Originally From: Carbonneau on Arbitration: Collected Essays

I. “TRIANGULAR” ARBITRATION AGREEMENT HELD UNENFORCEABLE

The U.S. Court of Appeals for the Seventh Circuit has ruled that an arbitration agreement entered into by an employee (at the behest of his employer) with an arbitration service provider is unenforceable because it contains an illusory promise under state contract law. In the court’s assessment, “[t]he contract [was]… hopelessly vague and uncertain as to the [service’s] obligation…. For all practical purposes, [the service’s] promise under this contract ‘makes performance entirely optional with the promisor.’” The contract also lacked consideration and mutuality of obligation and was, therefore, unenforceable. Penn v. Ryan’s Family Steak Houses, Inc., 269 F. 3d 753 (7th Cir. Oct. 17, 2001).

The facts of the case are an eloquent statement of the extraordinary lengths to which some business entities will go to deprive their lowerlevel employees of their basic legal rights. Ryan’s apparently had not been sufficiently reassured by the fact that it could lawfully impose an obligation to arbitrate unilaterally upon its employees either as a mandatory condition of employment or of continued employment. Fearing perhaps that courts would eventually reverse the legality of that practice, Ryan’s entered into a agreement with Employment Dispute Services (EDS), a specialized arbitration service-provider. The purpose of the contract was “to have EDS provide an arbitration forum for all employment-related disputes between Ryan’s and its employees.” Ryan’s then required its prospective employees to enter into a contract with EDS to use its services exclusively to resolve any employment disputes that arose with Ryan’s. The contract language emphasized that the contracting parties were the employee and EDS; Ryan’s was described as “a third-party beneficiary of the contract.” The “triangulation” or “stealth” factor presumably would make it more difficult for employees to challenge the fairness of the employer's ADR practices because they were no longer his and, as in the aftermath of Engalla and the fiasco with Kaiser Permanente, a professional, separate, outside agency administered the ADR or arbitration process. See Engalla v. Permanente Medical Group, Inc., 938 P. 2d 903 (Ca. 1997).