Statutory Non-Waiver Provision Does Not Prevent Severance of Unlawful Terms and Arbitration Enforcement

Where an arbitration provision includes substantive limitations on the relief otherwise available to a party under a federal statute, there are three possible judicial responses: sever the offending provisions and enforce the agreement; enforce the agreement and leave any invalidity questions to the arbitrator, as in PacifiCare Health Systems, Inc. v. Book, 538 U.S. 401 (2003); or invalidate the agreement in its entirety.  All three approaches were explored in the Eleventh Circuit’s decision in Bodine v. Cook’s Pest Control Inc., 2016 WL 4056031 (11th Cir. July 29, 2016). Bodine involved application of a non-waiver provision in the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) and its effect on an arbitration agreement with terms in conflict with the statute, with the court concluding that the agreement was enforceable under the Federal Arbitration Act.  The majority opinion, authored by Judge Charles Wilson and joined by visiting Judge Patrick Higginbotham of the Fifth Circuit, drew a vigorous dissent from Judge Beverly Martin.

U.S. Army Reservist Rodney Bodine sued his employer, Cook’s Pest Control, claiming it discriminated against him in violation of the USERRA, which protects the civilian employment of military personnel called to active duty. Cook’s moved to compel arbitration based on an arbitration provision in Bodine’s employment contract.  Bodine responded that the arbitration provision was unenforceable under the USERRA.

The USERRA contains a non-waiver provision under which it “supersedes any . . . contract, agreement . . . or other matter than reduces, limits, or eliminates in any manner any right or benefit provided by this chapter.” 38 U.S.C. § 4302(b).  Although the USERRA does not specifically prohibit arbitration, the parties all conceded—both in the district court and on appeal—that two terms of the arbitration agreement at issue limited rights provided in the USERRA:  (1) it provided for a six-month statute of limitations on all claims (USERRA claims are not subject to a statute of limitations); and (2) it allowed the arbitrator to assess costs and attorneys’ fees in a final award (no costs or fees may be charged to a USERRA plaintiff).

Bodine argued that these terms made the entire arbitration agreement invalid under the non-waiver provision. Cook’s, while conceding the offending terms were invalid, argued that they could be blue-penciled out of the rest of the contract, saving the arbitration agreement.  The district court agreed with Cook’s, enforcing the arbitration agreement (minus the two offending terms) and dismissing the case.

On appeal, a divided panel of the Eleventh Circuit went even further, enforcing the arbitration agreement but tasking the arbitrator with determining the validity of its terms. The court first recited the well-established principle that the FAA requires rigorous enforcement of arbitration agreements, even in suits to enforce federal statutory rights, absent a contrary congressional command. The court further noted that a severability clause in Bodine’s employment contract would be enforceable under Alabama law (applicable to interpretation of the agreement under the FAA) to strike out illegal terms.

Turning to the USERRA’s non-waiver provision, and focusing on the word “supersedes,” the court declined to read the provision to invalidate the entire agreement. The provision instead should be read in harmony with the FAA, which, the court concluded, requires only modification of the agreement by replacing invalid terms with USERRA terms, leaving the rest of the agreement intact.

In a lengthy dissent, Judge Martin disagreed with the majority’s reading of the non-waiver provision. Section 4302(b)’s command that the USERRA “supersedes . . . any contract [or] agreement” limiting its rights, she argued, clearly and unambiguously requires invalidating the entire agreement, not merely the offending terms.  If that was what Congress intended, it would have said so, as it has done in non-waiver provisions in other statutes.

Judge Martin also questioned the majority opinion in light of the history and purpose of the USERRA, pointing out that employers will not be deterred from including illegal terms in their contracts if the worst that can happen is removal of only the offending provisions. She further chided the majority for “giving the defendants more than they asked for” by referring to an arbitrator the question of the validity of provisions that all the defendants had consistently conceded were invalid.

Although the court’s opinion in Bodine focuses on the specific language of the USERRA, non-waiver provisions in federal statutes are quite common, and courts continue to grapple with the effect of such provisions on arbitration agreements. See, e.g., CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 671 (2012) (holding that, because provision of the Credit Repair Organizations Act (CROA) mentioning judicial enforcement did not create a right to initial judicial enforcement, enforcement of arbitration agreement under the FAA did not waive a “right of the consumer” and therefore did not violate the CROA’s non-waiver provision); Santoro v. Accenture Fed. Servs., LLC, 748 F.3d 217 (4th Cir. 2014) (interpreting non-waiver provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act).

Posted by Stacey Mohr.

Back to top