Employer Loses Right to Arbitrate Due to Breach

Article excerpt

The 9th Circuit made clear on Dec. 6, 2005, in Brown v. Dillard's, Inc., 430 F.3d 1004, that when an employer enters into an arbitration agreement with its employees, it must participate in an arbitration commenced by the employee or lose its right to arbitrate.

Dillard's requires its employees to arbitrate employment-related claims under its "Fairness in Action Program." Stephanie Brown, a Dillard's employee, was fired for allegedly falsifying a time entry form. Claiming that her termination was wrongful, Brown filed a notice of intent to arbitrate, seeking actual damages, removal of negative statements about her termination from her personnel records, a letter of apology, and punitive damages. Dillard's refused to participate in the arbitration. Brown then filed suit in Los Angeles County Superior Court. At that point, Dillard's decided that it wanted to arbitrate so it removed Brown's suit to federal court and then moved to compel arbitration. The district court denied the motion, holding that the arbitration agreement was unconscionable and thus unenforceable under California law.

The 9th Circuit conditionally affirmed on a different ground, holding that when an employer enters into an arbitration agreement with its employees, it must itself participate in properly initiated arbitration proceedings or forego its right to compel arbitration.

The court found that Dillard's clearly breached its own arbitration agreement by not participating in the arbitration. Under general principles of California contract law, this breach deprived the company of the right to enforce that agreement. Thus, it could not compel Brown to comply with the arbitration agreement. The court explained that if it

allowed [Dillard's] to compel arbitration notwithstanding its breach of the arbitration agreement, we would set up a perverse incentive scheme. Employers like Dillard's would have an incentive to refuse to arbitrate claims brought by employees in the hope that the frustrated employees would simply abandon them. …