Arbitration Agreement Violates State Public Policy of Forum State and Thus Trumps Applicable State Law of Another State

In Flemma v. Halliburton Energy Servs., Inc., No. 33,353, ___ P.3d ___, 2013 N.M. LEXIS 172 (N.M. May 30, 2013), the New Mexico Supreme Court found that an arbitration agreement that would have required a workplace termination dispute to be arbitrated was unenforceable because the agreement was contrary to the public policy of the forum state, New Mexico.  In so holding, the Court reversed the determination of the New Mexico Court of Appeals in Flemma v. Halliburton Energy Servs., Inc., 269 P.3d 931 (N.M. Ct. App. 2011).  The plaintiff in this case, Mr. Edward Flemma had been an employee of Halliburton for twenty six years when he was terminated, the last two of which he spent working in New Mexico before being terminated in 2008. In Flemma, Defendant argued that this case was covered by its Dispute Resolution Program (“DRP”), which required arbitration of employment disputes. 

The Court was first called upon to “navigate the arterial corridors of our conflict of rules” to determine the applicable law.  2013 N.M. LEXIS 172 at *8.  As this matter involved a contractual dispute, New Mexico’s conflict of law rules, which track those in the Restatement (First) of Conflict of Laws, would normally dictate that the applicable law was the law of the place where the contract was formed.  In this case the contract at issue was a unilateral contract.  Halliburton alleged that it had mailed the DRP to Flemma on four occasions.  Id. at *4.  The first, second, and fourth mailings allegedly occurred while Flemma was working in Texas, while the third allegedly occurred while Flemma was working in Louisiana.  Id. at *4 - *5.  Each transmittal notified Flemma that continued employment with Halliburton constituted acceptance of the DRP. For the purposes of its conflict of law analysis, the Court focused solely on Flemma’s residence during the fourth mailing, Texas.  Halliburton argued that the DRP constituted a unilateral contract, which was formed by Flemma’s state of residence (Texas), where Flemma accepted the unilateral contract by continuing to work for Halliburton.   

After discussing these facts, the Court concluded that New Mexico’s conflict of law rules would select the law of the place of performance, Texas, as the law governing the enforcement of the unilateral contract at issue.  After determining that its normal choice of law rules would require the application of Texas law to the interpretation of the DRP, the Court noted that, under Texas law, a valid agreement to arbitrate existed between plaintiff and defendant.

But, the saga did not end there. Instead, the New Mexico Supreme Court found that the DRP was unconscionable, and therefore unenforceable, under New Mexico law.  The case turned, then, on whether public policy dictated that New Mexico law, rather than Texas law, be applied to the dispute.  To overcome New Mexico’s normal choice of law rules, a countervailing public policy interest must be “fundamental and separate from general policies of contract interpretation.” 

The Court found that the DRP violated New Mexico public policy because it was unconscionable under new Mexico law.  In so holding, the Court explained that the DRP was “unreasonably one-sided in that it favors [defendant] in the employment dispute” by allowing defendant to amend the terms of the agreement even after a claim accrues.  The Court also noted that defendant was required to give notice of any such amendments only to current, not former, employees, and concluded “[t]herefore, the employees most likely to use the DRP, i.e. terminated employees, would not even get notice of changes to the DRP, which could negatively affect their claims.”  Halliburton’s ability to “change the rules of the game just before it starts” rendered its promise to arbitrate illusory, and the resulting contract, unconscionable.  See also Salazar v. Citadel Commc’ns Corp., 90 P.3d 466 (N.M. 2006) (“Under general New Mexico contract law, an agreement that is subject to unilateral modification or revocation is illusory and unenforceable.”)  In so holding, the Court distinguished this case from that of Sisneros v. Citadel Broad. Co., 142 P.3d 34 (N.M. 2006), explaining that amendments to the agreement in Sisneros applied only to claims which had not yet accrued, not, as was the case here and in Salazar, to all claims.  Flemma, 2013 N.M. LEXIS 172 at *23.  

In reaching this conclusion, the Court relied, in part, on Al-Safin v. Circuity City Stores, Inc., 394 F.3d 1254 (9th Cir. 2005) and Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) for the proposition that unreasonably one-sided arbitration agreements are unconscionable.  In particular, the Court quoted with approval the reasoning of the Ninth Circuit in Ingle:

Although the agreement requires Circuit City to provide exiguous notice to its employees of termination or any modification, such notice is trivial when there is no meaningful opportunity to negotiate the terms of the agreement. By granting itself the sole authority to amend or terminate the arbitration agreement, Circuit City proscribes an employee's ability to consider and negotiate the terms of her contract. Compounded by the fact that this contract is adhesive in the first instance, this provision embeds its adhesiveness by allowing only Circuit City to modify or terminate the terms of the agreement. Therefore, we conclude that the provision affording Circuit City the unilateral power to terminate or modify the contract is substantively unconscionable.

Flemma, 2013 N.M. LEXIS 172 at *16-*17 (quoting Ingle, 328 F.3d at 1179).  The Court also noted that the Supreme Court of Appeals of West Virginia used similar reasoning to find an arbitration agreement unconscionable in State ex rel. Saylor v. Wilkes, 613 S.E.2d 914, 922 (W. Va. 2005) (“The terms of Petitioner's Agreement were not negotiable and clearly weighed in favor of EDSI [Employment Dispute Services, Inc.] and the companies with whom EDSI contracted to provide arbitration services. EDSI retained the right to unilaterally modify rules governing arbitration without input or notice to Petitioner before, during or after amendments are made.”).  As a result, the Court applied New Mexico law and declined to enforce the DRP. 

The Court concluded with a strong statement regarding the need to ensure that a valid arbitration agreement exists before ordering the arbitration of claims, especially “in the context of the imbalanced at-will employee-employer relationship”:

In the context of this case, we must ensure that the employee, who has apparently agreed to arbitrate employment-related disputes, has received consideration for this promise. This is particularly crucial where the employer's authority to terminate employment is the cause for the need for dispute resolution. Here, Halliburton made what appears to be a return promise to arbitrate, but a closer evaluation of its promise reveals that it only created the illusion of such a promise because it could amend the DRP or do away with it all together after Flemma's claim accrued. This type of illusory promise is insufficient consideration for Flemma's promise to arbitrate employment-related disputes, and it is patently unfair in the context of the imbalanced at-will employee-employer relationship.

While not addressed by the New Mexico Supreme Court, the lower Court reached another potentially significant issue in this case – the manner in which the DRP was transmitted to Flemma and whether Flemma’s behavior constituted assent to the DRP.  The DRP was transmitted by Halliburton to Flemma by regular, not certified, mail.  Under Texas law, there is a presumption that a correctly addressed, stamped, and mailed letter is received by the intended recipient.  Flemma, 269 P.3d at 936.  The lower court, however, found that under New Mexico law, proof of conscious assent to changes in an at-will employment relationship was “particularly crucial…where acceptance may be manifested by continuing in a routine activity such as continuing to go to work.”  Id. at 937 (internal quotations and citations omitted).  Consequently, the lower court found that, under New Mexico law, the employer is required to prove that an employee had “actual knowledge” of an offer and “actual knowledge” that continued employment constituted acceptance of the offer.  Id.  

In DeArmond v. Halliburton Energy Servs., Inc., 81 P.3d 573 (N.M. Ct. App. 2003) the New Mexico Court of Appeals employed this reasoning to conclude that Halliburton’s DRP was not binding on the plaintiff under New Mexico law, which it assumed applied.  Nevertheless, in this case, the New Mexico Court of appeals determined, over the spirited dissent of Judge Bustamante, that the actual knowledge requirement, which it characterized as an “evidentiary” requirement, did not reflect a public policy of New Mexico sufficient to override application of Texas law.  Judge Bustamante, dissenting, noted that this problem could easily have been avoided by requiring a signature or other proof, but, absent such evidence, declined to conclude that “simply continuing the ‘routine activity’ of going to work was proof that the employee had consciously assented to the contract.  Flemma, 269 P.3d at 946 (dissent) (internal citations omitted). 

Takeaways:

• While the opinion makes a passing reference to the existence of a forum selection clause in the DRP, the court does not specify which forum the clause specified.  It should have been Texas, and it should have been, at a minimum, a court of competent jurisdiction in Houston, where Halliburton is headquartered;
• Assuming a Texas forum selection clause, Halliburton ought to have moved to compel arbitration on its home court – a Texas court.
• There ought to have been a carefully crafted choice of law clause, making Texas the law of choice without regard to conflict of law principles.  The choice of law clause could have provided that employees agreed not to challenge the choice of law and that employees waived any public policy argument.
• Halliburton ought to have conformed its DRP to the reasoning of Sisneros, and not left itself vulnerable, even in a Texas court, to the argument that the DRP was unconscionable because Halliburton could unilaterally amend the terms of the DRP at any time prior to the initiation of an action, even with respect to a claim that had already accrued.
• Understanding that Halliburton employees are scattered amongst several states, one wonders, as did Judge Bustamante, if it could not have obtained “consent”, rather than by snail-mail, by using a “click wrap” agreement to the effect that plaintiff had read, understood, and agreed to its terms. 

Please be sure to visit our website at http://RobertBFitzpatrick.com