 918 (5th Cir.2014) ; Lizalde, 746 F.3d at 225–26 ; Carey, 669 F.3d at 205–09 ; Morrison, 517 F.3d at 253–57. Most recently, we articulated a simple, three-prong test to determine whether a Halliburton -type savings clause sufficiently restrains an employer's unilateral right to terminate its obligation to arbitrate. See Lizalde, 746 F.3d at 226. "[R]etaining 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." Id. (citing Halliburton, 80 S.W.3d at 569–70 ).

Despite Lizalde's three-part test, Appellees argue that cases from our circuit pre-dating Lizalde and decisions from the Texas Supreme Court suggest that an employer's unilateral right to terminate an arbitration agreement does not render the agreement illusory so long as the agreement meets the first prong of Lizalde, i.e., so long as the employer's termination power extends only to prospective claims. This argument is unsupported by our precedent and decisions from Texas courts.

It is true that, at times, we have held that arbitration agreements failed to meet Halliburton solely because the agreement contained no express limitation on an employer's power to make unilateral...