Carey v. 24 Hour Fitness, USA, Inc

In Carey v. 24 Hour Fitness, USA, Inc. (5th Cir. 2012) 669 F.3d 202, the Fifth Circuit held that an unrestricted unilateral modification provision--granting the employer the right to revise, delete, or add to an arbitration agreement--rendered the agreement illusory. The court emphasized the need for a savings clause, explaining: "Although the employer 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. In re Halliburton Co. (Tex. 2002) 80 S.W.3d 566 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." (Carey, 669 F.3d at p. 207.) The Fifth Circuit rejected "the proposition that notice is all that is required to keep an arbitration agreement from being illusory." (Carey, supra, 669 F.3d at p. 208, fn. 2; see id. at p. 208 "notice is not sufficient to render an arbitration provision non-illusory ...".) In Carey, a contract change went into effect upon notice; there was no notice period. As the circuit court stated, "the critical issue" is whether the arbitration agreement " 'avoids application of ... amendments to disputes arising before notice.' " (Id. at p. 209, fn. 4.) The court answered that question in the negative and held that the agreement was illusory. In doing so, it relied on well-settled principles of Texas law: " 'While it is inferable that an amendment ... to the arbitration provision would not become effective until published, there is nothing to suggest that once published the amendment would be inapplicable to disputes arising, or arising out of events occurring, before notice.' " (Id. at p. 208.)