Petition for Writ of Certiorari — Ryan's Family Steak Houses, Inc. v. Floss

Supreme Court, U.&

No.90 600 OCT + 2 200

UFriue OF THE CLERK

In The

Supreme Court of the United States

Ryan's Family Steak Houses, Inc.,

Billy Lewis, and Steve "Doe,"

Petitioners,

Vv.

Sharon Floss,

Respondent.

Ryan's Family Steak Houses, Inc.,

Petitioner,

Vv.

Kyle Daniels,

Respondent.

On PetiTION For Writ OF CERTIORARI

To Tue Unitep States Court OF APPEALS

For Tue Sixtu Circuit

PETITION FOR WRIT OF CERTIORARI

STEPHEN F. FISHER

Counsel of Record

JACKSON, LEwis, SCHNITZLER

& KRUPMAN

2100 LANDMARK BUILDING

301 N. MAIN STREET

GREENVILLE, SC 29601-2122

(864) 232-7000

BECKER GALLAGHER LEGAL PUBLISHING, INC.,

CINCINNATI, OHIO 800-890-5001

QUESTIONS PRESENTED

In deciding whether an arbitration system is

“structurally biased” in violation of the Federal Arbitration

Act (FAA), may a District Court presume bias without any

evidentiary showing?

Does the federal common law of arbitration imply the

covenant of good faith and fair dealing into every arbitration

contract which falls under the FAA?

Is the FAA violated when judicially created contract

law is applied in such a manner as to invalidate arbitration

agreements which are otherwise enforceable?

LIST OF PARTIES TO THE PROCEEDING

Petitioners

The caption of the case in the Floss v. Ryan's Family

Steak Houses, Inc., et al. matter includes all parties to the

proceeding in the United States District Court tor the Eastern

District of Kentucky. The caption of the case in the Daniels

v. Ryan's Family Steak Houses, Inc. matter includes all

parties to the proceeding in the United States District Court

tor the Eastern District of Tennessee. The United States

Court of Appeals for the Sixth Circuit consolidated the two

Separate cases. Petitioners are Ryan's Family Steak Houses,

Inc., Billy Lewis, and Steve “Doe.” Pursuant to Rule 29(6)

of the Rules of the Supreme Court of the United States,

Ryan's Family Steak Houses, Inc., respectfully submits that

itis a publicly traded company, which has no parent company

and owns no subsidiaries. Billy Lewis and Steve “Doe” are

individuals and have no corporate affiliations.

Respondents

Kyle Daniels and Sharon Floss.

il

TABLE OF CONTENTS

oh Sos g 8B Ok OL yo }

LIST OF PARTIES TO THE PROCEEDING ....... ii

TABLE OF CONTENTS .............2--0-5- iil

pe RS bye gg V

CITATION TO REPORTS OF OPINIONS... ...... |

ya Ay ok ek ae ee l

STATUTORY PROVISIONS INVOLVED ......... 2

yp ego Sy es oes ok oe rar 2

REASONS FOR GRANTING THE WRIT ......... 4

A. THE SIXTH CIRCUIT ERRED IN

PRESUMING ARBITRAL BIAS, RATHER

THAN REQUIRING PROOF OF BIAS, AS

THIS COURT AND FOUR’ OTHER

me AS ee | 5

B. THE COURT OF APPEALS

MISINTERPRETED THE FEDERAL

COMMON LAW OF ARBITRATION BY

REFUSING TO IMPLY THE COVENANT

OF GOOD FAITH INTO A CONTRACT

PAGAars UNE SES TAA...........-. 12

oA THE SIXTH CIRCUIT VIOLATED § 2 OF

THE FAA BY CONSTRUING COMMON

LAW CONTRACT PRINCIPLES IN A

DISCRIMINATORY MANNER HOSTILE

TO ARBITRATION AGREEMENTS ....... 16

LARRY be ae ee dc ewe ek ee ee een 20

APPENDIX A

Court of Appeals Opinion, May 1, 2000 ...... la

APPENDIX B

District Court for the Eastern District of

Tennessee, Order, February 23,1999 ...... 21a

APPENDIX C

District Court of Eastern District of Kentucky,

eet A peeneet GO. SFO. kk os ee eas 29a

APPENDIX D

Magistrate, District Court for the Eastern

District of Kentucky, Report and

Recommendation, September 1, 1998 ...... 31a

APPENDIX E

Court of Appeals, Order Denying Rehearing,

POO WR Ae 2 on ee ce eee eee 4la

iV

TABLE OF AUTHORITIES

Cases:

Allied-Bruce Terminix Companies, Inc. v.

Dobson, 115 S.Ct. 834 (1995) ......... 3, 47

Apperson v. Fleet Carrier Corp.,

S70: F.2d 1964 CGC. FP ww 5 i es 10

Cole v. Burns Int’l Sec. Servs.,

as © 38 1665 4. Ee Peer) ns es es os 7 2

Dean Witter Reynolds Inc. v. Byrd,

Oe te a ee CU Os be oe oe ie re Y

Doctor’s Associates, Inc. v. Casarotto,

OO ey Oe Cte nk ee we ce Ree 18

First Options of Chicago, Inc. v. Kaplan,

Fie 0) .o. See CPP a ak Oe 17

Floss v. Ryan’s Family Steak Houses, Inc.,

211 F.3d 306 (6th Cir. 2000) ...... 3) oe ae

Gilmer v. Interstate/Johnson Lane Corp.,

_ Se a fh, | | rarer saree passim

Hooters of Am., Inc. v. Phillips,

173 F.3d 933 (4th Cir. 1999) ...... 9, 14, 15, 18

Koveleskie v. SBC Capital Markets, Inc..,

167 F.36 G1 C7 Ce. 1998) 0 i ee 8, 10, 11

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 ic, GIS ibe os ss 9,12

Moses H. Cone Mem. Hosp. v. Mercury

Constr. Corp., 460 U.S. 1, 24(1983) .... 12, 14

O'Melveny & Myers v. FDIC,

pa Ghee Fe Cee ee ck ae Sel eee 13

Permanence Corp. v. Kennametal, Inc.,

908 F.2d 98 (6th Cir. 1990) ........... 15, 19

Perry et.al. v. Thomas,

Ole 8s. We COT ee eee passim

Ranier v. Mt. Sterling Nat'l Bank,

Bie o.oo Lee Rees PPP 8k cae eee 18

Rosenberg v. Merrill Lynch,

Cis ee £e0 Se a rene 8, 10

Shearson/American Express, Inc., et al.

v. McMahon et al., 482 U.S. 220 (1987) ..... 14

Southland Corp. et al. v. Keating et al.,

O65 U.S. F CIRGS x ke ols ese eee passim

Texas Indus., Inc. v. Radcliff Materials, Inc. .,

637 01.5. GO CIGEE sos 84 woes eee 13

Trumbull v. Century Marketing Corp.,

12 F.Supp.2d 683 (N.D. Ohio 1998) ........ 3

Wallace v. Nat’l Bank of Commerce,

938 S.W.2d 684 (Tenn. 1996) ............ 18

vi

———_aaaa

Wright v. Universal Maritime Service Corp. et al.,

SZ £..66.00 361 (1908) 2... ww en 14

Statutes:

Pe i os 25 ee passim

Oh, PUNE ka en Ve he een l

28 U.S.C. §§1331 and 1367 .................. l

Oa i ee ne iw vs ee ee ee l

oF WBA BIEN OO 6. 9d Sh oe l

Other Authorities:

Wright, Miller & Cooper, Federal Practice and

Procedure: Jurisdiction 2d §4514 (1996)... ... 13

Ryan’s Family Steak Houses, Inc. (“Ryan’s”) petitions

for a writ of certiorari to review the judgment of the United

States Court of Appeals for the Sixth Circuit in these two

consolidated cases.

CITATION TO REPORTS OF OPINIONS BELOW

The consolidated opinion of the United States Court of

Appeals for the Sixth Circuit (App. A, infra, la-20a) is

reported at Floss v. Ryan’s Family Steak Houses, Inc., 211

F.3d 306 (6th Cir. 2000). The respective opinions of the two

district courts (App.B and C, infra, 21a-28a and 29a-40a) are

unreported.

JURISDICTION

Jurisdiction in the district court in Floss was invoked

under the Fair Labor Standards Act, 29 U.S.C.§201 er. seq.

and 28 U.S.C. §§1331 and 1367. The jurisdiction in the

district court in Daniels was invoked under the Americans

with Disabilities Act, 29 U.S.C.§12101 et. seq. and 28

U.S.C. §§1331 and 1367.

The cases were appealed to the Sixth Circuit under the

appeal provisions of the Federal Arbitration Act (9 U.S.C.

§ 1 et seq.). The court of appeals consolidated the two cases

and issued its opinion on May 1, 2000. That court denied

Ryan’s petition for rehearing and rehearing en banc on July

14, 2000. (App., infra, 41a-42a.)

This Court’s jurisdiction is invoked pursuant to 28

U.S.C. §1254(1).

STATUTORY PROVISIONS INVOLVED

These cases involve judicial interpretation of the

Federal Arbitration Act (FAA), 9 U.S.C. § 1 et. seq.

STATEMENT OF THE CASE

These two cases consider whether a nationwide third-

party arbitration system, used exclusively for resolving

employment disputes, is enforceab » under the FAA.

Ryan's operates a chain of family restaurants.

The two Plaintiffs are former employees, with Floss having

worked in a Kentucky store and Daniels having worked in a

Tennessee store. Before working at Ryan’s, each Plaintiff

signed a third-party arbitration contract with Employment

Dispute Services, Inc. (EDSI). EDSI is an independent

company that provides a neutral arbitration forum for

resolution of employment-related disputes. + Ryan's is a

third-party beneficiary under the employee-EDSI arbitration

agreement.

Daniels filed suit in the Eastern District of Tennessee

in May 1998, claiming he was discharged in violation of the

ADA. Ryan’s petitioned the district court pursuant to the

FAA to enforce the EDSI-Daniels arbitration contract,

requesting an order compelling arbitration and staying the

litigation. The district court refused to enforce the arbitration

agreement, holding that Daniels did not knowingly and clearly

waive his federal statutory rights, including his right to a jury

'’ EDSI had been known as “EDR” prior to 1997.

2

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trial. The district court also found the arbitration contract was

unenforceable on mutuality of obligation grounds. ”

Floss filed suit in February 1998, alleging both Fair

Labor Standards Act (FLSA) and state law claims. Ryan’s

petitioned the district court pursuant to the FAA to compel

Floss to arbitrate her claims and to stay the judicial action.

The district court held that Floss’s FLSA claim was subject to

arbitration and granted Ryan's petition to compel. The court

also rejected Floss’s fraudulent inducement chatlenge to the

arbitration agreement.

The Sixth Circuit consolidated the two cases on

appeal, and issued its opinion on May 1, 2000. The court

reversed in Floss and affirmed in Danieis, ultimately denying

Ryan's petition to compel arbitration in both cases. (App. A,

infra, 3a, 19a-20a.) Under the Sixth Circuit's view, neither

Plaintiff “validly waived their right to bring an action in

federal court.” (App. A, infra, 3a.) Though there was ao

supporting evidence before the court, the Sixth Circuit was

hostile to the EDSI system in many particulars. The court

attacked the neutrality of the forum based on nothing more

than the “uncertain relationship” between the employer

(Ryan's) and the arbitration services provider (EDSI). (App.

A, infra, 14a.) The Sixth Circuit also found bias because

EDSI allegedly would have been motivated to favor its routine

customers--the employers. The Sixth Circuit criticized

EDSI’s rule that allowed employees to be required to pay one-

~ The district court’s sole authority for its contract law analysis

was one district court opinion, Trumbull v. Century Marketing

Corp., 12 F.Supp.2d 683 (N.D. Ohio 1998). The court failed to

cite any state authority, either legislative or judicial, in this part of

its order.

half the arbitration fee. (App. A, infra, 15a.) Finally, the

penultimate basis of the Sixth Circuit’s decision was the

unstated presumption that EDSI would act in bad faith based

on nothing more than EDSI’s ability under the governing

rules to amend the arbitration rules from time to time. Based

simply on this right to amend, the Sixth Circuit found EDSI’s

promise to provide an arbitral forum to be illusory. (App. A,

infra, 18a-19a.)

The Sixth Circuit denied Ryan’s Petition for Rehearing

and Rehearing En Banc on July 14, 2000. (App. E, infra,

4la-42a.)

REASONS FOR GRANTING THE WRIT

Certiorari should be granted. The Sixth Circuit’s

holding is at odds with prior decisions of this Court as well as

at least four other circuits with respect to the standard to

prove arbitral bias under the FAA. The Sixth Circuit also

misinterpreted the federal common law of arbitration by

failing to apply the covenant of good faith and fair dealing to

the arbitration agreement at issue. In impliedly presuming

EDSI would provide arbitration services in bad faith, the

Sixth Circuit turned the FAA’s presumption of arbitrability on

its head, evincing the anachronistic judicial hostility to

arbitration which this Court has consistently rejected.

A. THE SIXTH CIRCUIT ERRED IN

PRESUMING ARBITRAL BIAS,

RATHER THAN REQUIRING

PROOF OF BIAS, AS THIS COURT

AND FOUR OTHER CIRCUITS

HAVE DONE.

In making structural bias attacks against arbitration, an

Opponent cannot rely on presumptions, but instead, must

present actual evidence of arbitral bias. This is the

controlling standard under Gilmer v. Interstate/Johnson Lane

Corp., 500 U.S. 20 (1991) (rejecting generalized attacks on

arbitration as resting on unfounded judicial suspicion of

arbitration). At least four circuit courts have either expressly

or impliedly recognized this standard. The rationale for this

rule is clear from this Court’s decisions: the Federal

Arbitration Act was designed in part to overcome

anachronistic judicial hostility towards arbitration. The Sixth

Circuit rejected this standard and refused to enforce a valid

arbitration contract based on nothing more than unsupported

allegations and presumption of bias in the EDSI arbitral

forum.

In sharp contrast to the analysis undertaken in Gilmer,

the Sixth Circuit’s decision was based on nothing more than

its poorly-disguised hostility to arbitration, rather than

analytical proof of actual bias. The court’s discrimination

against arbitration is evident by its unstated presumption that

EDSI would act in bad faith in providing an arbitral forum.

Like most arbitration services, EDSI reserved itself the right

to amend the arbitration rules and procedures from time to

time, without input from the employee. The same right to

amend existed under the NASD rules and procedures which

this Court endorsed in Gilmer. Nonetheless, holding this

reservation of power to be a fatal defect, the Sixth Circuit,

5

with no evidentiary support whatsoever, concluded that EDSI

would abuse its discretion in providing a neutral arbitral

forum. The Sixth Circuit’s concern that EDSI would misuse

its power to amend the arbitration procedures by promulgating

biased rules or enforcing existing rules in a biased manner

was simply a red herring, with no basis in fact or law.

Both Gilmer and the FAA itself allow a party two

separate opportunities to make arbitral bias claims. Attacks

brought prior to the arbitration hearing are analyzed for

structural bias (see generally Gilmer at 30-31), while attacks

made after the arbitration decision are analyzed for “evident

partiality or corruption in the arbitrators.” Id. (citing 9

U.S.C. §10). For pre-award bias challenges, as here, Gilmer

requires some evidentiary showing of bias to supplement a

party's mere speculation: plaintiff “first speculates that

arbitration panels will be biased. However, ‘we decline to

indulge the presumption that the parties and arbitral body

conducting a proceeding will be unable or unwilling to retain

competent, conscientious and impartial arbitrators.’” Id. at

30 (citation omitted). The type of generalized attacks on

arbitration expressed by the Sixth Circuit are to be rejected

because the FAA’s

purpose was to place an arbitration agreement

‘upon the same footing as other contracts

where it belongs,’ .. . and to overrule the

judiciary’s longstanding refusal to enforce

agreements to arbitrate. . . . Some centuries

ago, because of the jealously of the English

courts for their own jurisdiction, they refused

to enforce specific agreements to arbitrate

upon the ground that the courts were thereby

ousted from their jurisdiction. This jealousy

survived for so long a period that the principle

6

ee

became firmly embedded in the English

common law and was adopted with it by the

American courts. |

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213. 219-221,

n.6 (1986) (citing legislative history of the FAA): see also

Gilmer at 30 (“[I]n our recent arbitration cases we have

already rejected most of these arguments” against arbitration

as insufficient. ).

In addressing the arbitral bias claims before it, the

Gilmer Court analyzed the protections in the arbitration rules

and procedures. The Court concluded with the observation

that “[t]here has been no showing in this case that those

provisions are inadequate to guard against potential bias.” Id.

at 31 (emphasis added). The Supreme Court rejected

Gilmer’s invitation to presume bias. Rather, the Court upheld

the plaintiff's arbitration obligation because he failed to

“show” actual bias in the NASD system.

Since Gilmer, at least four circuit courts have squarely

addressed arbitral bias challenges. In Cole v. Burns Int’! Sec.

Servs., 105 F.3d 1465 (D.C. Cir. 1997), the DC Circuit heid

that federal statutory rights include both the substantive

protections granted under the statute and access to a neutral

forum in which to enforce those rights. Id. at 1482.

According to the DC Circuit, because minimal standards of

procedural fairness have to be satisfied before a civil action is

Stayed, a court should analyze arbitration rules to see if they

are sufficiently neutral and provide adequate safeguards

against bias. Id. at 1483. In Cole, unlike the Sixth Circuit in

this matter, the DC Circuit Court scrutinized’ the arbitral

procedures before it and found that they satisfied Gilmer.

Next, in Koveleskie v. SBC Capital Markets, Inc., 167

F.3d 361 (7th Cir. 1999), the plaintiff opposed arbitration,

arguing that the system in the securities industry was biased

against employees. More particularly, the plaintiff contended

that arbitrators were not obligated to follow the law, would

try to subvert Title VII's fee shifting principle, and there

would be inadequate judicial review of the award. The

Seventh Circuit rejected all of these arguments, stating:

Gilmer left open a door for plaintiffs to

challenge mandatory arbitration of statutory

claims by showing that [the] arbitration system

is structurally biased. However, we hold that

Koveleskie has failed to show actual bias in the

securities arbitration process.

Id. at 366 (emphasis added). Like the DC Circuit, the

Seventh Circuit actually scrutinized the arbitration rules for

neutrality rather than simply presuming bias as the Sixth

Circuit did in this matter.

In Rosenberg v. Merrill Lynch, 170 F.3d 1 (1st Cir.

1999), the plaintiff-employee alleged that the NYSE

arbitration system was biased against employees in favor of

the routine litigants--the employers. The First Circuit

emphatically rejected this argument, holding that the

employee failed to demonstrate actual bias or structural

infirmities in the arbitration system. According to the First

Circuit, under Gilmer, arbitration should be ordered unless

there has been “a showing of actual bias.” Id. at 38. Like

the DC and Seventh Circuit, the First Circuit actually

scrutinized the arbitration rules for neutrality rather than

presuming bias with no evidentiary basis as did the Sixth

Circuit in this matter.

a Sheek pall

In Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th

Cir. 1999), the employer itself (rather than a third party as in

the securities industry, or in the case at bar) conducted its

own “in-house” arbitration system. Instead of summarily

striking down the arbitration system for unfounded suspicions

of bias, as the Sixth Circuit did in this matter, the Fourth

Circuit, like the DC, First, and Seventh Circuits, adhered to

Gilmer, not only analyzing, but making conclusions, as to the

fairness of the arbitration rules before it. Id. at 939-40.

Contrary to Gilmer, and the decisions of the First,

Seventh, Fourth and DC Circuits, the Sixth Circuit announced

a rule peculiar to that circuit, which exemplifies the very

“anachronistic judicial hostility to agreements to arbitrate”

that this Court has consistently rejected. See Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U-S.

614, 626 at n.14 (1985). The Sixth Circuit stated:

We have serious reservations as to whether the

arbitral forum provided under the current

version of the EDSI Rules and Procedures is

suitable for resolution of statutory claims.

Specifically, the neutrality of the forum is far

from clear in light of the uncertain relationship

between Ryan’s and EDSI. Floss and Daniels

suggest that EDSI is biased in favor of Ryan’s

and other employers because it has a financial

interest in maintaining its arbitration service

contracts with employers. Though the record

does not clearly reflect whether EDSI, in

contrast to the American Arbitration

Association, operates on a for-profit basis, the

potential for bias exists. In light of EDSI’s

role in determining the pool of potential

arbitrators, any such bias would render the

9

arbitral forum fundamentally unfair.

Though obligated to provide some type of

arbitral forum, EDSI has unfettered discretion

in choosing the nature of that forum. . . . [and]

EDSI has reserved the right to alter the

applicable rules and procedures without any

obligation to notify, much less receive consent

from . . . [plaintiff-employees].

(App. A, infra, 14a-15a, 18a-19a.) The Sixth Circuit’s

analysis plainly demonstrates a standard for analyzing

arbitration agreements that applies a presumption of bias

without requiring any actual evidence of bias. Gilmer allows

no such presumption.

Gilmer not only gives arbitration opponents the chance

to prove bias before the hearing, but also recognizes that

arbitral bias can be protected against a second time--through

judicial review after the hearing. Gilmer, 500 U.S. at 30

(Under §10 of the FAA, reviewing “courts may overturn

arbitration decisions ‘where there [is] evident partiality or

corruption in the arbitrators.’”) (internal citations omitted);

see also Apperson v. Fleet Carrier Corp., 879 F.2d 1344,

1358-60 (6th Cir. 1989) (The federal courts need not defer to

such arbitration awards which are the result of evident

partiality or deny participants minimum levels of integrity.).

Accordingly, based on Gilmer and other circuit

decisions, the Sixth Circuit erred on two levels. First, the

Floss decision squarely conflicts with Gilmer’s approach to

pre-award structural attacks on arbitration--the opponent must

present sufficient evidence of structural bias to justify striking

down an otherwise enforceable contract. Gilmer, at 30-31;

see, e.g., Rosenberg, 170 F.3d. at 14 (Gilmer requires

showing of actual bias); Koveleskie, 167 F.3d at 366 (plaintiff

10

Raters Pech ae ey

“failed to show actual bias”). Second, the Floss decision

ignores § 10 of the FAA and Gilmer’s recognition of judicial

review of arbitral bias claims after the award has been

announced. Contrary to this precedent, the Sixth Circuit

promulgated a new and unworkable anti-arbitration standard

unique to that circuit: arbitration systems will be presumed

biased, before any arbitration takes place, without any proof,

evidentiary showing, or objective judicial inquiry into the

adequacy of the procedures, solely because the arbitration

provider reserves the right to amend its own rules and

procedures to address changes in the law. The Sixth Circuit

now requires District Courts to presume that if an arbitration

provider retains authority to revise its own operating

procedures, the provider will exercise this authority in a

manner so biased against employees as to render the

underlying arbitration contract unenforceable.

The linchpin of the Sixth Circuit’s decision was that

the arbitration services provider reserved to itself the right to

amend the rules without the permission of the other party to

the contract, the employee. The Sixth Circuit found this to be

too much, impliedly presuming that EDSI would use such

power in bad faith so as to render its promises illusory. This

conclusion ignores the reality that in other nationwide third-

party arbitration systems, e.g. AAA or those in the securities

industry, the employee bringing a claim generally has no say

as to the applicable rules. Compare Cole, 105 F.3d at 1482

n.9 (discussing employer’s ability to structure arbitration

procedures).

The Sixth Circuit demonstrated open hostility toward

arbitration. The Court’s presumption against arbitration

should not be countenanced.

B. THE COURT OF APPEALS

MISINTERPRETED THE

FEDERAL COMMON LAW OF

ARBITRATION BY REFUSING TO

IMPLY THE COVENANT OF

GOOD FAITH INTO A

CONTRACT FALLING UNDER

THE FAA.

The substantive federal law of arbitration should

require that the covenant of good faith and fair dealing be

implied into every contract falling under the FAA. Accord

Gilmer at 30 (rejecting the presumption that parties are unable

to retain “competent, conscientious and impartial arbitrators”

(internal citations omitted)). This contract rule of general

applicability promotes the Act’s underlying policy of favoring

arbitration agreements. Here, the Sixth Circuit completely

ignored the covenant, presumed bias, and thereby violated the

substantive federal law of arbitration.

Enacted in 1925, the FAA evinces the “liberal federal

policy favoring arbitration agreements. . . .” Moses H. Cone

Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24

(1983). The Act’s underlying policy is to guarantee the

enforcement of private contractual arrangements. Mitsubishi

Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S.

614, 625 (1985). Moreover, because Congress’s preeminent

purpose was to enforce private agreements, the Act requires

courts to rigorously enforce agreements to arbitrate. Dean

Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985).

The Act creates a body of federal substantive law

establishing and regulating the duty to honor an agreement to

arbitrate. Moses H. Cone Mem’! Hosp. v. Mercury Constr.

Corp., 460 U.S. 1, 26 at n.32 (1983). This substantive

12

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federal law of arbitrability applies to any arbitration

agreement within the FAA’s coverage. Id. at 24: see also,

Allied-Bruce Terminix Companies, Inc. v. Dobson, 115 S.Ct.

834, 838 (1995) (holding prior Supreme Court decision and

agreeing “that the Act set forth substantive law”); Perry et al.

v. Thomas, 482 U.S. 483, 492 at n.9 (1987) (enforcing

Section 2 of the FAA which “provides the touchstone for

choosing between state-law principles and the principles of

federal common law envisioned by the [FAA]”); Southland

Corp. et al. v. Keating et al., 465 U.S. 1, 15 at n.9 (1984)

(“While the Federal Arbitration Act creates federal

Substantive law requiring the parties to honor arbitration

agreements, it does not create any independent federal-

question jurisdiction. . . .”),

The substantive federal law of arbitration is a rare

example of the type of situation in which this Court has held

that federal common law should be adopted. These unusual

circumstances “fall into essentially two categories: those in

which a federal rule of decision is ‘necessary to protect

uniquely federal interests,’ and those in which Congress has

given the courts the power to develop substantive law.”

Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630,

640 (1981) (internal citations omitted).

Once the decision is made that federal common law is

applicable, the choice is often whether or not to displace the

law of the forum state. Wright, Miller & Cooper, Federal

Practice and Procedure: Jurisdiction 2d §4514 at 458-459

(1996). As Justice Scalia put it, “it might be simpler to

conceptualize the issue as simply whether to apply a federal

rule, which preempts rather than adopts the parallel state law,

or to apply the law of the forum state.” Id. at 459 (citing

O'Melveny & Myers v. FDIC, 512 U.S. 79, 86 (1994)). The

applicable common law here, subject to exceptions outlined

13

below, is that under the FAA, arbitration contracts are

analyzed under the forum state’s law if that law arose to

govern issues concerning the validity, revocability, and

enforcement of contracts generally. Perry v. Thomas, 482

U-S. 483, 492 (1987).

Because the Act establishes a “broad principle of

enforceability,” Southland Corp. v. Keating, 465 U.S. 1, 11

(1984), a paramount principle under the common law of

arbitration is that, in interpreting arbitration contracts, as a

matter of federal law, “any doubts concerning the scope of

arbitrable issues should be resolved in favor of arbitration,

whether the problem at hand is the construction of the contract

language itself or an allegation of waiver, delay, or a like

defense to arbitrability.” Moses H. Cone Memorial Hosp.,

460 U.S. 1, 24-25 (1983). This principle has also been

referred to as the presumption of arbitrability under the FAA.

See Wright v. Universal Maritime Service Corp. et al., 142

L.Ed.2d 361, 369 at n.1 (1998) (In discussing the

presumption of arbitrability under the NLRA, this Court “also

discerned a presumption of arbitrability under the FAA.”).

“Absent a well-founded claim that an arbitration agreement

resulted from the sort of fraud or excessive economic power

that ‘would provide grounds for the revocation of any

contract,, the Act ‘provides no basis for disfavoring

agreements to arbitrate statutory claims by skewing the

Otherwise hospitable inquiry into arbitrability.’”

Shearson/American Express, Inc., et al. v. McMahon et al.,

482 U.S. 220, 226 (1987) (internal citations omitted).

One circuit has already recognized that the covenant of

good faith applies to arbitration contracts. In Hooters, the

Fourth Circuit held that the arbitration services provider has

14

a duty to perform its obligations in good faith.

‘The courts could leave all discretion in

[contract] performance unbridled. . . . No

U.S. court now takes this approach.

[CJontractual discretion is presumptively

bridled by the law of contracts--by the

covenant of good faith implied in every

contract.’ . . . Good faith ‘emphasizes

faithfulness to an agreed common purpose and

consistency with the justified expectations of

the other party.’

Id. at 940 (internal citations omitted).

Here, the Sixth Circuit ignored the covenant of good

faith that operates to limit EDSI’s discretion in amending its

rules and procedures. The Sixth Circuit’s refusal to apply the

covenant of good faith is at odds with its prior decisions

which recognize that the covenant of good faith and fair

dealing is present in every contract. See, e.g., Permanence

Corp. v. Kennametal, Inc., 908 F.2d 98, 100 at n.2 (6th Cir.

1990). There is no basis for the Sixth Circuit’s decision to

treat arbitration contracts differently from all other contracts.

If anything, with the liberal federal policy favoring

arbitration, this Court’s decisions would require that the

covenant of good faith be read into every arbitration contract

with at least as much enthusiasm as other contracts.

Proper application of the covenant of good faith and

fair dealing would have required that the arbitration contracts

at issue in this matter be enforced. Under the covenant of

good faith, EDSI’s ability to amend the rules is presumed

valid because it would be presumed that EDSI would exercise

its authority in good faith rather, as presumed by the Sixth

Circuit, in a manner hostile to the fair resolution of claims.

15

The covenant is a check, a limitation on EDSI’s ability to

make unfair rule changes. Because the covenant of good faith

operates to create this limit on EDSI’s discretion, until unfair

rules or procedures are demonstrated, the mere ability to

modify rules cannot by itself be evidence of bad faith or bias

against employees.

The Sixth Circuit’s disregard of the covenant of good

faith as a limit on EDSI’s authority to amend and its resulting

presumption that EDSI would exercise its authority in bad

faith to prejudice claimants, is inconsistent with Gilmer, the

FAA, and general contract law. Accordingly, the Sixth

Circuit’s flawed analysis should be rejected.

C. THE SIXTH CIRCUIT VIOLATED

§ 2 OF THE FAA _ BY

CONSTRUING COMMON LAW

CONTRACT PRINCIPLES IN A

DISCRIMINATORY MANNER

HOSTILE TO ARBITRATION

AGREEMENTS.

Just as state legislatures may not pass laws which

discriminate against arbitration contracts, federal courts may

not construe common law contract principles in a

discriminatory manner so as to invalidate arbitration

contracts. Here though, the Sixth Circuit did precisely that,

thereby violating section 2 of the FAA. This Court has

previously and unequivocally proscribed this type of

arbitration hostility:

[a] court may not, then, in assessing the rights

of litigants to enforce an arbitration agreement,

construe that agreement in a manner different

from that in which it otherwise construes

16

Stine Fey 6

| 0 td Coe AA hh Ge tt bal EAPC ca nate A ie

nonarbitration agreements under state law.

Nor may a court rely on the uniqueness of an

agreement to arbitrate as a basis for a state-law

holding that enforcement would be

unconscionable, for this would enable the

court to effect what we hold today the

legislature cannot.

Perry et al. v. Thomas, 482 U.S. 483, 492 (1987).

The forum state’s contract law principles generally

apply to the interpretation of arbitration agreements. Perry v.

Thomas, 482 U.S. 483, 492 (1987) (“. . . [S]tate law,

whether of legislative or judicial origin, is applicable if that

law arose to govern issues concerning the validity,

revocability, and enforceability of contracts generally.”); First

Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944

(1995) (the FAA preempts state law which treats arbitration

contracts differently than other types of contracts); Allied-

Bruce Terminix Companies, Inc. v. Dobson, 115 S.Ct. 834,

843 (1995) (“What States may not do is decide that a contract

is fair enough to enforce all its basic terms (price, service,

credit), but not fair enough to enforce its arbitration clause. i“

Southland Corp., et al. v. Keating et al., 465 U.S. 1, 16

(1984) (“In creating a substantive rule applicable in state as

well as federal courts, Congress intended to foreclose state

legislative attempts to undercut the enforceability of

arbitration agreements.”) (footnotes omitted).

While the laws of the forum state apply, the FAA

preempts laws, either legislative or judicial in origin, which

discriminate against arbitration agreements. There have been

two instances in which the Court found the FAA was violated

Where the forum’s state statutes discriminated against

arbitration agreements. See, e.g., Perry v. Thomas, 482 U.S.

17

483, 490 (1987) (finding that the FAA preempted a state

statute which rendered unenforceable private agreements to

arbitrate certain wage collection claims); Doctor’s

Associates, Inc. v. Casarotto, 116 S.Ct. 1652 (1996) (FAA

preempted a state law requiring special notice for arbitration

contracts because the requirement did not apply to contracts

generally). This Court has also found that the FAA

preempted a state law, which, though facially neutral, was

applied in a discriminatory manner against arbitration

agreements. Southland Corp., et al. v. Keating et al., 465

U.S. 1 (1984) (finding preempted a state statute which

rendered agreements to arbitrate certain franchise agreements

unenforceable).

Southland Corp is controlling in this matter, though

this time it is a federal circuit court, rather than a state court,

which is bending the iaw to invalidate arbitration agreements.

The Sixth Circuit’s anti-arbitration construction is readily

apparent through the following:

(1) The Sixth Circuit contract law analysis is

completely silent as to the covenant of good faith and fair

dealing, though both Tennessee and Kentucky have long held

that the covenant is implied in every contract; see Ranier v.

Mt. Sterling Nat'l Bank, 812 S.W.2d 154 (Ky. 1991);

Wallace v. Nat’l Bank of Commerce, 938 S.W.2d 684 (Tenn.

1996);

(2) The Sixth Circuit’s contract law analysis is

completely silent as to the covenant of good faith and fair

dealing, though a Fourth Circuit case applying the FAA and

Gilmer expressly based its ruling on its conclusion that the

covenant of good faith is implied into every contract,

including arbitration contracts. Hooters, 173 F.3d 933;

18

(3) The Sixth Circuit’s contract law analysis is

completely silent as to the covenant of good faith and fair

dealing, despite its own precedents that expressly recognized

that the covenant of good faith is implied into every contract.

Permanence Corp., 908 F.2d at 100 at n.2 (every contract

contains the “implied covenant of good faith performance and

fair dealing.”);

(4) The Sixth Circuit presumed, without any

evidentiary support whatsoever, that EDSI would exercise its

rights to change the arbitration rules in an arbitrary manner;

though the FAA’s “baseline” presumption is the opposite--to

presume arbitrability;

(5) The linchpin of the Sixth Circuit’s contract law

analysis regarding illusory promises, was neither state law nor

federal law, but rather the court’s selective reading of a

treatise, Williston on Contracts; the court failed to mention

that even professor Williston recognized that the covenant of

good faith is implied in every contract.

The Sixth Circuit's decision is the embodiment of

judicial hostility towards arbitration. This Court’s analysis in

Southland Corp. will not tolerate the Sixth Circuit’s arbitrary

misapplication of state contract law principles in a manner to

achieve its anti-arbitration agenda. The Sixth Circuit’s

analysis turned the FAA on its head: though the statute

requires a court to presume an arbitration contract to be

enforceable, the Sixth Circuit applied the opposite

presumption and then misapplied general contract principles

to create the illusion that it was acting in conformity with § 2

of the FAA.

CONCLUSION

For the foregoing reasons, this Court should reverse

the Sixth Circuit’s decision and remand in these two cases.

Respectfully submitted,

/s/

Stephen F. Fisher

JACKSON, LEWIS, SCHNITZLER

& KRUPMAN

2100 Landmark Building

301 N. Main Street

Greenville, South Carolina 29601-2122

(864) 232-7000

ATTORNEYS FOR PETITIONER

RYAN’S FAMILY STEAK HOUSES, INC.

20

ALT SR CT ORT AARON ROM SM Bey Fle

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

[Filed May 1, 2000]

Nos. 99-5099/5187

99-5099

Sharon Floss,

Plaintiff-Appellant,

V.

Ryan’s Family Steak Houses,

Inc., et al.,

Defendants-Appellees.

99-5187

Kyle Daniels,

Plaintiff-Appellee,

V.

Ryan’s Family Steak Houses,

Inc.,

Defendant-Appellant.

OO ae ae ae ae a ae a a eet a a ae Ne ea a ea Ye Nes

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Appeal from the United States District Court

for the Eastern Districts of Kentucky at Covingion

and Tennessee at Knoxville.

Nos. 98-00038; 98-00294--William O. Bertelsman

and R. Leon Jordan, District Judges.

Argued: March 9, 2000

Decided and Filed: May 1, 2000

Before: MARTIN, Chief Judge; SUHRHEINRICH, Circuit

Judge; GWIN, District Judge.’

OPINION

GWIN, District Judge. With these appeals,

consolidated for purposes of decision, the Court reviews

whether employees effectively waived their rights to bring

actions in federal court under the Americans with Disabilities

Act, 42 U.S.C. § 12101, et seq. ("ADA"), and the Fair Labor

Standards Act, 29 U.S.C. § 201, et seq. ("FLSA"). At the

district court, the plaintiffs attempted to sue their former

employer, Ryan's Family Steak Houses, Inc. ("Ryan's").

However, when applying for employment at Ryan's, both

plaintiffs had signed a form indicating they would arbitrate all

employment-related disputes. In both cases, Ryan's filed a

motion to compel arbitration.

The Honorable James S. Gwin, United States District

Judge for the Northern District of Ohio, sitting by designation.

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Finding no valid arbitration agreement, the United

States District Court for the Eastern District of Tennessee

refused to require Plaintiff-Appellee Kyle Daniels to arbitrate

his claim under the ADA. In contrast, the United States

District Court for the Eastern District of Kentucky found that

Plaintiff-Appellant Sharon Floss was required to arbitrate her

dispute and could thus not pursue her claim under the FLSA

in federal court.

Ryan's now appeals the district court's refusal to

require Daniels to arbitrate his ADA claim. Similarly, Floss

appeals the district court's order requiring her to submit her

FLSA claim to arbitration. Because we find neither Daniels

nor Floss validly waived their right to bring an action in

federal court, we REVERSE the district court's order

requiring Floss to arbitrate her claim, and AFFIRM the

district court's order refusing to require Daniels to submit his

Claim to arbitration.

I.

In support of its argument that the plaintiffs agreed to

waive their right to bring an action in federal court and

instead agreed to arbitrate all employment disputes, Ryan's

relies upon a document identified as the "Job Applicant

Agreement to Arbitration of Employment-Related Disputes."

Ryan's includes this purported agreement in its employment

application packet. Only those applicants who sign the

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agreement are considered for employment at Ryan's.' Both

Daniels and Floss acknowledge signing the agreement.

The employee's agreement to arbitrate is not with

Ryan's. Instead, the agreement runs between the employee

and a third-party arbitration services provider, Employment

Dispute Services, Inc. ("EDSI"). In the agreement, EDSI

agrees to provide an arbitration forum in exchange for the

employee's agreement to submit any dispute with his potential

employer to arbitration with EDSI. Although Ryan's is not

explicitly identified as a party to the agreement, the agreement

says the employee's potential employer is a third-party

beneficiary of the employee's agreement to waive a judicial

forum and arbitrate all employment-related disputes.

The agreement gives EDSI complete discretion over

arbitration rules and procedures. The agreement says that all

arbitration proceedings will be conducted under "EDSI Rules

and Procedures." The agreement then gives EDSI the

unlimited right to modify the rules without the employee's

consent.

In July 1994, Kyle Daniels applied for employment

with Ryan's and received this agreement as part of the

' A notice on the inside cover of the packet informs

applicants that they must agree to the terms and conditions outlined

in the agreement in order to be considered for employment with

Ryan's.

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employment application packet.’ Similarly, Ryan's gave

Sharon Floss the agreement when she applied for employment

in December 1997. Both Daniels and Floss signed the

agreement and began their employment at Ryan's shortly

thereafter.

Daniels ceased working at Ryan's on August 13, 1997.

On that date, Daniels claims he attempted to resume his

employment with Ryan's after taking a medical leave to treat

his viral hepatitis. However, Daniels says Ryan's terminated

him upon his return to the restaurant.

Floss ceased working at Ryan's on January 23, 1998.

Floss left her position with Ryan's after a confrontation with

two management employees. According to Floss, these

managemeni employees intimidated and harassed her after

learning that she had complained to the United States

Department of Labor regarding Ryan's pay practices.

On February 17, 1998, Floss sued Ryan's in the

United States District Court for the Eastern District of

Kentucky for violation of the Fair Labor Standards Act.

The agreement received by Daniels designated

Employment Dispute Resolution, Inc. (“EDR”) as the arbitration

services provider. EDR is now apparently referred to as

Employment Dispute Services, Inc. (“EDSI”).

? Floss also asserted state-law claims for false

imprisonment and intentional infliction of emotional distress,

naming as codefendants the two management employees involved

in the alleged confrontation.

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Floss claimed that Ryan's (1) did not pay employees legally-

required minimum and overtime wages, (2) failed to pay

employees for certain hours worked, and (3) retaliated against

her because she complained of these practices to the United

States Department of Labor. Floss sued in both her individual

capacity and on behalf of similarly-situated Ryan's employees.

On May 19, 1998, Daniels filed his action against

Ryan's in the United States District Court for the Eastern

District of Tennessee. In this action, Daniels asserted a claim

under the ADA, alleging that Ryan's terminated him on

account of his handicapped status despite his ability to

perform the essential functions of his job with or without

reasonable accommodation.*

In both actions, Ryan's filed motions to compel

arbitration. In ruling on these motions, the respective district

courts reached different conclusions as to whether the

agreements were enforceable.

In Daniels's action, the district court ruled that the

agreement was not enforceable. The court reasoned that EDSI

did not provide Daniels with any consideration for his

promise to arbitrate his dispute with Ryan's. Though EDSI

prornised to provide an arbitration forum, the court found that

only Ryan's and EDSI, rather than Daniels, actually

benefitted from that promise. The court also found that the

arbitration document did not bind EDSI. Specifically, the

court noted that the agreement gave EDSI an unlimited right

* Daniels also asserted a claim under a state disability

discrimination statute.

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Court of Appeals Opinion - 5/1/00

to unilaterally modify or amend the rules and procedures of

the arbitration proceeding without providing notice to

Daniels. Finally, the court noted that even if enforceable, the

agreement was not sufficiently clear so as to represent a

knowing and intelligent waiver of Daniels's right to pursue his

disability discrimination claim in federal court.

However, the district court in Floss's case enforced

the agreement.* The court rejected Floss's argument that

claims under the FLSA could not be made subject to

mandatory arbitration.

Both Ryan's and Floss now appeal the rulings adverse

to them.

IT.

Before turning to the merits of these appeals, we

consider whether Floss timely filed her notice of appeal.

Ryan's says Floss failed to file her appeal within thirty days

of the issuance of the final order from which she appeals, as

required by Federal Rule of Appellate Procedure 4(a)(1)(A).

> The district court enforced the agreement under the

Federal Arbitration Act (“FAA”). See 9 U.S.C. § 2. The FAA

authorizes federal district courts to stay a proceeding if any matter

raised therein is subject to an arbitration agreement and to issue an

order compelling arbitration if a party has filed suit in

contravention of an arbitration agreement. See 9 U.S.C. §§ 3 and

4.

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On October 20, 1998, the district court issued an order

staying Floss's FLSA action pending arbitration. On

December 21, 1998, the court, at Floss's request, issued a

final order dismissing her action. Floss filed her notice of

appeal on January 21, 1999.

Ryan's says that the district court's order granting a

stay constituted a final order with regard to the arbitrability of

Floss's FLSA claim. The second order dismissing Floss's

action was, according to Ryan's, superfluous. Because Floss

did not file her notice of appeal within thirty days of the stay

order, Ryan's argues that Floss's appeal is untimely.

We disagree. Floss could not have filed a notice of

appeal based on the district court's stay order. An

interlocutory order granting a stay pending arbitration is not

appealable. See 9 U.S.C. § 16(b); Arnold v. Arnold Corp.,

920 F.2d 1269, 1275 (6th Cir. 1990) (noting that

interlocutory order directing parties to arbitrate dispute is not

appealable). And contrary to Ryan's suggestion, the district

court's stay order was interlocutory rather than final.° "[A]

final order is one that dismisses an action in deference to

arbitration." Arnold, 920 F.2d at 1275 (internal quotations

omitted). The district court's stay order did no such thing.

° This court has found that a stay order may constitute a

final order when the stay delays the enforcement of a judgment

pending the clarification of that judgment. See M&C Corp. v.

Erwin Behr GmbH & Co., 143 F.3d 1033, 1036-37 (6" Cir. 1998).

Such is not the case here.

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Floss filed her appeal within thirty days of the district

court's final order dismissing her action; therefore, her appeal

is timely.

III.

We review de novo a district court's decisions

regarding both the existence of a valid arbitration agreement

and the arbitrability of a particular dispute. See Bobbie

Brooks, Inc. v. Int'l Ladies' Garment Workers Union, 835

F.2d 1164, 1170 (6th Cir. 1987) (stating that district court's

finding that a contract exists is subject to de novo review);

M&C Corp. v. Erwin Behr GmbH & Co., 143 F.3d 1033,

1037 (6th Cir. 1998) ("A determination of the arbitrability of

a dispute is subject to de novo review.").

IV.

In deciding whether to compel arbitration of a federal

Statutory claim, we initially consider whether the statutory

claim is generally subject to compulsory arbitration. If the

statutory claim is not exempt from mandatory arbitration, we

next consider whether the parties have executed a valid

arbitration agreement and, if so, whether the statutory claim

falls within the scope of that agreement. See Mitsubishi

Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S.

614, 628, 105 S.Ct. 3346, 3355, 87 L.Ed.2d 444 (1985)

(stating that courts should consider both whether the parties

have agreed to arbitrate a federal statutory claim and whether

that claim is generally subject to compulsory arbitration).

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A.

Mandatory arbitration of federal statutory claims

continues to generate considerable debate among courts and

commentators. At bottom, this debate centers on the efficacy

of resolving "public disputes in private fora." Harry Edwards,

Where Are We Heading With Mandatory Arbitration of

Statutory Claims in Employment?, 16 Ga. St. U. L. Rev.

(forthcoming April 2000) (emphasis in original).

With its informal nature, arbitration is widely-accepted

as a sound method for resolving essentially private disputes,

such as those arising from collective bargaining agreements

and other contracts. Yet, for some, this informality renders

arbitration suspect as a forum for resolving statutory claims,

which typically implicate important public interests. As one

jurist and commentator has explained:

When public laws are enforced in private fora,

however, we have no assurance that the

underlying public interests are fully satisfied.

This is not to say that private fora are

incapable of resolving disputes in a manner

protective of the public interest. However,

conflicts that are resolved through mediation

and arbitration usually are not subject to public

scrutiny, so we do not know whether such

resolutions are consistent with prevailing

interpretations of public law or whether the

procedures followed were inequitable.

Id. (emphasis in original) (footnote omitted).

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For a time, skepticism regarding the role of arbitration

in resolving statutory claims held sway. This skepticism is

perhaps best reflected in the Supreme Court's approach to the

mandatory arbitration of statutory claims. The Court rejected

arbitration as the lone forum for vindicating claims under

Title VII of the 1964 Civil Rights Act and the Securities Act

of 1933. See Alexander v. Gardner-Denver Co., 415 U.S. 36,

47, 94 S.Ct. 1011, 1019, 39 L.Ed.2d 147 (1974); Wilko v.

Swan, 346 U.S. 427, 438, 74 S.Ct. 182, 188-89, 98 L.Ed.

168 (1953). In so holding, the Court explained that

arbitrators’ inexperience with legal concepts coupled with the

lack of stringent procedural safeguards rendered an arbitral

forum, in the context of the statutory claims at issue, an

unsuitable replacement for a court of law. See Gardner-

Denver, 415 U.S at 57; Wilko, 346 U.S. at 435-36.

However, the tide soon turned. In a trio of cases

decided in the 1980s, the Supreme Court enforced arbitration

agreements covering claims under the Sherman Act, see

Mitsubishi Motors Corp., 473 U.S. at 640, the Securities Act

of 1933, see Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477, 483, 109 S.Ct. 1917, 1921, 104

L.Ed.2d 526 (1989), the Securities Exchange Act of 1934, see

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220,

238, 107 S.Ct. 2332, 2344, 96 L.Ed.2d 185 (1987), and the

civil provisions of the Racketeering Influenced Corrupt

Organizations Act ("RICO"), see McMahon, 473 U.S. at 242.

These holdings led the Court to declare in 1991 that "LiJt is

now well settled that statutory claims may be the subject of an

arbitration agreement, enforceable by the FAA." Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 26, 111 S.Ct.

1647, 1652, 114 L.Ed.2d 26 (1991).

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The Court addressed its growing acceptance of

mandatory arbitration for statutory claims in Gilmer v.

Interstate/Johnson Lane Corp., in which the Court upheld the

mandatory arbitration of claims under the Age Discrimination

in Employment Act, 29 U.S.C. § 621, et seq. See id. at 27.

In permitting the compulsory arbitration of statutory claims,

the Court recognized that by "'agreeing to arbitrate a statutory

claim, a party does not forgo the substantive rights afforded

by the statute; it only submits to their resolution in an arbitral,

rather than a judicial, forum.'" /d. at 26 (quoting Mitsubishi,

473 U.S. at 628). And the Court dismissed generalized attacks

on the suitability of arbitral fora as arising from a "'suspicion

of arbitration as a method of weakening the protections

afforded in the substantive law to would-be complainants.'"

Id. at 30 (quoting Rodriguez de Quijas, 490 U.S. at 481).

Such a suspicion, the Court observed, was "far out of step"

with the "current strong endorsement" of arbitration. /d.

Yet not all statutory claims are amenable to mandatory

arbitration. See Mitsubishi, 473 U.S. at 627-28. In creating a

statutory cause of action, Congress may choose to mandate a

judicial forum for its resolution. See id. at 628. Such an intent

is typically evidenced in the statutory text, legislative history,

or by an “inherent conflict" between arbitration and the

underlying purposes of the statute. McMahon, 482 U.S. at

227.

Here, Floss argues that a conflict exists between

arbitration and her claim under the FLSA. Specifically, Floss

insists that an arbitral forum does not sufficiently allow for

the furtherance of the important social policies implicated by

the minimum wage provisions of the FLSA. Floss contends

that a claim under these provisions involves not only an

attempt to receive an individual remedy, but also an effort to

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promote a minimum standard of living for the nation's lowest

paid workers. According to Floss, requiring a party to seek

resolution of a minimum wage claim under the FLSA in an

arbitral forum will thwart the latter objective.

Floss's argument does not persuade. Though a claim

under the FLSA certainly serves a purpose beyond providing

relief to an individual claimant, we fail to see how the broader

policies furthered by such a claim are hindered when that

claim is resolved through arbitration. As the Supreme Court

has held, both judicial and arbitral fora "can further broader

social purposes." Gilmer, 500 U.S. at 28. Indeed, the Court

has upheld the compulsory arbitration of various statutory

Claims that further both individual and societal interests,

including claims under the Sherman Act and RICO. Floss

offers no compelling reason for drawing a distinction between

these statutes and the FLSA.

However, even if arbitration is generally a suitable

forum for resolving a particular statutory claim, the specific

arbitral forum provided under an arbitration agreement must

nevertheless allow for the effective vindication of that claim.

Otherwise, arbitration of the claim conflicts with the statute's

purpose of both providing individual relief and generally

deterring unlawful conduct through the enforcement of its

provisions. See Gilmer, 500 U.S. at 28 ("[S]o long as the

prospective litigant effectively may vindicate [his or her]

Statutory cause of action in the arbitral forum, the statute will

continue to serve both its remedial and deterrent function.")

(quoting Mitsubishi, 473 U.S. at 637).

Both Floss and Daniels argue that the specific

arbitration forum provided by the current version of the EDSI

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Rules and Procedures does not allow them to effectively

vindicate their claims under the FLSA and the ADA. They

say the procedures allow for the appointment of a biased and

incompetent panel of arbitrators,’ as well as unduly limit the

participants’ discovery opportunities.

We have serious reservations as to whether the arbitral

forum provided under the current version of the EDSI Rules

and Procedures is suitable for the resolution of statutory

claims. Specifically, the neutrality of the forum is far from

clear in light of the uncertain relationship between Ryan's and

’ Under EDSI’s current procedures, a panel of three

“adjudicators” preside over ever arbitration proceeding. Each

adjudicator is selected from one of three “selection pools.” One

pool consists of supervisors or managers of an employer who has

entered into an arbitration agreement with EDSI. A second pool

consists of nonsupervisory employees of an empoloyer who is a

signatory to an EDSI arbitration agreement. A third pool consists

of attorneys, retired judges, and “other competent professional

persons” not associated with either party. If the dispute involves

more than $20,000, only licensed attorneys are included in this

third pool.

The selection process begins with EDSI furnishing both

parties a list of potential adjudicators organized according to each

selection pool. Inforraation regarding each adjudicator’s recent

employment history and related biographical information is

provided to the parties along with this list. The parties may then

move to strike any adjudicator for cause. Following the removal

of any adjudicators for cause, the parties each strike a name from

the list until only one name remains from each selection pool.

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EDSI. Floss and Daniels suggest that EDSI is biased in favor

of Ryan's and other employers because it has a financial

interest in maintaining its arbitration service contracts with

employers. Though the record does not clearly reflect whether

EDSI, in contrast to the American Arbitration Association,

operates on a for-profit basis, the potential for bias exists. In

light of EDSI's role in determining the pool of potential

arbitrators, any such bias would render the arbitral forum

fundamentally unfair. See Cole v. Burns Int'l Security

Services, 105 F.3d 1465, 1482 (D.C. Cir. 1997) ("At a

minimum, statutory rights include both a substantive

protection and access to a neutral forum in which to enforce

those protections.").

Moreover, EDSI's current rules require an employee

to generally pay one-half of the arbitrators' fees as a condition

of pursuing a dispute. Such a fee structure could potentially

prevent an employee from prosecuting a federal statutory

claim against an employer. Recognizing as much, the District

of Columbia Circuit has refused to countenance an employer's

requirement that employees submit their disputes to

arbitration as a condition of employment absent that

employer's agreement to bear the full costs of the arbitrators’

fees. See Cole, 105 F.3d at 1484-85.

Though we have concerns with both the fee structure

and potential bias of EDSI's arbitral forum, we need not

decide whether these deficits prevent the arbitration of Floss

and Daniels's statutory claims. As explained below, Floss and

Daniels are not contractually obligated to submit their federal

statutory Claims to arbitration in EDSI's arbitral forum. Thus,

Floss and Daniels need not establish the unsuitability of

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EDSI's arbitral forum in order to litigate their statutory claims

in federal court.

B.

The Federal Arbitration Act declares that arbitration

agreements "shall be valid, irrevocable, and enforceable, save

upon grounds that exist at law or in equity for the revocation

of any contract." 9 U.S.C. § 2. However, "the FAA was not

enacted to force parties to arbitrate in the absence of an

agreement." Avedon Engineering, Inc. v. Seatex, 126 F.3d

1279, 1286 (10th Cir. 1997). Indeed, "[t]he sine qua non of

the FAA's applicability to a particular dispute is an agreement

to arbitrate the dispute in a contract which evidences a

transaction in interstate commerce." Hartford Lloyd's Ins. Co.

v. Teachworth, 898 F.2d 1058, 1061 (Sth Cir. 1990).

Floss and Daniels say the arbitration agreements they

signed as part of their employment applications with Ryan's

are unenforceable. In deciding whether the agreements are

enforceable, we examine applicable state-law contract

principles. See Perry v. Thomas, 482 U.S. 483, 492 n.9, 107

S.Ct. 2520, 2527 n.9, 96 L.Ed.2d 426 (1987); Avedon

Engineering, Inc., 126 F.3d at 1287; Shulze and Burch

Biscuit Co. v. Tree Top, Inc., 831 F.2d 709, 715 (7th Cir.

1987); Coastal Indus., Inc. v. Automatic Steam Products

Corp., 654 F.2d 375, 377-78 (Sth Cir. 1981). Thus, we

review both Kentucky and Tennessee law to decide if Floss

and Daniels have executed valid arbitration agreements.

Consideration is an essential element of every contract.

See Price v. Mercury Supply Co., 682 S.W.2d 924, 933

(Tenn. Ct. App. 1984); Cuppy v. General Accident Fire &

l6a

ARR DA aa els Hd Dade he tb

Court of Appeals Opinion - 5/1/00

Life Assurance Corp., 378 S.W.2d 629, 632 (Ky. Ct. App.

1964). In other words, a promise is legally enforceable only

if the promisor receives in exchange for that promise some act

or forbearance, or the promise thereof. See Kozy v. Werle,

902 S.W.2d 404, 411 (Tenn. Ct. App. 1995) ("Consideration

consists when the promise does something that he is under no

legal obligation to do or refrains from doing [that] which he

has a legal right to do."); Sutton v. First Nat'l Bank of

Crossville, 620 S.W.2d 526, 531 (Tenn. Ct. App. 1981) ("'It

is invariably held that the promise of one party is a valid

consideration for the promise of the other party.'") (quoting

Dark Tobacco Growers’ Ca-op Assn. v. Mason, 263 S.W. 60,

67 (Tenn. 1924)); Phillips v. Phillips, 171 S.W.2d 458, 464

(Ky. Ct. App. 1943) (defining consideration as a legal right

given to the promisor the exercise of which he is otherwise

not entitled).

A promise constitutes consideration for another

promise only when it creates a binding obligation. Thus,

absent a mutuality of obligation, a contract based on

reciprocal promises lacks consideration. See Dobbs vy.

Guenther, 846 S.W.2d 270, 276 (Tenn. Ct. App. 1992):

David Roth's Sons, Inc. v. Wright and Taylor, Inc., 343

S.W.2d 389, 390 (Ky. Ct. App. 1961). Put more succinctly,

such a contract "must be binding on both or else it is binding

on neither." Morgan v. Morgan, 218 S.W.2d 410, 412 (Ky.

Ct. App. 1949).

Promises may fail to create legally binding obligations

for a variety of reasons. See 17A AM. JUR. 2d Contracts

§ 139 (1991). Most notably, a promise may in effect promise

nothing at all. Such an illusory promise arises when a

promisor retains the right to decide whether or not to perform

17a

Court of Appeals Opinion - 5/1/00

the promised act. See Trumbull v. Century Marketing Corp.,

12 F. Supp.2d 683, 686 (N.D. Ohio 1998) (holding that

einployer's promise in employee handbook to arbitrate

disputes did not create binding obligation when employer

retains right to revoke arbitration provision); David Roth's

Sons, Inc., 343 S.W.2d at 391 (noting that a promise absent

any fixed obligation to perform "is illusory in the sense that

[the promisor] has made no legally enforceable commitment,

and justice demands the other party should not be bound"). A

promise is also illusory when its indefinite nature defies legal

enforcement. See Kovacs v. Freeman, 957 S.W.2d 251, 254

(Ky. 1997) ("Under Kentucky law, an enforceable contract

must contain definite and certain terms setting forth promises

of performance to be rendered by each party."); Jamestowne

On Signal, Inc. v. First Federal Savings & Loan Ass'n, 807

S.W.2d 559, 564 (Tenn. Ct. App. 1990) ("'Courts will not

upliold agreements which are indefinite and uncertain as to the

obligations imposed on the parties thereto.'") (quoting Union

State Bank v. Woell, 434 N.W.2d 712 (N.D. 1989).

In the purported agreement at issue in this case, EDSI

offered its promise to provide an arbitral forum as

consideration for Floss and Daniels's promise to submit any

dispute they may have with their employer to arbitration with

EDSI. In ruling in favor of Daniels, the district court found

that EDSI's promise did not create a binding obligation. We

agree.

EDSI's promise to provide an arbitral forum is fatally

indefinite. Though obligated to provide some type of arbitral

forum, EDSI has unfettered discretion in choosing the nature

of that forum. Specifically, EDSI has reserved the right to

alter the applicable rules and procedures without any

18a

NAA as AN 1k WON lta MN dg,

Court of Appeals Opinion - 5/1/00

obligation to notify, much less receive consent from, Floss

and Daniels. EDSI's right to choose the nature of its

performance renders its promise illusory. As Professor

Williston has explained:

Where a promisor retains an unlimited right to

decide later the nature or extent of his

performance, the promise is too indefinite for

legal enforcement. The unlimited choice in

effect destroys the promise and makes it

merely illusory.

1 SAMUEL WILLISTON, CONTRACTS § 43, at 140 (3d

ed. 1957).

EDSI's illusory promise does not create a binding

obligation. The purported arbitration agreement therefore

lacks a mutuality of obligation. Without a mutuality of

obligation, the agreement lacks consideration and,

accordingly, does not constitute an enforceable arbitration

agreement.®

7

Ryan's has pursued an acceptable objective in an

unacceptable manner. An employer may enter an agreement

with employees requiring the arbitration of all employment

* Floss insists that the district court erred in determining

as a matter of law that she was not fraudulently induced to sign the

agreement. Because the agreement is unenforceable on other

grounds, we do not address this argument.

19a

Court of Appeals Opinion - 5/1/00

disputes, including those involving federal statutory claims.

Yet an employer cannot seek to do so in such a way that

leaves employees with no consideration for their promise to

submit their disputes to arbitration. Here, we find that Floss

and Daniels did not receive any consideration for their

promise to arbitrate their disputes. We thus refuse to enforce

their promise in favor of Ryan's.

The judgment of the United States District Court for

the Eastern District of Tennessee in case 99-5187 is

AFFIRMED, and the judgment of the United States District

Court for the Eastern District of Kentucky in case 99-5099 is

REVERSED.

20a

APPENDIX B

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF TENNESSEE

AT KNOXVILLE

[Filed February 23, 1999]

No. 3:98-cv-294

KYLE DANIELS,

Plaintiff,

V;

RYAN'S FAMILY

STEAKHOUSE, INC.,

)

)

)

)

)

)

)

Defendant. )

)

ORDER

For the reasons stated in the Memorandum Opinion

filed contemporaneously with this Order, it is hereby

ORDERED that the defendant's motion to dismiss and

petition to compel arbitration and Stay the case [doc. 5] is

DENIED.

ENTER:

/s/

Leon Jordan

United States District Judge

21a

District Court Order & Opinion - 2/23/99

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF TENNESSEE

AT KNOXVILLE

[Filed February 23, 1999]

“No. 3:98-cv-294

KYLE DANIELS,

Plaintiff,

V.

RYAN'S FAMILY

STEAKHOUSE, INC., |

Defendant.

ee A

MEMORANDUM OPINION

This civil action is before the court on the defendant's

motion to dismiss and petition to compel arbitration and stay

the case [doc. 5]. The plaintiff has responded [doc.8], and the

defendant has filed a reply brief [doc. 11]. Oral argument on

the defendant's motion was heard on November 30, 1998, and

thus, the motion is ripe for the court's consideration. For the

reasons discussed below, the defendant's motion will be

denied.

When the plaintiff applied for a job with Ryan's

Family Steak Houses, he signed a document entitled, "JOB

APPLICANT AGREEMENT TO ARBITRATION OF

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a? ih MEL Be SAAN art tae

District Court Order & Opinion - 2/23/99

EMPLOYMENT-RELATED DISPUTES." By its terms, the

agreement purports to be a contract between the employee and

a firm named Employment Dispute Resolution, Inc. (EDR).

See doc. 6, exh. B to affidavit of James Randolph Hart,

{B.2.C. It informs the employee that his potential employer,

"Company," has entered into an agreement with EDR so that

all “employment-related disputes" would be arbitrated and

settled by EDR. Ryan's is not named as the employer or the

"Company" anywhere in the document. Paragraph B.2.D.

states that the Company is a third party beneficiary of this

Agreement, so if the employee has a "claim or dispute" with

the Company, then the employee must submit the claim or

dispute to EDR for binding arbitration. The agreement does

not define the rights, including a right to a jury trial, that the

employee is waiving, nor does it describe the types of "claims

or disputes" that are covered by the agreement. The

agreement specifically says that the agreement is between the

employee and EDR, not the "Company," but EDR is not a

Signatory to the agreement The agreement informs the

employee that it is not a employment contract and does not

affect his “at will" employment relationship with the

company.

The agreement promises that any arbitration matter

will be heard and decided "under the provisions and the

authority of the Federal Arbitration Act, 9 USC sec. 1, as

applicable." However, the agreement also provides that any

employment-related dispute must be "brought 'ONLY' in the

EDR arbitration forum and under EDR Rules and Procedures,

as modified or amended from time to time."

The defendant asks this court to enter an order

enforcing the agreement to arbitrate, and dismissing this civil

23a

District Court Order & Opinion - 2/23/99

action. In the alternative, the defendant asks that this civil

action be stayed pending the outcome of arbitration. The

defendant argues that the Federal Arbitration Act (FAA)

provides that such agreements should be enforced if there is

evidence of an executed arbitration clause. The defendant says

that the agreement in this case is covered by the FAA and the

plaintiff has failed to take his claim to arbitration as required

by the agreement.

In response, the plaintiff argues that "contracts of

employment. . .of workers engaged in foreign or interstate

commerce" are not enforceable under the FAA. This

argument has been addressed by the Sixth Circuit in Asplundh

Tree Expert Company v. Bates, 71 F.3d 592, 600 (6" Cir.

1995). The Sixth Circuit found that this exclusionary clause

only applies to workers directly involved in the movement of

goods in interstate commerce. A restaurant server does not

meet this definition, and so the plaintiff's first argument must

fail.

Next, the plaintiff argues that, contrary to the

defendant's assertion, this court has discretion determining

the enforceability of Agreement. Section 2 of the FAA

provides that such agreements are valid and enforceable "save

upon such grounds as exist at law or equity for the revocation

of any contract." It is this argument that saves the plaintiff's

lawsuit in this forum. The court finds that the agreement in

this case is not a binding contract, and that the employee

could not have knowingly executed a valid waiver of his

federal statutory rights, including his right to a jury trial.

First, the court finds that there is no consideration for

the agreement. When asked at oral argument about the

24a

District Court Order & Opinion - 2/23/99

consideration for the agreement, counsel for the defense

replied that the consideration flowing to the employee is

EDR's agreement to provide an arbitration forum for

disputes. This benefit clearly flows only to EDR and the

Company, not the employee.' Thus, EDR has not given the

employee anything of value in exchange for the employee's

promise to arbitrate his "employment-related disputes. "

In Trumbull v. Century Marketing Corp., 12 F. Supp.

2d 683 (N.D. Ohio 1998), the arbitration clause at issue was

found in the employee handbook which the employee signed.

The District Court found that there was no consideration for

the “alleged arbitration agreement" because the handbook was

not signed as a condition of employment, rather it was signed

some time later. /d. at 686. In this case, signing the

agreement cannot be said to be a condition of employment

since EDR is not the employer, the Company is, and the

agreement is between EDR and the employee, not the

Company.

Second, the court finds that the agreement is non-

binding because only one party, the employee, is bound. The

agreement provides that the employee must submit to the EDR

arbitration forum and the EDR rules and procedures, "as

modified or amended from time to time." Thus, the employee

is absolutely bound to arbitrate disputes with his employer and

submit to whatever rules and regulations EDR chooses. By

the terms of the agreement EDR is free to modify those rules

' This finding is supported by the fact that it costs the

employee more to file a complaint with EDR than in federal court.

See EDR's Rules and Regulations, Art. XIX.

25a

District Court Order & Opinion - 2/23/99

and regulations at any time. In fact, at oral argument, the

court was provided with a copy of EDR's rules and

regulations for arbitration that had been revised in January

1998, well after the plaintiff was employed by Ryan's. Not

only can EDR modify its rules and procedures regarding

arbitration without notice to the employee, but EDR and the

Company could modify whatever agreement they have

between themselves without any obligation to notify the

employee.

Like the agreement in this case, the handbook in

Trumbull provided that the employer could modify, augment,

delete or revoxe any of the policies or procedures set-out in

the handbook without notice to the employees. In finding that

the employer was not bound by alleged contract, the District

Court said:

To give effect to this language and hold that a

valid contract exists would be to create a

contract where only one party is bound. The

plaintiff would be bound by all the terms of the

handbook while the defendant could simply

revoke any term (including the arbitration

clause) whenever it desired. Without mutuality

of obligation, a contract cannot be enforced.

Two other points should be made about this

agreement. EDR is not even a signatory of the agreement.

Only the plaintiff, Kyle Daniels, signed the agreement, with

an unknown party witnessing his signature. Second, the court

is concerned that the Company is not identified anywhere in

the agreement. The literal terms of the agreement could force

26a

District Court Order & Opinion - 2/23/99

the plaintiff to arbitrate his employment disputes with any

number of potential employers, not just Ryan's.

For these reasons, the court finds that the EDR

agreement is a non-binding contract and cannot be enforced.

However, even if the agreement was construed to be valid

contract, it is this court's opinion that there has been no valid

waiver by the plaintiff of his federal statutory rights including

his right to a jury trial.

Although the Supreme Court and the Sixth Circuit both

recognize that an individual's right to pursue a statutory

employment discrimination claim in federal court can be

waived in an employment contract, the waiver must at least be

knowing in order to be valid. See Gilmer v.

Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647,

114 L.Ed.2d 26 (1991); K.M.C. Co., Inc. v. Irving Trust Co.,

757 F.2d 752, 756 (6" Cir. 1985); Trumbull, 12 F. Supp. 2d

at 686-88. Particularly, there must be a knowing waiver of his

statutory rights and his constitutional right to a jury trial, and

the employee must be aware of the significance of the waiver.

This is especially true because in the employer/employee

context such contracts are rarely the result of bargaining

between the parties. Rather, the potential employee is given

such a contract to sign on a take-it-or-leave-it basis. If the

employee refuses to sign -- no job. This hardly qualifies as

mutual assent by the parties. See Trumbull, 12 F. Supp. 2d at

686.

It is a question of federal law whether a waiver of

Statutory and constitutional rights has been knowing and

voluntary. See K.M.C. Co., 757 F.2d at 755-56; Trumbull, 12

F. Supp. 2d at 686. A valid waiver must be knowing and

27a

District Court Order & Opinion - 2/23/99

clear. See K.M.C. Co., 757 F.2d at 756; Trumbull, 12 F.

Supp. 2d at 687.

The court finds that the alleged waiver in this case was

not knowing or clear. First, the language of the agreement

makes no distinction between the arbitration of statutory

claims as opposed to contractual disputes such as salary.

Further, the agreement refers only to "employment-related

disputes" or "claims or disputes with the Company." The

plaintiff was not advised of the significance of the waiver, nor

was he specifically informed that he was agreeing to waive his

right to a jury trial. Based on the language of the agreement,

the plaintiff would not necessarily have understood that

important legal rights were being waived by signing the

agreement.

In the absence of such knowledge, the court finds that

the plaintiff did not knowingly and clearly waive his statutory

and constitutional rights, and the waiver is not valid.

Therefore, for these reasons, the court finds that the

defendant's motion to dismiss and compel arbitration must be

denied. An order reflecting this opinion shall be entered.

ENTER:

/s/

Leon Jordan

United States District Judge

28a

APPENDIX C

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

AT COVINGTON

[Filed October 20, 1998]

CIVIL ACTION NO. 98-38

SHARON FLOSS, Individually and

on behalf of all employees of

Defendant similarly situated

Plaintiff,

¥.

RYAN' S FAMILY

STEAK HOUSES, INC., ET AL

Defendants.

eee eee eee eae ae

ORDER

This matter is before the court on the Report and

Recommendation of the Magistrate Judge, and having

considered de novo those objections filed by plaintiff and

defendants thereto, and the court being sufficiently advised,

IT IS ORDERED as follows:

29a

1. That the objections (Docs. #21 and #22) be, and

they are, hereby overruled;

2. That the Report and Recommendation (Doc. #20)

be, and it is, hereby adopted as the findings of fact and

conclusions of law of this court;

3. That the motions of plaintiff for order directing and

defining contents (Doc. #2) and for leave to file an amended

complaint (Doc. #6) be, and they are, hereby denied, without

prejudice;

4. That the motion of defendant to dismiss (Doc. #3-

1) be, and it is, hereby denied, without prejudice;

5. That. the motion of defendant to compel arbitration

and stay proceedings (Doc. #3-2) be, and it is, hereby

granted;

6. That this matter be, and it is, hereby stayed

pending arbitration; and

7. That the parties are to file a status report, in the

form of a pleading, on or before APRIL 20, 1999, or upon

completion of arbitration, whichever shall first occur,

advising the court of the status of such arbitration.

This 20" day of October, 1998.

/s/

WILLIAM O. BERTELSMAN, JUDGE

30a

APPENDIX D

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF KENTUCKY

AT COVINGTON

[Filed September 1, 1998]

CIVIL ACTION NO. 98-38

SHARON FLOSS,

Plaintiff,

Vv.

RYAN' S FAMILY

STEAK HOUSES, INC., et al.,

Defendants.

eee eee eee

REPORT AND RECOMMENDATION

This case was referred to the undersigned magistrate

judge for an evidentiary hearing to determine whether plaintiff

was fraudulently induced into signing an otherwise valid

arbitration agreement (hereinafter "Arbitration Agreement")

with the defendant. See 28 U.S.C. §636(b) and 7/1/98 Order

[Doc. #16]. At an evidentiary hearing held on August 25,

1998, the plaintiff testified as to her recollection of the

circumstances of the agreement. The defendant also presented

two managerial witnesses, Frank Santorelli and Tim Lam,

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District Court Report & Recommendation - 9/1/98

who testified as to their memory of the events which gave rise

to the Agreement. Having heard the testimony presented, the

court concludes that the plaintiff was not fraudulently induced

into entering the Agreement, and therefore recommends that

the agreement be enforced.

I. Plaintiff's Request for a Jury Trial

The plaintiff contends that this Report and

Recommendation should determine only whether plaintiff has

produced sufficient evidence to present her defense of fraud

in the inducement of the Arbitration Agreement to a jury.

Plaintiff argues that this factual issue must be resolved by a

jury rather than by the undersigned magistrate judge.

Section 4 of the Federal Arbitration Act, 9 U.S.C. §4,

recites in relevant part "If the making of the arbitration

agreement, be in issue, the court shall proceed summarily to

the trial thereof." However, a party to an arbitration

agreement cannot obtain a jury trial merely by demanding

one; to be entitled to a jury trial, the party "must make at least

some showing that under prevailing law, he would be relieved

of his contractual obligation to arbitrate if his allegations

proved to be true," and "he must produce at least some

evidence to substantiate his factual allegations." Dillard v.

Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148,

1154 (5" Cir. 1992); Topf v. Warnaco, Inc., 942 F. Supp.

762, 766 (D. Ct. 1996). In this case, the plaintiff has not met

her burden of showing that she is entitled to a jury trial,

because no reasonable jury could find fraudulent inducement

on the evidence presented. See Doctor’s Assoc., Inc. v.

Stuart, 85 F.3d 975, 980 (2d Cir. 1996) (noting party's failure

to show facts sufficient as a matter of law).

32a

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District Court Report & Recommendation - 9/1/98

II. Evidence Presented

The evidence presented by the parties reveals two

Significant facts in dispute: 1) whether plaintiff was

interviewed on December 2, 1997 by Mr. Lam or on

December 3, 1997 by Mr. Santorelli; and 2) whether Mr.

Santorelli falsely represented the effect of plaintiff's signature

on the Arbitration Agreement. However, neither of these

factual disputes requires the court to submit the issue of

fraudulent inducement to a jury, because even assuming that

plaintiff's version of the facts is correct, it is insufficient to

show fraudulent inducement.

Mr. Santorelli and Mr. Lam, both assistant managers

at Ryan's at the time of plaintiff's employment, ' testified that

signing the Arbitration Agreement is a precondition to

employment with Ryan's. In fact, both managers testified that

the job applicant's signature on the arbitration agreement is a

precondition to the applicant obtaining an interview with

Ryan's. Ifa job applicant declines to sign the agreement, the

interview process does not go forward.

The Arbitration Agreement, entitled "Job Application

Agreement to Arbitration of Employment-Related Disputes,"

consists of a double-sided single spaced document which

clearly reflects and details the parties’ agreement to arbitrate

employment-related disputes. The Agreement consists of

niultiple paragraphs and concludes with space for the

applicant's name, address and social security, number, and

signature lines for the job applicant and a witness. It is

' Mr. Santorelli has since left Ryan’s employ.

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District Court Report & Recommendation - 9/1/98

obvious from the language of the agreement and the placement

of the signature lines that the signatory is agreeing to the

terms of arbitration as provided in the Agreement.

Separated by a dotted line at the bottom of the

Arbitration Agreement on the back side of the form, below

the signature lines, is a separate section which gives the

appearance of being detachable. The section permits the

Signer to check "yes" or "no" in response to the query:

"Please indicate whether you wish to be considered for

purposes of serving as an 'Adjudicator' and participating in

hearings and deciding disputes under the EDSI° Rules and

Procedures." Below the space for a "yes" or "no" response in

the same area of the form is the statement: "Note: Your

indication of interest is no assurance that you will be selected

for Adjudicator training or to serve as an Adjudicator."

It is uncontroverted that the plaintiff picked up an

employment application packet containing the Arbitration

Agreement and the employment application on December 1,

1997. Ms. Floss took the packet home with her, read through

its contents, and completed and dated all of the forms the

same date. However, she testified that she initially left blank

the signature line on the Arbitration Agreement because she

did not fully understand it. The plaintiff testified that she

> EDSI stands for Employment Dispute Services, Inc., an

entity with which Ryan’s has contracted to arbitrate employment

disputes. The Arbitration Agreement is actually between EDSI and

the job applicant and recites that it is not intended to be “any part

of an employment contract.”

34a

District Court Report & Recommendation - 9/1/98

returned with the employment packet on December 3, 1997,

whereupon she was interviewed by Frank Santorelli.

The date of the interview and name of the interviewer

is contradicted by the testimony of Mr. Santorelli and Mr.

Lam, as well as by the employment application and

Arbitration Agreement themselves. The testimony of the

Ryan's employees and the forms themselves indicate that Ms.

Floss was interviewed by Mr. Lam on December 2, 1997.

Mr. Lam testified that his standard practice is to affix his

Signature to application documents in front of the employee

after verifying that all documents have been completed and

signed by the applicant, including the Arbitration Agreement.

The second fact in dispute concerns what was said by

Mr. Santorelli (or Mr. Lam) during the interview process.

Ms. Floss testified that during the interview, she asked Mr.

Santorelli to explain the portion of the Arbitration A greement

which she did not understand - specifically, the meaning of

the phrase containing the work “Adjudicator” in the

detachable-style section at the bottom of the form. As

indicated above, the phrase asks whether the signatory wishes

to be considered "for purposes of serving as an ‘Adjudicator’

and participating in hearings and deciding disputes under the

EDSI Rules and Procedures."

In an affidavit previously filed with the court and

verified through her testimony, the plaintiff stated that she

"explained to [the manager] that I had strong feelings against

both arbitration and unions, both of which in my belief

represented a means of placing the employee's rights

35a

District Court Report & Recommendation - 9/1/98

secondary to either collective rights or employer rights."* She

testified that she clearly informed the manager that she would

not agree to arbitration, and signed the Arbitration Agreement

only after being reassured that signing but marking the "no"

box under the query asking whether she wished to be an

"Adjudicator" was equivalent to declining the Arbitration

Agreement. In contrast to plaintiff's testimony on this point,

Mr. Lam and Mr. Santorelli expressly deny having

deliberately misled the plaintiff or any other applicant as to

the meaning of the Arbitration Agreement.*

Ms. Floss admitted that she signed an identical

arbitration agreement during a brief period of employment

with Ryan's in Indiana in August 1997, but claims that she

would not have signed the Arbitration Agreement in Indiana

if it had been explained to her.” However, she also admitted

> Ms. Floss, who has an eleventh grade education and her

G.E.D., spoke in clear but simple language from the witness stand.

Despite her repeated insistence from the witness stand that she does

not "use fancy words," she also testified that the words in the

affidavit were the words she spoke at the time.

* While Mr. Lam testified that “several” applicants had

questioned him regarding the meaning of the term “adjudicator” in

the phrase, he testified that his standard practice was to explain the

meaning in terms which the court found to be clear and

unambiguous. Of the 800 to 1,000 job applicants interviewed by

Mr. Lam, none have ever refused to sign the Arbitration

Agreement.

> Ms. Floss contradictorily responded “No, sir” when

initially questioned as to whether she had agreed to arbitration in

36a

<n ti baa ae a

District Court Report & Recommendation - 9/1/98

that she signed that agreement without reading it because of

her "desperate" financial circumstances.

The "Application for Employment" in the packet

received by Ms. Floss clearly states in bright red, capital

letters across the top of the form: "THE ENTIRE

APPLICATION FORM MUST BE COMPLETED AS WELL

AS THE ATTACHED ARBITRATION AGREEMENT

PRIOR TO BEING CONSIDERED FOR HIRE!" In

addition, a "NOTICE TO ALL APPLICANTS" on the first

page of the application proclaims:

In order for you to be considered for

employment at Ryan's Family Steak Houses,

Inc., you must agree to the terms and

conditions in the attached Job Applicant

Agreement to Arbitration of Employment

Related Services ("Arbitration Agreement.")

Your failure to sign and accept the Arbitration

Agreement and its related EDSI Rules and

Procedures will terminate the job application

process.

Ms. Floss admitted in her testimony that she understood in

December 1997 based upon the above language that her

failure to sign the Arbitration Agreement would preclude her

employment with Ryan's.

Indiana.

37a

District Court Report & Recommendation - 9/1/98

In addition, Ms. Floss admitted at the hearing? that she

was provided with a copy of the arbitration Rules and

Procedures to keep, but failed to review them. This court has

reviewed a copy of the arbitration Rules and Procedures

provided to Ms. Floss, and concludes that the meaning of the

word "Adjudicator" is clear and unambiguous in those context

of those rules.

Ill. ANALYSIS

Even taking all of Ms. Floss's allegations as true,’ the

court concludes that she cannot prevail on her claim of

fraudulent inducement because any reliance on the alleged

statements of Mr. Santorelli was not reasonable. See Topf,

942 F. Supp. at 768 (citing Cohen v. Wedbush, Noble,

Cooke, Inc., 841 F.2d 282 (9th Cir. 1988)). The language of

the employment application and of the Arbitration Agreement

® In her affidavit previously, filed with this court, the

plaintiff denied receiving a copy of the Agreement or the EDSI

rules; however, she acknowledged on cross-examination that she

received a copy of the Agreement on December 1, 1997 to review,

and thereafter received a copy of the referenced rules to keep.

’ If the undersigned were the fact finder, | would not

credit Ms. Floss’s recall of the circumstances of her hiring by

Ryan's, because here testimony was inconsistent and contradicted

by other more credible testimony and documentary evidence.

However, I do not believe that §4 permits the court to make such

credibility determinations, and therefore have assumed Ms. Floss’s

version to be true for the purposes of this Report and

Recommendation.

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District Court Report & Recommendation - 9/1/98

is clear and unambiguous. Plaintiff acknowledged reading and

comprehending the language in both documents which

Specified that she was required to sign the Arbitration

Agreement in order to be eligible for employment with

Ryan's, and that her failure to agree to arbitration would

preclude her employment.

Plaintiff's argument that the query asking whether she

wisned to be an "Adjudicator" is ambiguous is not persuasive.

The term as used in the context of the sentence in which it is

placed as well as the sentence directly below it, together with

its spacial placement on the Arbitration Agreement form,

permits no ambiguity. Moreover, even if the plaintiff's

education somehow caused her to view the phrase as

ambiguous as used in the Agreement itself, any ambiguity

would have been quickly resolved by reference to the

accompanying Rules and Procedures, which the plaintiff

apparently failed to read.

Plaintiff's allegation that Mr. Santorelli lied to her by

misrepresenting the meaning of the query asking whether she

wanted to serve as an "Adjudicator" for purposes of deciding

disputes under the Arbitration Agreement does not amount to

fraudulent inducement, because any reliance by Ms. Floss was

not reasonable. The alleged misrepresentation directly

conflicted with the language of the Arbitration Agreement,

which the court finds to be clear and unambiguous. See e.g.

Cohen, 841 F.2d at 285. Whether under federal or Kentucky

law, "negligence in failing to read the contract prevents any

reliance on oral representations at the time of the signing."

Cline v. Allis-Chalmers Corp., 690 S.W.2d 764, 765 (Ky.

Ct. App. 1985); Cecil v. Cecil, 712 S.W.2d 353, 355 (Ky.

Ct. App. 1986). Although the plaintiff argues that the

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District Court Report & Recommendation - 9/1/98

employer is an "authority figure" on which she legitimately

relied, the plaintiff is far from illiterate, and the parties

enjoyed no fiduciary or other special relationship which would

entitle the plaintiff to rely on a representation of Ryan's which

contradicted the plain language of the contract.

IV. CONCLUSION

Accordingly, for the reasons stated herein, IT IS

RECOMMENDED THAT the plaintiff's claim of fraudulent

inducement be rejected by the court as a matter of law, and

that the Arbitration Agreement be enforced.

OBJECTIONS to this report and recommendation must

be filed with the Clerk of Court within ten (10) days of the

date of service of the same or further appeal is waived. United

States v. Walters, 638 F.2d 947 (6th Cir. 1981), Thomas v.

Arn, 474 U.S. 140 (1985). Poorly drafted objections, general

objections or objections that require a judge's interpretation

snould be afforded no effect and are insufficient to preserve

the right of appeal. See Howard v. Secretary of Health and

Human Services, 932 F.2d 505, 509 (6 Cir. 1991). A party

may file a response to another party’s objections within ten

(10) days after being served with a copy thereof. Rule 72(b),

Fed.R.Civ.P.

This the 1“ day of September, 1998.

/s/

Gregory Wehrman

United States Magistrate Judge

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APPENDIX E

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

[Filed July 14, 2000]

Nos. 99-5099/5 187

99-5099

Sharon Floss,

Plaintiff-Appellant,

¥.

Ryan’s Family Steak Houses,

Inc., et al.,

Defendants-Appellees.

99-5187

Kyle Daniels,

Plaintiff-Appellee,

V.

Ryan’s Family Steak Houses,

Inc.,

Defendant-Appellant.

4la

Nee ee eee eee eee ewe ee eae es GS

ORDER

BEFORE MARTIN, Chief Judge; SUHRHEINRICH,

Circuit Judge; and GWIN,” District Judge.

The court having received a petition for rehearing en

banc, and the petition having been circulated not only to the

original panel members but also to all other active judges of

this court, and no judge of this court having requested a vote

on the suggestion for rehearing en banc, the petition for

rehearing has been referred to the original panel.

The panel has further reviewed the petition for

rehearing and concludes that the issues raised in the petition

were fully considered upon the original submission and

decision of the cases. Accordingly, the petition is denied.

ENTERED BY ORDER OF THE COURT

/s/

Leonard Green, Clerk

Hon. James S. Gwin, United States District Judge for

the Northern District of Ohio, sitting by designation.

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