24 Hour Fitness|Contracts Are Deceptive

DALLAS (CN) - The 5th Circuit affirmed that binding arbitration provisions in 24 Hour Fitness' employee contracts are deceptive, and employees are not bound by them.

John Carey brought a class action against the health club operator, seeking unpaid overtime wages under the Fair Labor Standards Act.

The company claims its employee handbook declared such claims subject to mandatory arbitration, under the Federal Arbitration Act, and that class actions could not be brought.

But a three-judge panel of the 5th Circuit ruled that the binding arbitration provision "was illusory from the outset" because 24 Hour Fitness claimed the unilateral right to modify or terminate the arbitration provision at any time.

Writing for the Circuit, Judge Edward C. Prado found that "under Texas law, an arbitration clause is illusory if one party can 'avoid its promise to arbitrate by amending the provision or terminating it altogether.' In re 24R, Inc., 324 S.W.3d 564, 567 (Tex. 2010). Put differently, where one party to an arbitration agreement seeks to invoke arbitration to settle a dispute, if the other party can suddenly change the terms of the agreement to avoid arbitration, then the agreement was illusory from the outset."

Prado said the crux of the issue is whether 24 Hour Fitness has the power to make changes to its arbitration policy that have retroactive effect: changes that strip the right of arbitration from an employee who already has attempted to invoke it.

Prado found that the 5th Circuit has refused to enforce an arbitration agreement that was capable of being retroactively modified. (Morrison v. Amway Corp., 517 F.3d at 257.)

He found that where such provisions were deemed not illusory, there were two provisions in place - one stated that "no amendment shall apply to a Dispute of which the Sponsor had actual notice on the date of amendment"; the other stated that any termination of the arbitration program "shall not be effective until 10 days after reasonable notice of termination is given to Employees or as to Disputes which arose prior to the date of termination." (In re Halliburton Co., 80 S.W.3d 566, 569-570 (Tex. 2002).)

"Although 24 Hour Fitness is correct that it is necessary for an employer seeking to change the terms of an employment contract to prove notice and acceptance of those changes, it does not follow that these two steps are sufficient to make a contract non-illusory. Halliburton makes this clear. In that case, the court discussed the proposition that an employer must give notice and obtain its employees' acceptance of any changes to the terms of employment. 80 S.W.3d at 568. It also held that Halliburton had satisfied these requirements and that the plaintiff had accepted its imposition of a dispute resolution program as a matter of law. Id. at 569. If notice and acceptance were all that were required to make an arbitration agreement non-illusory, the court could have answered the question of illusoriness at once upon finding that Halliburton had satisfied those requirements. Instead, later in the opinion, the court embarked upon a completely separate discussion of whether the arbitration agreement was illusory. Id. at 569-70. Nowhere in that discussion did the court suggest that its earlier holding - that notice and acceptance of the change had occurred - was sufficient to answer that question, or even that it factored into the inquiry at all. Id. Instead, the court's analysis of whether the agreement was illusory dealt exclusively with the savings clause preventing any changes from having retroactive effect. Id. 24 Hour Fitness has not argued that the notice and acceptance requirements would prevent it from retroactively eliminating its arbitration policy, which is the critical inquiry for determining whether an agreement is illusory."

Since Dec. 7, 2011, 24 Hour Fitness has sued at least 39 former employees in Dallas Federal Court, seeking to compel arbitration for overtime pay claims.

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