Arbitration clauses are intended to keep parties bound by contract out of court by requiring that all contract disputes be settled by arbitration. The benefits of such clauses are that arbitration is usually much faster and cheaper, and the outcome is confidential, all of which has led to arbitration clauses creeping into more types of contracts — especially employment contracts. A good example from the sports and recreation industry of how the courts treat arbitration clauses is the case of Amateur Athletic Union v. Augustus Bray, 2016 Tex. App. LEXIS 7044.
BRUSH WITH THE LAW
In August 2012, Augustus Bray, a volunteer for the AAU, a nonprofit volunteer sports organization, was working at an AAU-sponsored track meet in Houston. Bray was assigned to the Jury of Appeals, which resolves any protests lodged during the track meet. While Bray was sitting in the press box, a woman attempted to squeeze past him and Bray made contact with the woman's body.
As a result of the contact, meet director Charles Oliver told the woman to report it to the police department and file charges. In addition, Paul Campbell, director of the AAU Junior Olympics event, allegedly made a statement that Bray was being charged with sexual assault and, in accordance with AAU policies, his AAU membership was to be immediately terminated. Police arrested Bray and escorted him from the track meet. Bray was charged with the criminal offense of assault by contact, but the charge was later dismissed.
Bray submitted written complaints to the AAU National Board of Review alleging that Oliver's and Campbell's conduct violated AAU rules. The board dismissed Bray's complaint. Bray contended that the board failed to investigate his complaints properly before dismissing them and appealed the board's dismissal to the AAU National Board of Appeals, which sustained the dismissal.
After exhausting the administrative appeals process with the AAU, Bray filed suit against Campbell and Oliver alleging claims of negligence, intentional infliction of emotional distress, and defamation. In particular, Bray alleged that Campbell and Oliver were "acting in the scope of their employment and in furtherance of AAU's business," and that the AAU was liable for their conduct.
In response to Bray's lawsuit, the AAU and the individual defendants filed a motion to have the case dismissed and compel arbitration under the AAU National Policies.
The AAU National Policies contain a binding arbitration provision, under "Membership Policies," which is set forth in bold capital letters, underlined, and conspicuously placed on the first page. The clause states, "BY APPLYING FOR AAU MEMBERSHIP... OR UPON ENTERING ANY AAU EVENT, THE APPLICANT/MEMBER/ENTRANT AND THE AAU AGREE TO SUBMIT ALL CIVIL DISPUTE(S) TO BINDING ARBITRATION."
The arbitration agreement states that the parties agree to submit the dispute to an arbitrator pursuant to American Arbitration Association (AAA) rules, the Federal Arbitration Act (FAA), and the Arbitration Code of Florida, where the AAU national office is located. The agreement also contains a forum-selection clause requiring that arbitration be conducted in the county where the AAU's national office is located.
In opposing the motion to compel arbitration, Bray asserted the arbitration clause is not a valid and enforceable agreement because: (1) neither he nor any of the individual defendants are signatories to the arbitration agreement; (2) his tort claims fall outside the scope of the arbitration agreement because they stand apart from the contract, i.e., the AAU National Policies and Code; (3) the arbitration agreement is illusory because the AAU can avoid its obligation to arbitrate by unilaterally amending or terminating the agreement without prior notice; and (4) the agreement is unconscionable because it imposes excessive fees and travel costs, and provides insufficient remedies by prohibiting exemplary damages.
After the trial court ruled in favor of Bray and denied the motion to compel arbitration, the AAU appealed. On appeal, the court held that in order to find in favor of the AAU and compel arbitration under the Federal Arbitration Act, the AAU had to establish: (1) the existence of a valid and enforceable agreement to arbitrate, and (2) that the claims at issue fall within the scope of the arbitration agreement. However, even if the AAU was able to meet its obligation, Bray could still win if able to demonstrate some affirmative defense to enforcement of the arbitration agreement.
COVERED BY THE CODE
In rejecting Bray's first argument that the arbitration agreement contained in the AAU National Policies and Code was not signed and was therefore invalid and unenforceable, the Court of Appeals held that — while generally parties must sign an arbitration agreement before being bound by it — neither the FAA nor Texas law requires that an arbitration agreement be signed as long as it is in writing and agreed to by the parties. Therefore, since the arbitration agreement is contained in the AAU National Policies and incorporated into the AAU Code, and Bray and the others expressly agreed to be bound by such policies in their annual membership applications, which they did sign, the court found that there was a valid or enforceable agreement to arbitrate.
Second, the court ruled that since all the claims raised by Bray arose out of actions taken by individuals in their roles as AAU officers, the claims fall within the scope of the arbitration agreement contained in the AAU National Policies and Code.
Since the AAU was able to meet its burden and establish the existence of both a valid and enforceable agreement to arbitrate, the court next considered whether Bray had provided any valid defenses against enforcement of the otherwise valid arbitration agreement.
In rejecting the two defenses raised by Bray (that the agreement was illusory and unconscionable), the court first held that an arbitration clause is only illusory when one party can avoid its promise to arbitrate by amending the provision or terminating it altogether. In looking at the AAU's arbitration clause, the court found that since the arbitration agreement was not a stand-alone contract, but rather part of a much broader underlying contract (the AAU National Policies and Code), the agreement was not illusory. The court also noted that since Bray had repeatedly renewed his AAU membership and enjoyed the benefits and bore the obligations of such membership for more than 30 years, there was sufficient consideration and mutuality of obligation for the arbitration agreement. Therefore, the agreement is not illusory.
As for Bray's second claim that the arbitration agreement was unconscionable due to its prohibition against the recovery of punitive or exemplary damages, the court upheld Bray's argument. In particular, the court held that since the portion of the arbitration agreement prohibiting punitive damages eliminates a statutory remedy that is available as a matter of public policy upon proof of malicious conduct, that provision is unconscionable and unenforceable. However, because of the arbitration agreement's severability clause, the court held that only the provision prohibiting punitive damages needed to be severed from the agreement, and that the remainder of the agreement was still valid and enforceable.
EFFECTIVE, IF FAIR
As the Court of Appeals decision in AAU v. Bray illustrates, arbitration clauses can be a very effective tool for sport and recreation administrators in keeping employment and other disputes out of court.
It must be noted that arbitration agreements are nothing new in sports. Professional sports leagues routinely mandate that its officers and athletes submit to mandatory arbitration — the NFL and its handling of "Deflategate" is one recent example. However, while mandatory arbitration is not necessarily a bad thing for employees, it is important that the process is handled fairly and with considerable due process, and that all agreements comply with AAA rules and the FAA.
In addition, jurisdictional clauses should be used with care. For example, the AAU agreement required that all arbitrations be done in the AAU's home state of Florida. If the costs imposed by an arbitration agreement are excessive and effectively prevent a party from asserting his or her rights in an arbitration proceeding, the court will void the arbitration agreement.
Attorney John Wolohan is a professor of sports law in the David B. Falk College for Sport and Human Dynamics and an adjunct professor in the College of Law at Syracuse University, where Eric Centner is a third-year student.
This article originally appeared in the January | February 2017 issue of Athletic Business with the title "Assault case triggers court arguments over arbitration clause" Athletic Business is a free magazine for professionals in the athletic, fitness and recreation industry. Click here to subscribe.