Moran v. Ceiling Fans Direct, Inc.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
F I L E D
September 6, 2007
No. 06-20810
Charles R. Fulbruge III
Clerk
JOSE MORAN; KELLY SIMMONS; and DAVID GOLLINGER
Plaintiffs-Appellees
v.
CEILING FANS DIRECT, INC.
Defendant-Appellant
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:06-CV-813
Before DEMOSS, DENNIS, and OWEN, Circuit Judges.
PER CURIAM:*
This case involves the validity and scope of an arbitration agreement. The
district court determined that (1) the defendant-employer did not give adequate
notice of its arbitration policy to its employees; (2) if it did give adequate notice,
the plaintiffs-employees did not accept the terms of the policy; and (3) if they did
accept the terms, the policy did not cover the Fair Labor Standards Act, 29
U.S.C. § 201, et seq. (“FLSA”) claims at issue. We also requested supplemental
briefing on the issue of jurisdiction. For the following reasons, we affirm.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 06-20810
I. BACKGROUND FACTS
Ceiling Fans Direct, Inc. (“CFD”) is a Texas corporation that installs
ceiling fans in new residential construction projects in the Houston metro and
surrounding areas. Jose Moran and Kelly Simmons (collectively, “Appellees”)
formerly worked as ceiling fan installers for CFD.1
In the summer of 2005, several CFD employees sued CFD in federal court
for overtime compensation alleging that CFD mis-classified them as exempt
employees under the FLSA. In December of 2005, the United States
Department of Labor (“DOL”) initiated an investigation and filed an FLSA
lawsuit on August 30, 2005. The suit eventually settled.
On December 28, 2005, Appellees attended a meeting with various other
employees to discuss changes in pay rates, service calls, and the new CFD
arbitration policy. At the end of the meeting, President and General Manager
Darrell Ellefson (“Ellefson”) mentioned that CFD was instituting a policy
requiring arbitration for all employment-related disputes. The parties have
different accounts of this meeting. According to CFD, Ellefson personally
handed out a copy of a document entitled “Notice to All Employees of Ceiling
Fans Direct, Inc. of Dispute Resolution Program” (“Notice”) to each individual
employee. According to Appellees, copies of the Notice were sitting on a table,
and they were invited to take one and read it.
The Notice provided in pertinent part:
EMPLOYEE AND CFD AGREE THAT ANY [AND] ALL
DISPUTES ARISING OUT OF OR RELATING TO ANY ASPECT
OF EMPLOYEE’S EMPLOYMENT, COMPENSATION, OR
1
On May 18, 2006, the district court granted a motion for leave to file an
amended complaint to add David Gollinger (“Gollinger”) as a party-plaintiff. Gollinger
was an employee at CFD prior to December 28, 2005. Because Gollinger was not
employed by CFD when it instituted its arbitration policy, Gollinger’s claims are not
covered by the policy.
2
No. 06-20810
TERMINATION OF EMPLOYMENT WITH CFD . . . SHALL BE
EXCLUSIVELY ARBITRATED AS PROVIDED BELOW.
It also stated that any employee who returned to work after December 28, 2005
would be deemed to have accepted the terms of the policy. However, this
provision was never read nor explained to the employees at the meeting. In fact,
at that point, Ellefson had not even read the policy. In response to one question,
he simply stated, “Yeah, this paper means you can’t sue this ni**er!” As Ellefson
was aware, many of the employees, including Appellees, did not take a copy of
the Notice. When some employees complained that they would not sign
anything, Ellefson informed them that it did not matter, that they did not have
to sign anything, but that they still could not sue CFD. A few days later,
however, Simmons told Ellefson that he would not sign the policy and Ellefson
told him not to worry about it.
In January of 2006, CFD issued a new employee handbook that included
another copy of the arbitration agreement and a signature page entitled,
“Acknowledgment by Employee,” which read “I hereby state, I have read and
understand the preceding ‘Employee Handbook’ and have agreed to abide by the
Dispute Resolution Program.” However, it is undisputed that CFD did not
require any signatures and that no employee, including Ellefson, actually signed
the handbook. In contrast, each employee was required to initial their
agreement to the CFD policy on drug and alcohol use at the workplace.
Although the handbook indicated that “CFD retains the right to amend, modify
or discontinue this dispute resolution program through additional written notice
at any time,” Ellefson circulated a memo dated April 27, 2006 indicating that it
was “not true” that the arbitration policy “can be changed or discontinued at
anytime [sic].”
On March 9, 2006, Appellees filed suit against CFD for unpaid overtime
wages and retaliation under the FLSA. Shortly thereafter, Ellefson approached
3
No. 06-20810
various employees and informed them that CFD was in financial trouble, that
the lawsuit would be a “death blow” to the company, and that CFD would take
care of its employees for the overtime compensation it owed. At no point did he
state that the FLSA claims were subject to the arbitration policy. Appellees
subsequently resigned from employment with CFD.
On April 3, 2006, CFD filed a motion to compel arbitration. The district
court denied the motion, concluding that (1) CFD did not give adequate notice
of its arbitration policy to its employees; (2) if it did give adequate notice,
Appellees did not accept the terms of the policy; and (3) if they did accept the
terms of the policy, the policy did not cover the FLSA claims at issue. CFD filed
a timely notice of appeal.
II. STANDARD OF REVIEW
This court reviews de novo the legal question of subject matter jurisdiction.
Meredith v. Louisiana Fed’n of Teachers, 209 F.3d 398, 402 (5th Cir. 2000). This
court also reviews a district court’s denial of a motion to compel arbitration de
novo, using the same standard as the district court. Waste Mgmt., Inc. v.
Residuos Industriales Multiquim, S.A. de C.V., 372 F.3d 339, 341 (5th Cir. 2004)
(citing Texaco Exploration & Prod. v. AmClyde Engineered Prods., 243 F.3d 906,
909 (5th Cir. 2001)); Harvey v. Joyce, 199 F.3d 790, 793 (5th Cir. 2000). Finally,
this court reviews a district court’s interpretation of a state law de novo. Am.
Bankers Ins. Co. of Florida v. Inman, 436 F.3d 490, 492 (5th Cir. 2006) (citing
Concise Oil & Gas P’ship v. La. Intrastate Gas Corp., 986 F.2d 1463, 1471 (5th
Cir. 1993)).
III. JURISDICTIONAL ANALYSIS
Based on this court’s previous decisions in Cerveceria Cuauhtemoc
Moctezuma S.A. de C.V. v. Montana Beverage Co., 330 F.3d 284 (5th Cir. 2003)
(per curiam) and May v. Higbee Co., 372 F.3d 757 (5th Cir. 2004), this court
requested supplemental briefing on the issue of jurisdiction. The parties agree
4
No. 06-20810
that the sole potential avenue for jurisdiction in this case lies in 9 U.S.C. § 16(a),
which states in pertinent part:
(a) An appeal may be taken from--
(1) an order--
(A) refusing a stay of any action under
section 3 of this title,
(B) denying a petition under section 4 of
this title to order arbitration to proceed
This court has stated that “section 16 reinforces the congressional policy in favor
of arbitration by making anti-arbitration decisions widely appealable even when
interlocutory, but making pro-arbitration decisions generally not appealable
unless final.” May, 372 F.3d at 761.
CFD moved the district court to compel arbitration under 9 U.S.C. §§ 3and 4, but the district court denied the motion. That decision would generally
be immediately appealable under 9 U.S.C. § 16(a). Appellees, however, point the
court’s attention to Cerveceria. In Cerveceria, the parties entered into a
distributorship agreement that did not contain an arbitration agreement itself,
but did incorporate by reference the entirety of the Texas Beer Industry Fair
Dealing Law (“BIFDL”), TEX. ALCO. BEV. CODE § 102.71, et seq., which provides
in pertinent part that certain disputes “may, at the option of either [party]” be
submitted to arbitration. A dispute arose between the parties, the plaintiffs filed
suit, and the defendant moved to compel arbitration. The district court refused
to compel arbitration, finding that there was no binding agreement to arbitrate.
This court agreed and further concluded that the absence of any such agreement
deprived the court of appellate jurisdiction. Cerveceria, 330 F.3d at 287.
In May, however, this court characterized Cerveceria as “an exceptional
case.” 372 F.3d at 761. This court recognized that “there may well be cases in
which an attempt to compel arbitration is so meritless that it fails to trigger the
advantages of the statute authorizing the interlocutory appeal. But any such
5
No. 06-20810
cases would be the exception, the rare exception.” Id. at 762. This court further
recognized that a broad reading of Cerveceria’s jurisdictional holding would
conflict with prior decisions of this circuit and the decisions in other circuits.2
Id. at 763 & n.10. We agree that Cerveceria is an “exceptional” case in which the
attempt to compel arbitration was so meritless that it failed to trigger the
advantages of § 16(a). Indeed, Cerveceria involved a contract, that incorporated
a statute, that contained a provision, that provided only for permissive
arbitration. 330 F.3d at 287. In contrast, CFD has provided an actual
agreement that contains a mandatory arbitration clause. We conclude that §
16(a) confers jurisdiction over this appeal notwithstanding the district court’s
opinion that the documents at issue failed to constitute a binding agreement to
arbitrate. See Iberia Credit Bureau Inc. v. Cingular Wireless LLC, 379 F.3d 159,
165 (5th Cir. 2004).
IV. MERITS ANALYSIS
CFD argues that the district court erred in finding that CFD did not give
adequate notice of its arbitration policy and that the district court further erred
in finding that even if adequate notice was given, Appellees did not accept the
terms of the policy. “Arbitration is ‘a matter of contract and a party cannot be
required to submit to arbitration any dispute which he has not agreed so to
submit.’” PaineWebber Inc v. The Chase Manhattan Private Bank (Switzerland),
206 F.3d 453, 462 (5th Cir. 2001) (quoting United Steelworkers of Am. v. Warrior
& Gulf Nav. Co., 363 U.S. 574, 582 (1960)). Courts conduct a two-step inquiry
in determining whether parties should be compelled to arbitrate a dispute.
2
See, e.g., Am. Heritage Life Ins. Co. v. Lang, 321 F.3d 533, 536-39 (5th Cir. 2003);
Chailland v. Brown & Root, Inc., 45 F.3d 947, 949 & n.5 (5th Cir. 1995); Tays v. Covenant Life
Ins. Co., 964 F.2d 501 (5th Cir. 1992); see also Specht v. Netscape Communications Corp., 306
F.3d 17, 25-26, 28-30 (2d Cir. 2002); TechnoSteel, LLC v. Beers Constr. Co., 271 F.3d 151,
161-64 (4th Cir. 2001); PCS Nitrogen Fertilizer, L.P. v. Christy Refractories, L.L.C., 225 F.3d
974, 976, 978 (8th Cir. 2000); Sandvik AB v. Advent Int’l Corp., 220 F.3d 99, 102-04 (3d Cir.
2000); Telecom Italia, SpA v. Wholesale Telecom Corp., 248 F.3d 1109, 1114 (11th Cir. 2001).
6
No. 06-20810
Washington Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 264 (5th Cir. 2004).
First, the court determines whether the parties agreed to arbitrate the dispute
by evaluating whether there is a valid agreement to arbitrate and whether the
dispute falls within the scope of the agreement. Am. Heritage Life Ins. Co. v.
Lang, 321 F.3d 533, 536 (5th Cir. 2003) (citation omitted). Second, if the court
finds that the parties agreed to arbitrate, it next determines whether any federal
statute or policy renders the claims nonarbitrable. Bailey, 364 F.3d at 264.
“Although there is a strong federal policy favoring arbitration, this federal
policy favoring arbitration does not apply to the determination of whether there
is a valid agreement to arbitrate between the parties.” Will-Drill Res., Inc. v.
Samsom Res. Co., 352 F.3d 211, 214 (5th Cir. 2003) (internal quotations and
citations omitted). Instead, the question of whether the parties agreed to
arbitrate a dispute is governed by state contract law. First Options of Chicago,
Inc. v. Kaplan, 514 U.S. 938, 944 (1995).
Under Texas law, which is applicable in this case, an employer may
change the terms of an at-will employment contract if he or she gives notice of
the change and the employee accepts the change. In re Halliburton Co., 80
S.W.3d 566, 568 (Tex. 2002) (citing Hathaway v. Gen. Mills, Inc., 711 S.W.2d
227, 229 (Tex. 1986)). “[T]o prove notice, an employer asserting a modification
must prove that he unequivocally notified the employee of definite changes in
employment terms.” Hathaway, 711 S.W.2d at 229 (emphasis added). The
employee must have knowledge of the proposed modification, which includes not
only knowledge of the nature of the change, but also knowledge of the certainty
of its imposition. Id. (citations omitted). When an employer notifies an
employee of changes to the at-will employment contract and the employee
continues working with knowledge of those changes, the employee has accepted
those changes as a matter of law. Id. (citation omitted).
7
No. 06-20810
Based on the Texas Supreme Court’s decision in Hathaway, in which the
court refused to find a valid contract modification, we agree that there was no
valid agreement between the parties to arbitrate this dispute. In Hathaway, the
issue on appeal was whether the parties agreed to modify their employment-at-
will contract to lower commission rates. 711 S.W.2d at 228. The employee
testified that he disagreed with the rate change. Id. He further testified that
his employer told him to discuss the change with the regional sales manager and
to not worry about the change because the regional sales manager would “take
care of the situation.” Id. A month later, the employee received a letter proposal
containing the new rates. Id. He did not sign the letter and testified that he
was told by his employer not to do so because the regional sales manager would
talk to him about the matter. Id. Based on these facts, the Texas Supreme
Court concluded that the employer did not conclusively establish unequivocal
notification, and without such proof, the employee’s continued employment
under protest did not equal acceptance as a matter of law. Id. at 229.
Here, when CFD first introduced the new arbitration policy, Ellefson did
not read it, did not explain it, did not mention that continued employment would
be deemed as acceptance, and was aware that many employees, including
Appellees, did not take a copy of it. When CFD issued the new employee
handbook, which contained a form for employees to sign acknowledging the
validity of the arbitration policy, CFD did not require its employees to sign it,
even though it did require the employees to sign a form concerning CFD’s policy
on drug and alcohol use at the workplace. All the while, Ellefson repeatedly told
the employees, including Appellees, that CFD would take care of them and
specifically told Simmons, who refused to sign the arbitration policy, not to
worry about it. Ellefson also circulated a memo addressing the arbitration policy
that directly contradicted its terms. Like the situation in Hathaway, we
conclude that CFD did not conclusively establish unequivocal notification, and
8
No. 06-20810
without such proof, Appellees’ continued employment under protest did not
equal acceptance under Texas law.
CFD’s citation to Halliburton is unavailing. In Halliburton, the employee
had unequivocal notice of the proposed changes to the at-will employment
contract. 80 S.W.3d at 568-69. Moreover, the Texas Supreme Court
emphasized, “[t]his is not a case in which the written notice was contradicted by
other written or oral communications between the employer and the employee.”
Id. at 569. In contrast, Appellees did not receive unequivocal notice of the
arbitration policy and there were several contradictory written and oral
communications between Ellefson and Appellees.
CFD’s citation to In re Dillard Dept. Stores, Inc., 198 S.W.3d 778 (Tex.
2006) is also unavailing. In Dillard, the employee-plaintiff admitted that she
received and read the arbitration agreement, which conspicuously warned that
any employee was deemed to accept the policy by continuing her employment.
Id. at 780-81. In contrast, Appellees did not receive or read the arbitration
policy and there is no evidence that they were otherwise informed that they were
deemed to accept the policy by continuing their employment.3
CONCLUSION
For the foregoing reasons, the decision of the district court is affirmed.
AFFIRMED.
3
Because we conclude that CFD has not established unequivocal notice or acceptance,
we need not address the issues of whether the FLSA claims at issue would be covered under
the arbitration policy or whether any federal statute or policy renders the claims nonarbitrable.
See Bailey, 364 F.3d at 264.
9