Penn v. Ryan's Family Steak Houses, Inc.

• Decision Date: 17 October 2001
• Docket Number: No. 00-2355,00-2355
• Citation: 269 F.3d 753
• Parties: (7th Cir. 2001) Craig Penn, Plaintiff-Appellee, v. Ryan's Family Steak Houses, Inc., Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 753

269 F.3d 753 (7th Cir. 2001)

Craig Penn, Plaintiff-Appellee, v. Ryan's Family Steak Houses, Inc., Defendant-Appellant.

No. 00-2355

United States Court of Appeals, Seventh Circuit

Argued November 28, 2000

Decided October 17, 2001

Appeal from the United States District Court for the Northern District of Indiana, Fort Wayne Division. No. 99-CV-0530--William C. Lee, Chief Judge. [Copyrighted Material Omitted] Before Wood, Jr., Diane P. Wood, and Evans, Circuit Judges.

Diane P. Wood, Circuit Judge.

Craig Penn worked as a server at Ryan's Family Steak Houses (Ryan's) in Fort Wayne, Indiana, from 1996 until 1998. After he was fired, he filed this suit under the Americans with Disabilities Act (ADA) alleging that he had been subjected to a hostile work environment at Ryan's and that he was fired in retaliation for his complaints about the harassment. In the district court, Ryan's filed a motion seeking to stay the case and compel arbitration, alleging that Penn was bound by an arbitration agreement he signed when he applied for his job at Ryan's. The district court found that the arbitration agreement Penn signed would create an arbitration panel that was biased in favor of Ryan's. In addition, the court found that Penn had not made a knowing and voluntary waiver of his right to a judicial forum for his dispute, an omission the court found fatal to the company's effort to enforce the agreement. For these reasons, the district court denied the motion Ryan's had filed. Ryan's brought an interlocutory appeal of that order pursuant to 9 U.S.C. § 16(a) (1)(A) & (B). We agree with the district court that the arbitration contract Penn signed is unenforceable, although we reach that conclusion for different reasons.

I

At the outset, it is important to make one thing clear: Penn never signed an arbitration agreement, pre-employment or otherwise, with Ryan's. We thus do not have before us the conventional case in which the question is whether a particular dispute falls within the scope of an arbitration agreement or whether an alleged agreement between an employer and its employee to arbitrate various disputes is unenforceable for some reason. The document relating to arbitration that Penn signed was quite a different animal. Before Penn ever arrived on the scene, Ryan's had entered into a contract with a company called Employment Dispute Services, Inc. (EDS) to have EDS provide an arbitration forum for all employment-related disputes between Ryan's and its employees. When Penn applied for a job at Ryan's, Ryan's required him to execute a contract with EDS. That contract in turn expressed Penn's agreement to use EDS's services to arbitrate any employment-related claims he might have against Ryan's. The document went on to state explicitly that it was a contract with EDS, not with Ryan's, although it added that Ryan's was a third-party beneficiary of the contract. EDS's sole business is apparently the provision of arbitration services for employment disputes according to this model: EDS contracts with employers to provide an arbitration forum for any claims the company's employees bring against it, and the companies that contract with EDS then require their employees to enter into separate contracts with EDS.

The arbitration agreement that Penn signed is largely devoid of specifics about the obligations it imposes on EDS. The contract goes on for two pages detailing the types of claims Penn is required to arbitrate. The only mention of any EDS responsibility, however, is a brief phrase saying that Penn is agreeing to the contract "[i]n consideration of the agreement by EDS to provide an arbitration forum." At the same time he received and signed the arbitration agreement, Penn also received a copy of EDS's Rules and Procedures (the Rules), which set out the specifics of the services EDS provides in somewhat more detail. According to that document, EDS provides parties to disputes before it with a panel of three arbitrators: one a member of management at a company that uses EDS's services (but not the company involved in the dispute), one a non- management employee of one of the EDS companies, and the third an "[a]ttorney[ ], retired judge[ ], or other competent professional person[ ] not associated with either party." When an employee brings a dispute to EDS for arbitration, EDS provides the parties to the dispute with a list of three potential arbitrators in each category (managers, employees, and neutrals). Each side is allowed one strike in each category, and the remaining three arbitrators form the panel. The Rules also allow each side unlimited strikes "for cause." Although the procedure after a potential arbitrator is struck for cause is not explained in the Rules, it appears that EDS would then add another potential arbitrator to the list so that the parties could move on to their peremptory strikes. EDS retains discretion to determine whether an arbitrator will be struck for cause and also retains complete control over who appears on the lists of proposed arbitrators.

The Rules set out limited procedures for discovery, allowing each side unlimited document requests, but only one deposition in the absence of extraordinary circumstances. The Rules provide that the arbitrators must apply the substantive law that would have applied to the employee's claim in a court of competent jurisdiction and that the decision of the panel will be final and binding. The panel of arbitrators is given discretion to set the time and place of the hearing. Finally, the Rules charge the chief executive officer of EDS with interpreting the Rules and deciding "any issue which may arise relating to them," and give EDS the power unilaterally to amend or modify the Rules.

In the district court, Penn argued that the EDS arbitration system is inherently biased against employees. Relying on cases such as Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999), Penn reasoned that an arbitration agreement that forces a party to arbitrate before a biased tribunal cannot be enforceable. Although Penn raised objections to several aspects of the EDS system, the overarching theme of his challenge was that EDS is no more than a straw-man for the employers who fund it, and thus, presumably, any award they rendered would reflect the kind of "evident partiality" that the Federal Arbitration Act (FAA), 9 U.S.C. § 10(a)(2), recognizes as a reason for unenforceability. As Penn notes, with the exception of relatively insignificant filing fees, employers pay the cost of EDS arbitration. Unlike some other arbitration fora such as the American Arbitration Association, EDS handles only employment arbitration, so essentially all of its funding comes from employers. In addition, the employers who contract with EDS are repeat players, and if an employer becomes dissatisfied with EDS's services, EDS stands to lose a substantial amount of business. On the other hand, EDS has no incentive to seek approval from the employees who appear before it, because the employees are for all practical purposes captive customers. For all these reasons, Penn argues, EDS has a very strong incentive to tilt its arbitration panels in favor of the companies that employ it.

EDS also has ample opportunity to tilt the scales. As noted above, the contract Penn signed with EDS provides no details about the forum that will be provided. Although the Rules and Procedures do set out more specifics, EDS retains the right to modify them at any time without notice to or consent from the employees who have entered into the EDS agreements. Even as the Rules stand, Penn argues, EDS has substantial opportunity to shade its procedures in favor of employers. First, unlike the usual system with two partisan arbitrators and one neutral, under which each party has free rein to name its own advocate, here EDS has complete control over the names that appear on the lists for both the employer's arbitrator and the employee's arbitrator. Although both the employer and the employee have the right to strike arbitrators from the lists for cause, this feature is of little practical help to the employee as long as EDS controls the three names from which the employee must choose. Nothing prevents EDS from finding the stool pigeons among the employee population and offering the employee only the opportunity to choose the least among three evils. In addition, EDS's rules contain very restrictive discovery provisions, allowing each side only one deposition in most cases. As Penn points out, employment disputes are often extremely fact-intensive battles between witnesses with sharply different recollections of events, and a single deposition is likely to be inadequate in many cases. Although the Rules allow parties to petition the arbitration panel for permission to take additional depositions in "extraordinary fact situations," the Rules also explicitly discourage such requests. If the panels are indeed predisposed against employees, as Penn suggests, an employee seeking permission to conduct additional discovery would most likely face an uphill battle. Finally, under the Rules set out by EDS, EDS has complete discretion over the location and time of the arbitration proceedings. This power, Penn argues, could easily be used to inconvenience an employee or impose exorbitant travel expenses on him.

In response to Penn's objections, Ryan's introduced an affidavit from the Chairman and co-owner of EDS, James P. LaCoste, which addressed many of Penn's concerns. First, LaCoste averred that the EDS process for selecting arbitrators incorporated "numerous safeguards" to "ensure fairness and neutrality of the panel." The lists of potential arbitrators are generated solely by EDS, LaCoste noted, and employers have "absolutely no input" into the selection of potential arbitrators. In addition, both the management arbitrator and the employee arbitrator are "neutral" in the sense that they are not...