Missouri Supreme Court Invalidates Arbitration Agreement and Casts Doubt on Whether Continued Employment Constitutes Sufficient Consideration in Non-Compete Agreements

Late last month, the Missouri Supreme Court ruled in Baker v. Bristol Care that continued employment was insufficient consideration for enforcing an arbitration agreement.  The decision casts doubt on some arbitration agreements many employers have utilized to avoid costly and protracted court litigation with current and former employees.  The Court’s decision also strongly suggests that, if a non-competition agreement were challenged on the same grounds, it would also be found unenforceable.  In light of this decision, Employers should review both their arbitration and non-competition agreements.

The facts of the case are relatively simple.  When Bristol Care, Inc. (which manages long-term care facilities) promoted Carla Baker to a managerial position, it required her to sign both an employment and arbitration agreement.  The employment agreement provided that Baker’s employment would continue indefinitely, but permitted Baker to resign with 60 days’ notice or for Bristol Care to terminate her employment for a list of reasons.  The arbitration agreement required both Bristol Care and Baker to resolve disputes between them through arbitration rather than in court.  The arbitration agreement stated, in short, that Bristol Care could terminate Baker’s employment at any time with five days’ pay, and that Bristol Care reserved the right to amend, modify or revoke the arbitration agreement with 30 days’ notice to Baker.  Both Baker and Bristol Care signed the agreements, and Baker received her promotion.

Bristol Care later terminated Baker from her managerial position, after which Baker filed a class-action lawsuit in court for allegedly unpaid overtime hours.  Baker Care asked the court to require Baker to arbitrate her claims under the arbitration agreement, but the trial court refused, and the Missouri Supreme Court agreed that the arbitration agreement was unenforceable.

The Supreme Court found that because Bristol Care could terminate Baker’s employment at any time, Baker was an at-will employee.  It then made explicit what several lower courts had found: that continued employment alone was insufficient consideration for an arbitration agreement.  In this context “consideration” refers to a thing of value in exchange for a promise. Thus, the Missouri Supreme Court found that Bristol Care’s agreement to continue employing Baker was not a thing of sufficient value to enforce the arbitration agreement.  This holding is somewhat surprising given that Baker was not simply retained in her previous position, but rather received both a promotion and a raise upon signing the arbitration agreement.  The Court further found that Bristol Care’s agreement to arbitrate its own claims against Baker was not consideration because Bristol Care retained the right to modify the agreement with 30 days’ notice to Baker.  Finding insufficient consideration for the arbitration agreement, the Court held that Baker was not bound by it.  Bristol Care will now be required to litigate this class action overtime lawsuit in court.

After Baker v. Bristol Care, employers should review their arbitration agreements with employees to determine whether they need to provide additional consideration, and given the Missouri Supreme Court’s treatment of the terms of Bristol Care’s arbitration provision, employers should consider reviewing such agreements generally.

The Baker v. Bristol Care decision also casts doubt on whether non-competition agreements are valid if continued employment was the consideration for those agreements.  The Federal Arbitration Act (FAA) and United States Supreme Court decisions require states to treat arbitration agreements the same as all other contracts under state law.  Because the Missouri Supreme Court has now held that continued employment is insufficient consideration to support arbitration agreements, it stands to reason that in the future it will find continued employment insufficient consideration for other types of employer-employee agreements, or risk running afoul of the FAA.  Thus, although the Missouri Supreme Court’s decision did not address the issue, there is reason to believe that it may find that continued employment is insufficient consideration for non-compete agreements.  Just that conclusion was reached by the Kentucky Supreme Court in June of this year in the case of Creech v. Brown, 433 S.W.3d 345 (Ky. June 19, 2014); and the Missouri Supreme Court appears poised to follow that trend.

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters, including those relating to drafting and enforcing arbitration and non-competition agreements, for almost sixty years, and are available to discuss these issues and others.  As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.