Chapter 32 - § 32.5 • DEFENSES TO ARBITRATION

• Jurisdiction: Colorado

§ 32.5 • DEFENSES TO ARBITRATION

§ 32.5.1—Common Law Contract Defenses Generally

Following the U.S. Supreme Court's ruling in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the focus is no longer on whether employment claims may be arbitrated, but whether a valid agreement exists in the first place.

An arbitration agreement is a contract. See Gilmer, 500 U.S. at 24. The relationship between parties to the agreement is contractual, and the rights and liabilities of the parties are controlled by the law of contracts. See generally Am. Jur. 2d Alternative Dispute Resolution § 70 (1995). Colorado courts consistently have enforced arbitration agreements in the same manner as any other contract. See, e.g., Wales v. State Farm Mut. Auto Ins. Co., 559 P.2d 255, 257 (Colo. App. 1976); see also Allen v. Pacheco, 71 P.3d 375, 378 (Colo. 2003) (Colorado applies principles governing contract formation to determine whether parties have agreed to submit a claim to arbitration).

Section 2 of the FAA specifically provides that arbitration agreements are enforceable, "save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The U.S. Supreme Court has recognized that "courts should remain well attuned to well-supported claims that the agreement to arbitrate resulted from the sort of fraud or overwhelming economic power that would provide grounds 'for the revocation of any contract.'" Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 627 (1985). Thus, arbitration agreements generally are subject to the same defenses applicable to other contracts. Circuit City Stores, Inc. v. Adams, 279 F.3d 889, 892 (9th Cir. 2002). However, the defenses to enforcement of an otherwise valid arbitration agreement on state law grounds have been significantly curtailed in the wake of the Supreme Court's decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011).

In Concepcion and its progeny, the Court has made clear that only those state laws that apply to contracts generally, and not arbitration agreements specifically, are valid defenses to arbitration under the FAA. Id. at 563 U.S. 347 n.6; Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019). While defenses to arbitration that are found in traditional common law and apply equally to all contracts, such as fraud, duress, lack of consideration, and unconscionability, remain valid in the wake of Concepcion, other state law defenses directed squarely at arbitration agreements and not contracts in general are invalidated by the FAA. Concepcion, 563 U.S. at 339. Where state law prohibits the arbitration of claims on a wholesale basis, without regard to a valid agreement of the parties, such prohibition is preempted by the FAA. The preemption applies regardless of whether the state law provision is statutory or a judicial creation. Id. Moreover, under Concepcion, courts cannot rely on traditional state law defenses, such as duress or unconscionability, where more stringent standards apply to arbitration agreements as opposed to other forms of contract. Id. For a more detailed discussion of Concepcion and its holding in the context of class waivers, see § 32.4.8.

The question of arbitrability — that is, whether the parties agreed to arbitrate a particular dispute — is, absent an express agreement to the contrary, an issue for judicial determination. AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986).³⁹ The U.S. Supreme Court has clarified that, under the FAA, if an agreement to arbitrate delegates questions of arbitrability to the arbitrator, a district court will determine the enforceability of the delegation provision, but the arbitrator will determine the enforceability of the arbitration agreement as a whole. Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63 (2010); see also Urbanic v. Travelers Ins. Co., 2011 U.S. Dist. LEXIS 50629 (D. Colo. May 6, 2011) (applying Rent-A-Center in a dispute over the arbitrability of claims under the FMLA).

Employees may attempt to oppose the enforcement of arbitration agreements by arguing that the agreement was a contract of adhesion, unconscionable, illegal,⁴⁰ or fraudulently induced. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). The elements of these defenses will be governed by state law. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); see also Avedon Eng'g, Inc. v. Seatex, 126 F.3d 1279, 1283 (10th Cir. 1997). Appellate courts undertake a de novo review when considering a district court's order compelling arbitration. Moffet v. Life Care Centers of America, Inc., 187 P.3d 1140, 1143 (Colo. App. 2008). DMA Int'l, Inc. v. Qwest Commc'n Int'l, 585 F.3d 1341, 1344 (10th Cir. 2009).

Illusory Contracts

For example, in Dumais v. American Golf Corp., 299 F.3d 1216 (10th Cir. 2002), the district court held that conflicting provisions in the employment handbook allowed the employer to change the arbitration provision at will. Id. at 1218. The Tenth Circuit agreed, and held that an arbitration agreement allowing one party the unfettered right to alter the arbitration agreement's existence or its scope is illusory, and therefore, unenforceable. Id. at 1219; see also Stein v. Burt-Kuni One, LLC, 396 F. Supp. 2d 1211, 1215 (D. Colo. 2005). The court also rejected the employer's argument regarding a presumption favoring arbitration, stating that "[t]he presumption in favor of arbitration is properly applied in interpreting the scope of an arbitration agreement; however, this presumption disappears when the parties dispute the existence of a valid arbitration agreement." Id. at 1220.

The holding in Dumais has nonetheless been limited by more recent litigation. In re Cox Enters., Inc., 835 F.3d 1195 (10th Cir. 2016). That litigation involved a challenge to the arbitration provision of a broader service agreement that contained an arguably illusory arbitration clause. In finding that it was for the arbitrator, not the court to decide the whether or not the clause was illusory, the court noted that in order for the arbitration provision to be illusory, the entire service agreement, and not just the arbitration provision contained therein, must be illusory. Id. at 1211.

Moreover, Colorado's federal district court has found certain arbitration provisions unenforceable. For instance, in Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196 (D. Colo. 2001), the court found the arbitration agreement to be illusory because it bound the employee while withholding the power to interpret, modify, rescind, or supplement its terms unilaterally; unenforceable because it required its employees to share the costs of arbitration and limited hearing time periods and post-hearing briefs; and void as against public policy because it denied its employees the statutory right to seek attorney fees under Title VII. Id. at 1202-04. Furthermore, because the agreement contained no severability clause, the entire agreement was rendered unenforceable. Id. at 1205. Likewise, in Perez v. Hospitality Ventures-Denver LLC, 245 F. Supp. 2d 1172 (D. Colo. 2003), the court determined that the arbitration agreement was illusory because the employer reserved the unilateral right to modify the agreement, and unenforceable in its entirety, because it required the employees to pay a portion of the arbitration costs and did not contain a severability clause. Id. at 1174. In contrast, where an arbitration agreement allowed an employer, but not an employee, to seek a preliminary injunction, the agreement was not illusory where the provision was intended to prevent an employee from causing irreparable injury to the employer. See Pike's Peak Nephrology Assocs., P.C. v. Total Renal Care, Inc., 2010 U.S. Dist. LEXIS 42694, at *15-16 (D. Colo. March 30, 2010).

Following In re Cox Enters., Colorado's federal district courts have also begun shifting illusory arguments on contracts containing arbitration provisions to arbitrators for decision. See BigBen 1313 LLC v. Belcaro Group, Inc., 2018 U.S. Dist. LEXIS 151935 (D. Colo. Sept. 6, 2018).

Simply because the employer has a right to modify the terms of an employee handbook that contains an arbitration provision does not automatically ensure the contract is illusory and the arbitration provision therefore unenforceable. Colorado's federal district court has compelled arbitration where a handbook that included an arbitration provision required thirty days' notice before any changes were effective. Lumuenemo v. Citigroup, Inc., 2009 U.S. Dist. LEXIS 15654, at *13-14 (D. Colo. Feb. 12, 2009). The Lumuenmo court adopted the rationale from Hardin v. First Cash Financial Services, 465 F.3d 470 (10th Cir. 2006), which held that because the defendant could not alter the provision following "actual notice of a potential dispute or claim," the arbitration provision was not illusory. See also Roberts v. Cent. Refrigerated Serv., 2014 U.S. Dist. LEXIS 83695 (D. Utah June 18, 2014) (arbitration provision was contained in separate memorandum that fell outside scope of employee manual modification provision).

Unconscionability

In Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002), following the Supreme Court's remand, the Ninth Circuit found the arbitration agreement at issue to be both procedurally and substantively unconscionable under California law. First, the agreement was procedurally unconscionable because it was a contract of adhesion, in that it was drafted by the party with superior bargaining power (employer), which relegated to the employee the option of either adhering to its terms without modification or rejecting the contract entirely. Id. at 893. Also, the agreement was substantively unconscionable, in that it unilaterally forced employees to arbitrate all employment-related claims against the employer but did not require the employer to arbitrate its claims; limited the relief available to the employees; required...