Ted Kubala, Jr. v. Supreme Production Svc, Inc.

Case: 15-41507 Document: 00513602225 Page: 1 Date Filed: 07/20/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 15-41507 FILED
July 20, 2016
Lyle W. Cayce
Clerk
TED L. KUBALA, JR.,
Individually and on Behalf of All Other Similarly Situated,
Plaintiff–Appellee,
versus
SUPREME PRODUCTION SERVICES, INCORPORATED,
Defendant–Appellant.
Appeal from the United States District Court
for the Southern District of Texas
Before HIGGINBOTHAM, SMITH, and OWEN, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Ted Kubala brought a proposed Fair Labor Standards Act (“FLSA”) col-
lective action against his employer, Supreme Production Services, Incorpor-
ated (“Supreme”). After the action was filed but, according to Supreme, before
it had learned of the suit, the company announced a new policy requiring
employees to arbitrate employment disputes, including FLSA claims. The
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agreement indicated that an employee’s continued employment was expressly
conditioned on his acceptance of the terms of the agreement; it contained a
“delegation clause” that assigned to the arbitrator the power to make gateway
determinations as to the arbitrability of a specific claim.
Kubala continued employment and accepted payment for his work. The
district court denied Supreme’s motion to dismiss or compel arbitration.
Because the arbitration agreement is binding and contains a delegation clause
transferring the power to decide threshold questions of arbitrability to the
arbitrator, we reverse and remand and direct the district court to enter an
order compelling arbitration.
I.
Kubala and other employees were paid a base salary and an hourly
bonus for time spent working in the oilfields. Kubala’s suit, filed March 9,
2015, claimed that he and similarly situated workers were improperly denied
overtime pay. The suit is a proposed collective action, but no certification deci-
sion was entered before Kubala appealed, so he is the only appellant.
On March 11, 2015—two days after the suit was filed but ostensibly
before Supreme received notice—the company held a meeting at which it
announced a new arbitration policy to govern all employment-related disputes,
including in relevant part any claims under the FLSA. In addition to various
substantive terms, the policy contained a “delegation clause” stating that any
disputes as to the interpretation or applicability of the agreement are to be
resolved in the first instance by the arbitrator. The policy and accompanying
presentation indicated that an employee’s assent to the arbitration agreement
was a necessary condition of employment and that its effective date would be
the earlier of the date on which the employee signed the policy or March 13,
2015. Kubala did not sign the agreement after the meeting. Supreme offered
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evidence indicating that he relented the next day, but the district court never
entered a factual finding that Kubala did or did not eventually sign the policy.
Relying on this arbitration agreement (and specifically referencing the
delegation clause), Supreme moved for the district court either to dismiss
Kubala’s claims or to compel arbitration. Kubala opposed the motion, which
the court denied. It reasoned that there was no arbitration agreement, because
nothing in Supreme’s arbitration policy indicated an intent to arbitrate pre-
existing disputes. The court did not address Supreme’s contention that the
delegation clause transferred the power to decide threshold arbitrability issues
to the arbitrator. Supreme appeals under 9 U.S.C. § 16(a)(1)(C).
II.
We review de novo a ruling on a motion to compel arbitration. Carey v.
24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th Cir. 2012). Enforcement of
an arbitration agreement involves two analytical steps. The first is contract
formation—whether the parties entered into any arbitration agreement at all.
The second involves contract interpretation to determine whether this claim is
covered by the arbitration agreement. Ordinarily both steps are questions for
the court. Will-Drill Res., Inc. v. Samson Res. Co., 352 F.3d 211, 214 (5th Cir.
2003). But where the arbitration agreement contains a delegation clause
giving the arbitrator the primary power to rule on the arbitrability of a specific
claim, the analysis changes. See First Options of Chi., Inc. v. Kaplan, 514 U.S.
938, 942 (1995).
Ordinarily this type of dispute involves two layers of arguments—the
merits (does Kubala have a right to back pay?) and arbitrability of the merits
(must Kubala bring his claim for back pay in arbitration rather than in court?).
Id. The presence of a delegation clause adds a third: “Who should have the
primary power to decide” whether the claim is arbitrable. Id. Delegation
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clauses are enforceable and transfer the court’s power to decide arbitrability
questions to the arbitrator. Thus, a valid delegation clause requires the court
to refer a claim to arbitration to allow the arbitrator to decide gateway
arbitrability issues. Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68–69 (2010).
Thus, if the party seeking arbitration points to a purported delegation
clause, the court’s analysis is limited. It performs the first step—an analysis
of contract formation—as it always does. But the only question, after finding
that there is in fact a valid agreement, is whether the purported delegation
clause is in fact a delegation clause—that is, if it evinces an intent to have the
arbitrator decide whether a given claim must be arbitrated. Id. If there is a
delegation clause, the motion to compel arbitration should be granted in almost
all cases. 1
Supreme contends that the agreement contains a valid and enforceable
delegation clause. Thus, this appeal presents two issues: first, whether the
parties entered into a valid agreement to arbitrate some set of claims; and sec-
ond, whether that agreement actually does contain a delegation clause that
requires that this claim go to arbitration for gateway rulings on threshold
1 We have carved out a narrow exception to the Rent-A-Center rule: Where the argu-
ment for arbitration is “wholly groundless,” we refuse to enforce a delegation clause. See
Douglas v. Regions Bank, 757 F.3d 460, 464 (5th Cir. 2014). Such cases are exceptional, and
the rule in Douglas is not a license for the court to prejudge arbitrability disputes more prop-
erly left to the arbitrator pursuant to a valid delegation clause. So long as there is a “plausi-
ble” argument that the arbitration agreement requires the merits of the claim to be arbi-
trated, a delegation clause is effective to divest the court of its ordinary power to decide arbi-
trability. Id. at 463 (quoting Agere Sys., Inc. v. Samsung Elecs. Co., 560 F.3d 337, 340 (5th
Cir. 2009)). Thus, even where a party relies on Douglas to resist arbitration, the court should
not resolve the parties’ arbitrability arguments. Instead, it should look only to whether there
is a bona fide dispute on arbitrability. If there is, the claim must be referred to arbitration
for resolution of the arbitrability issue.
This exception is not relevant here, because Kubala has not briefed the Douglas excep-
tion and, in any event, could not persuasively posit that Supreme’s arguments for arbitration
are wholly groundless. See Yohey v. Collins, 985 F.2d 222, 224–25 (5th Cir. 1993) (stating
that issues not briefed on appeal are waived).
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arbitrability issues.
III.
The district court erroneously held that there is no arbitration agree-
ment. The court appears to have thought that the question at the first step of
the analysis is whether there is an agreement to arbitrate the claim currently
before the court. But as we have explained, the only issue at the first step is
whether there is any agreement to arbitrate any set of claims. Determining
whether that agreement covers the claim at bar is the second step. Thus, the
district court erred by engaging in close contract interpretation at the first
step, which focuses only on contract formation. The proper course is to exam-
ine only the formation issue, and it is obvious that these parties validly formed
an agreement to arbitrate some set of claims.
Whether they entered a valid arbitration contract turns on state contract
law. Carey, 669 F.3d at 205. They agree that Texas contract law governs.
Arbitration agreements between employers and their employees are broadly
enforceable in Texas. In re Poly-Am., L.P., 262 S.W.3d 337, 348 (Tex. 2008).
Kubala was not initially subject to an arbitration agreement; instead, it was
imposed while he was already employed on an at-will basis. Therefore, the
question is whether the arbitration agreement was a valid modification of the
terms of his employment. To demonstrate a modification of the terms of at-will
employment, the proponent of the modification must demonstrate that the
other party (1) received notice of the change and (2) accepted the change. In re
Halliburton Co., 80 S.W.3d 566, 568 (Tex. 2002). But acceptance need not be
anything more complicated than continuing to show up for the job and accept
wages in return for work. “[W]hen the employer notifies an employee of
changes in employment terms, the employee must accept the new terms or
quit. If the employee continues working with knowledge of the changes, he has
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accepted the changes as a matter of law.” Hathaway v. Gen. Mills, Inc.,
711 S.W.2d 227, 229 (Tex. 1986) (cited in Halliburton, 80 S.W.3d at 568). 2
Texas law is no different when the modification in question is an arbi-
tration requirement for employment-related disputes. The law allows an em-
ployer to impose an arbitration agreement as a term of continued employment
so long as it provides notice of the policy; as in Halliburton, see 80 S.W.3d
at 568–69, an at-will employee who continues working with notice of a new
arbitration policy is deemed to have accepted the policy as a matter of law.
Halliburton makes plain that this principle applies where the modification in
question is the addition of an arbitration agreement to the existing employ-
ment agreement.
Supreme has satisfied this requirement. It provided notice in the form
a meeting at which the policy was explained and employees (including Kubala)
were informed that acceptance was a condition of continued employment.
Kubala continued to come to work after the March 13 date of deemed accep-
tance. This is a nearly identical match for the facts in Halliburton, in which
the court determined that the agreement was valid and binding. See id. at 573.
We agree.
Kubala’s only responses are unpersuasive. First, adopting the district
court’s mistaken approach, Kubala attempts to conflate the first two prongs of
the contract-formation analysis. He therefore urges that the contract, properly
interpreted, does not cover his claim, so there is no agreement to arbitrate. As
explained above, these issues of contract interpretation do not factor into the
first step, because they do not go to contract formation. Second, Kubala
2Therefore, it does not matter whether Kubala signed the agreement, which explicitly
indicated that it would come into effect on a certain date if the employee continued to work.
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maintains that no contract was formed because he was not given sufficiently
advanced notice that the arbitration agreement would come into effect. We
will not consider that theory, because Kubala failed to present it to the district
court. See Little v. Liquid Air Corp., 37 F.3d 1069, 1071 n.1 (5th Cir. 1994)
(en banc) (per curiam). In sum, there is a valid arbitration agreement.
IV.
Because Supreme asserts that the agreement contains a valid delegation
clause, our analysis is initially narrow. If we determine that the agreement
does contain such a clause, the role of the federal courts is strictly limited―we
must refer the claim to arbitration absent some exceptional circumstance. If
the agreement does not contain a delegation clause, we must perform the
ordinary arbitrability analysis.
Because there is a valid delegation clause, we do not reach the arbitra-
bility dispute and instead remand with direction to the district court to refer it
to arbitration. The delegation clause reads as follows:
The arbitrator shall have the sole authority to rule on his/her own juris-
diction, including any challenges or objections with respect to the exis-
tence, applicability, scope, enforceability, construction, validity and
interpretation of this Policy and any agreement to arbitrate a Covered
Dispute.
That clause is strikingly similar to the clause in Rent-A-Center:
The Arbitrator, and not any federal, state, or local court or agency, shall
have exclusive authority to resolve any dispute relating to the interpre-
tation, applicability, enforceability or formation of this Agreement in-
cluding, but not limited to any claim that all or any part of this Agree-
ment is void or voidable.
Rent-A-Ctr., 561 U.S. at 66 (citation omitted). These clauses are almost iden-
tical. It inevitably follows that the clause in this case is a valid and enforceable
delegation clause. Just as in Rent-A-Center, see id. at 68–69, the parties agreed
that the arbitrator and not the court should be the decisionmaker on whether
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a given claim is arbitrable.
Kubala does not engage with this line of reasoning and authority. Nor
does he articulate any fallback argument for why, even if the agreement is
valid and the delegation clause is enforceable, there is some external reason
(under federal labor law or otherwise) that prevents his claim from being sent
to arbitration. Instead, he makes a variety of contract-interpretation argu-
ments designed to show that the arbitration agreement does not apply retro-
actively to claims filed before it went into effect. But those are precisely the
sort of issues that, in the presence of a valid delegation clause, we cannot
resolve. Thus, we do not opine on whether the agreement requires that the
merits of Kubala’s claim be arbitrated rather than tried in court. The only
issue now is who answers that question. It is plainly the right and responsi-
bility only of the arbitrator.
The order denying Supreme’s motion to dismiss for the purpose of com-
pelling arbitration is REVERSED, and this matter is REMANDED with dir-
ection for the district court to refer the dispute to arbitration.
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PATRICK E. HIGGINBOTHAM, Circuit Judge, concurring:
Ted Kubala sued Supreme for denying him overtime pay. Two days later,
Supreme presented him with a “take it or leave it” arbitration agreement.
Supreme now claims that that agreement’s delegation clause governs Kubala’s
preexisting suit.
Supreme’s claim has troubling implications. The Fair Labor Standards
Act (FLSA) affords employees a federal forum for their claims. 1 It is beyond
dispute that an employer may not fire an employee for filing a FLSA suit. 2
Similarly, an employer’s threat to discharge an employee who refuses to
withdraw a suit would sit uneasily with the law. 3 But what if a Texas employer
with no extant arbitration agreement, once notified of an employee’s FLSA
suit, threatens to fire the employee unless he agrees to arbitrate the suit? Its
threat would coerce the plaintiff into relinquishing his FLSA-given right to
decision by an independent judiciary for private decision by appointed private
1 29 U.S.C. § 216(b).
2 Id. § 215(a)(3); see LeCompte v. Chrysler Credit Corp., 780 F.2d 1260, 1263-64 (5th
Cir. 1986); Goldberg v. Bama Mfg. Corp., 302 F.2d 152, 154 (5th Cir. 1962). Of course, an
employee’s right to be free from retaliation under the FLSA and similar statutes is unrelated
to the merit of her suit. Indeed, the phenomenon of employment discrimination suits falling
away on the merits only to rise again as retaliation claims is commonplace. See generally
Vadie v. Mississippi State Univ., 218 F.3d 365, 374 & n.24 (5th Cir. 2000); Romella Janene
El Kharzazi et al., Retaliation – Making it Personal, EQUAL EMPL. OPPORTUNITY COMM’N,
https://www.eeoc.gov/laws/types/retaliation_considerations.cfm (“[R]etaliation has been the
most frequently alleged basis of discrimination in the federal sector since fiscal year 2008. In
addition, the number of discrimination findings based on a retaliation claim has outpaced
other bases of discrimination. . . . In a large number of these cases, it is common for an original
discrimination allegation (on a basis other than retaliation) [to] fail to establish a violation
of the law, but the subsequent retaliation allegation results in a discrimination finding.”).
3 Cf. Brandon v. Sage Corp., 808 F.3d 266, 271 (5th Cir. 2015) (in a Title VII case,
entertaining the “possibility that a realistic, drastic pay cut threat might deter someone from
supporting a discrimination charge in certain circumstances,” giving rise to an actionable
retaliation claim).
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arbitrators, just as powerfully as if the employer had demanded he drop the
suit outright. With all deference to the judiciary’s recent and warm embrace of
arbitration, who decides and whether it is a public or private proceeding
matters a great deal, arriving on stage as it does redolent with large concerns
attending a regime of contracting out justice – when consent so often must be
blind to inequality of bargaining power.
In my view, neither the FLSA nor Texas’s sanction of “take it or leave it”
employment agreements easily suffer such a threat, and an arbitration
agreement exacted through one is of questionable validity. I do not discern a
contrary view in the Supreme Court’s arbitration jurisprudence, nor do I read
our opinion to reach this issue. Indeed, Supreme insists it was unaware of
Kubala’s suit until well after the arbitration agreement became effective, and
Kubala offers no argument or evidence in opposition - only insinuations. That
aside, he briefs no arguments, FLSA-related or otherwise, specific to the
agreement’s delegation clause, which a sharply divided Court in Rent-a-Center
held is a separate and severable arbitration agreement, a decision we properly
apply with the force it commands. 4 Today, I only caution that we ought do no
more.
Given this, I agree that the arbitrability of Kubala’s suit must itself be
arbitrated, and concur in today’s well-stated opinion.
4 See Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 72-73 (2010).
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