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Employees, Contracts, and a Rare Arbitration Denial

| Feb 1, 2021 | Firm News |

Although I’ve written a good bit recently about arbitration clauses and the hazards that they can pose to workers in employment disputes, it isn’t the case that they are unbeatable in the correct circumstances. Workers (well, retirees technically) won an all-too-uncommon victory in the U.S. District Court of Southern Illinois on January 25, 2021 in the matter of Hensiek et al v. Board of Directors of Casino Queen Holding Company, Inc. et al. No. 3:20-CV-377-DWD

The dispute stems from claims by former employees against the Board of the company, as well as individual board members, regarding the management of the employee stock ownership plan (ESOP) that was set up as a sort of pension/employee ownership arrangement in 2012. The plaintiff’s actual claims are somewhat complicated, but they basically allege that the ESOP bought Casino Queen stock at inflated prices, leading to the plan taking on an unsupportable 170 Million dollar debt load. They further allege that the managers of the ESOP concealed the dire financial straits of the Casino from the ESOP beneficiaries until 2019, when they revealed that the total assets of the ESOP were 2.8 million. Effectively, the employees are saying that the only ones that really benefited from the arrangement were the prior owners of the casino who offloaded their shares at a premium, to the harm of the employee’s ESOP. These actions, they say, are in violation of the Employee Retirement Income Security Act (ERISA).

The Defendants had, understandably, a wide range of defenses to the suit, but the pertinent one here is that, in 2017, they decided to add language to ESOP agreement which mandated that any disputes be arbitrated, and that any right to a class action by the employees was waived. The ESOP managers added this restriction pursuant to a clause in the original language of the ESOP which stated that the board could make any modification to the ESOP that they decided was “expedient or proper.”

The court did not approve of this change. The law is very clear that arbitration clauses and class action waivers can be part of these plans, and even that they can force Plaintiff’s to individual arbitration even when there are ERISA violations alleged. However, in this case the court pointed out the Federal Arbitration Act, which governs such arrangements, only applies when there is a valid contract, and a valid contract requires consideration on both sides. While the original ESOP itself was a valid contract, the self-serving change in language by the board was totally unsupported by any additional benefit to the employees, resulting in a contract modification that was, in the words of the court, “at best, without necessary consideration, or at worst, illusory, and, in either case, unenforceable.” Hensiek et al v. Board of Directors of Casino Queen Holding Company, Inc. et al. No. 3:20-CV-377-DWD.

Given previous arbitration clause litigation, I wouldn’t be surprised if this decision is appealed. That said, its refreshing to see a decision that allows workers to pursue their claims in court, rather than having them shunted to individual arbitration. If there was financial wrongdoing here, the parties responsible should not be able to duck liability by unilaterally changing their contract with the injured parties.

Attorney Travis Dunn