Hooters of America, Inc. v. Phillips
39 F.Supp.2d 582 (1998)
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Rule of Law:
An employment arbitration agreement is unenforceable if it is unconscionable, illusory, and violates public policy by stripping an employee of substantive rights and remedies guaranteed by federal anti-discrimination statutes. Such an agreement is particularly unenforceable when its one-sided and unfair procedural rules are concealed from the employee at the time of signing.
Facts:
- Annette Phillips was employed as a server at a Hooters restaurant in Myrtle Beach, South Carolina, operated by Hooters of Myrtle Beach (HOMB) and affiliated with Hooters of America, Inc. (HOA).
- In November 1994, HOA implemented a mandatory Alternative Dispute Resolution (ADR) program, including binding arbitration, for all employees.
- At a meeting where the program was introduced, employees, including Phillips, were presented with an arbitration agreement but were not provided with a copy of the actual arbitration rules and procedures.
- On November 25, 1994, and again on April 23, 1995, Phillips signed the agreement, which required her to arbitrate all employment-related disputes, including sexual harassment claims.
- On June 19, 1996, Gerald Brooks, the brother of Hooters' CEO, allegedly sexually harassed Phillips while she was working.
- Phillips reported the incident to management, who allegedly told her nothing could be done to correct Brooks' behavior.
- As a result of the incident and management's alleged inaction, Phillips submitted her written resignation on June 25, 1996, claiming constructive discharge.
Procedural Posture:
- Hooters of America, Inc. (HOA) filed a complaint in the U.S. District Court for the District of South Carolina seeking a declaratory judgment that the arbitration agreements signed by Annette Phillips were valid.
- HOA filed a motion for a preliminary injunction, which the court treated as a motion to compel arbitration of Phillips' individual claims under the Federal Arbitration Act (9 U.S.C. § 4).
- Phillips filed an answer and interposed a counterclaim against HOA and Hooters of Myrtle Beach (HOMB) for violations of Title VII, including sexual harassment and constructive discharge.
- Phillips' counterclaim also asserted a class action claim on behalf of similarly situated female employees challenging the enforceability of the arbitration agreements.
- HOA filed a motion to stay court proceedings on all claims pending arbitration under 9 U.S.C. § 3.
- The district court conducted limited discovery and held an evidentiary hearing on the factual issues related to the making and validity of the arbitration agreement.
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Issue:
Is an employment arbitration agreement, which incorporates by reference a set of one-sided and undisclosed procedural rules that strip an employee of substantive statutory rights, enforceable under the Federal Arbitration Act?
Opinions:
Majority - Currie, District Judge
No, the arbitration agreement is unenforceable because it is unconscionable, illusory, and contrary to public policy. The court found the agreement was invalid on several independent grounds. First, the agreement was unconscionable under South Carolina law due to the gross disparity in bargaining power and because its terms were so one-sided as to be oppressive; the rules limited statutory remedies, imposed unfair procedural burdens on the employee, and gave Hooters sole control over the list of approved arbitrators. Second, the agreement violated the public policy underlying Title VII because it did not allow for the effective vindication of statutory rights, as required by the Supreme Court's decision in Gilmer, by stripping Phillips of crucial remedies and a fair forum. Third, the agreement was an illusory contract lacking consideration because Hooters reserved the unilateral right to modify or cancel the rules at any time without notice, meaning it was not actually bound by its promise to arbitrate. Finally, the court concluded that severance of the offending provisions was not feasible because the rules were so pervasively unfair and riddled with conflicts that the court would have to rewrite the entire contract, which it is not permitted to do.
Analysis:
This case is a landmark example of a court's refusal to enforce a mandatory, employer-drafted arbitration agreement under the Federal Arbitration Act due to its profound substantive and procedural unfairness. The decision demonstrates that while federal policy favors arbitration, courts will act as 'gatekeepers' to ensure the arbitral forum provides a fair and effective means of vindicating statutory rights. It establishes a clear limit on employers' ability to craft one-sided arbitration systems, providing a framework for challenging such agreements on grounds of unconscionability, public policy, and illusoriness. The case reinforces the core principle from Gilmer that arbitration is a substitute for a judicial forum, not a vehicle for the wholesale waiver of substantive statutory rights.
