Defendant Ryan’s Family Steak Houses, Inc. appeals the October 2, 2003 order of the district court, denying its motion to dismiss and petition to compel arbitration, pursuant to the Federal Arbitration Act, 9 U..S.C. §§ 3 and .4, of Plaintiff Erric Walker’s, Steve Ricketts’, and Vickie Atchley’s claims' for violations of the Fair Labor Standards Act of 1938 (“FLSA”), 29 U.S.C. §§ 201-219. For the reasons that follow, we AFFIRM.
I.
A. Procedural History
On November 12, 2002, Plaintiffs Erric Walker, Steve Ricketts, and Vickie Atchley
On October 2, 2003, the, district court denied Ryan’s motion, holding that there was inadequate consideration for the arbitration agreements, the agreements had the hallmarks of unconscionable adhesion contracts, the agreements were not founded upon mutual assent, and Plaintiffs did not knowingly and voluntarily waive their constitutional right to a jury trial. The court also held that the arbitration forum provided for in the agreements is not able to provide for effective vindication of statutory claims and is an inappropriate substitute for the judicial forum. The court observed that the pool of arbitrators would be constituted in a biased manner and that the limited discovery available in the forum suggested structural bias in favor of the employer. The court further determined that the arbitration agreements appear to prohibit arbitration of class-based claims, which provides a powerful disincentive for employees. to pursue individual claims of relatively low monetary value. Ryan’s timely appealed.,
B. Substantive Facts
Since 1996 or 1997, any individual who applies for employment with Ryan’s has been presented with a Í2-page application packet. The second page of the packet notifies the applicant that he or she is required to complete .and sign the “Job Application Agreement to Arbitration of EmploymenNRelated Disputes” (hereafter “Arbitration Agreement”) in order to be considered for a position. Failure to sign and accept the Arbitration Agreement and its related rules and procedures purportedly terminates the job application process. After the one-page notice come five pages of single-spaced rules and procedures governing the arbitration procedure. Only after wading through the rules does the applicant get to the one-page job application for the positions óf server, salad bar, dishwasher, frontline, hostess, meat-cutter, cook, breadroom, or cashier. The two-page Arbitration Agreement, which the applicant must sign, then follows the application. 1
. Plaintiffs cite several., examples of applicants who were hired on the spot after a 15 to
'20
minute interview, during which the hiring manager hurriedly presented them with various documents that they were instructed to sign in order to be
One Ryan’s employee, Nanella Dukes, was hired on the spot, without filling out any paperwork. Only after working for four or five days was Dukes handed the application packet and told to sign the documents, with her manager explaining that the agreement meant that if Dukes “ever had any problems with Ryan’s or Ryan’s management, [she] had to ‘go through Ryan’s arbitration.” ’ Plaintiffs Julie Oaks and Steven Ricketts also were hired on the spot without first completing the Arbitration Agreement. Oaks’s manager explained that the arbitration agreement meant that if Oaks ever had any problems with Ryan’s, she “had to ‘go through Ryan’s’ before [she] could go to an attorney.”
According to Dukes, based on her experience conducting new employee orientations, Ryan’s managers would place an “x” in every spot an applicant was required to sign, and applicants would be instructed to sign every “x” without any explanation. Dukes’s explanation of the application process is consistent with that of Paul Heuther, who worked as a manager at various Ryan’s restaurants over a ten-year period. Heuther states that the application process typically would last no longer than 20 minutes, applicants often would be hired on the day that they applied when managers presented the application packet, they would simply tell the applicants that if they wanted a job, “sign these documents here.” Heuther further explains, “Our supervisors at Ryan’s told us during manager meetings with them, that if it came up to tell any job applicant that the arbitration agreement meant that problems would be handled ‘up the chain of command,’ and that we would handle problems ‘in house’ first, and if the problem could not be resolved there, then it would be taken to the supervisor to resolve.”
Plaintiffs complain that the time-limited context in which they were presented with the Arbitration Agreement, combined with the managers’ provision of misleading information about the agreement, is particularly problematic because many of the plaintiffs have not completed high school and/or were in dire financial circumstances at the time of application and therefore were desperate for the low-wage jobs Ryan’s offers. Plaintiffs point out that the average annual salary for a top-paid Ryan’s restaurant worker is approximately $16,000, while minimum wage employees make approximately $11,000 annually. Accordingly, Plaintiffs suggest that they had neither the ability nor the incentive to comprehend the significance of executing the Arbitration Agreement.
Unlike the typical pre-employment arbitration agreement which involves a contract between the applicant and his or her potential employer, Ryan’s Arbitration Agreement is not between the applicant and Ryan’s. Rather, it is between the applicant and Employment Dispute Services, Inc. (“EDSI”). EDSI is a South Carolina corporation whose sole business is the marketing and administration of the Employment Dispute Resolution Program. The program is a third-party arbitration system which was established in 1992 to provide employers and employees outside of the securities industry with a purportedly fair and expeditious means of resolving employment-related disputes. EDSI has contracts with a total of seven companies, including Ryan’s.
By executing the Arbitration Agreement with EDSI, Plaintiffs agreed to (a) bring any employment disputes that he or she may have against _ Ryan’s and that would otherwise be decided in a state or federal court only in EDSI’s arbitral forum 2 and (b) be bound by a final decision of the EDSI arbitration panel. The purported consideration for Plaintiffs’ promise to arbitrate is EDSI’s agreement “to provide an arbitration forum, Rules and Procedures, and a hearing and decision based on any claim or dispute [that the applicant] may file or defend[.]” According to the agreement, Ryan’s is a third party beneficiary of the agreement between Plaintiffs and EDSI, and Plaintiffs are third party beneficiaries of Ryan’s agreement with EDSI. The agreement continues for the period of Plaintiffs’ employment with Ryan’s, unless mutually terminated in writing by Plaintiffs and EDSI.
The 2000 version of EDSI’s Employment Dispute Resolution Rules and Procedures — the most recent version of the rules — provides that the substantive rights and remedies in EDSI’s arbitration forum are the same as - ,are available in a federal or state court. The rules govern .all legal disputes, claims, or causes of action that arise out of the employment or possible employment of all parties signatory to an employment dispute resolution agreement with EDSI. The rules govern both the claims of a “claimant” (i.e., an applicant or employee) and any claims that a signatory defendant might bring against a claimant who has signed the Arbitration Agreement. 3
The rules further provide that a panel of three “adjudicators” resolves arbitration claims and are chosen from three separate selection pools: (1) supervisors or managers of an employer signatory to an agreement with EDSI; (2) employees who are non-exempt from the wage and hour protections of the Fair Labor Standards Act; and (3) attorneys, retired judges, or other competent legal professional persons not associated with either party. No individual who has been employed by an employer
EDSI provides the parties with a list of three potential adjudicators in each of the three selection pools. The parties have access to a schedule of the adjudicators’ fees and their employment history for at least the previous five years, along with related biographical information. Potential adjudicators also are required to disclose any information which may preclude them from making an objective and impartial decision.
Once EDSI selects the pools of potential adjudicators, the claimant and the defendant alternately strike names from each of the three selection pools until one name from each pool remains. Any potential adjudicator may be struck for cause. As a matter of EDSI practice, if an adjudicator is removed from the pool for cause, EDSI provides another potential adjudicator.
Once arbitration proceedings commence, 4 any party may serve a request for production of documents, and counsel for the parties have subpoena power. The rules also permit each party to schedule a deposition of one individual. A party may file a request for additional depositions, “but such requests are not encouraged and shall be granted in extraordinary fact situations and for good cause shown.”
Under the 2000 version of the rules, EDSI reserves the right to modify or amend the Rules after the date the claimant signs the Arbitration Agreement. The claimant, however, has the right to have his or her dispute resolved pursuant to the rules that were in effect at the time the agreement was signed, unless he or she prefers the modified rules.
II.
Plaintiffs filed a self-styled class action under the FLSA, seeking unpaid wages and related penalties against Ryan’s. Ryan’s argues that Plaintiffs’ action should not be in federal court at all and, pursuant to the FAA, moved to enforce the pre-employment arbitration agreements that Plaintiffs executed. For the reasons that follow, we hold that the district correctly refused to enforce Plaintiffs’ arbitration agreements as unenforceable under Tennessee law.
A. Standard of Review
This Court reviews
de novo
a district court’s decisions regarding both the existence of a valid arbitration agreement and the arbitrability of a particular dispute.
Floss v. Ryan’s Family Steak Houses, Inc.,
B. Analysis
1. The FAA and State Law
“The FAA provides for stays of proceedings in federal district courts when an issue in the proceeding is referable to arbitration, [9 U.S.C.] § 3, and for orders compelling arbitration when one party has failed, neglected, or refused to comply with an arbitration agreement, [id] § 4.”
Gilmer v. Inter state/Johnson Lane Corp.,
The FAA provides that “[a] written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. “Thus, generally applicable state-law contract defenses like fraud, forgery, duress, mistake, lack, of consideration or mutual obligation, or uneonscionability, may invalidate arbitration agreements.”
Cooper,
2. Choice of Law
Tennessee law applies when analyzing the enforceability of the three named Plaintiffs’ Arbitration Agreements because the agreements were executed in Tennessee and substantially performed in that state.
See Cooper,
The Supreme Court has held that application of only one state’s law in the context of a class action may violate the due process clause of the Fourteenth Amendment and the Full Faith and Credit Clause of Article IV, § 1 of the Constitution.
Phillips Petroleum Co. v. Shutts,
Ryan’s has failed to demonstrate how Tennessee contract law materially conflicts with that of any other jurisdiction in which some of the opt-in plaintiffs worked. Ryan’s has failed to show that the law of any -other jurisdiction does not, like Tennessee, require consideration or mutuality for a valid contract or refuses to enforce unconscionable contracts. Instead, Ryan’s
3. Consideration
In
Floss, supra,
this Court addressed the propriety of virtually the identical arbi-tral scheme at issue in this case and, as in this case, applied Tennessee contract law. At issue was the arbitrability of Plaintiffs Sharon Floss’s and Kyle Daniels’s FLSA claims in light of the arbitration agreement that they had executed with 'EDSI as part of their application for employment with Ryan’s. As in this case, the plaintiffs argued that the EDSI rules and procedures did not allow them to effectively vindicate their FLSA claims on the grounds that the procedures allow for the appointment of a biased panel of arbitrators and unduly limited their discovery opportunities.
Floss,
After voicing its concerns over EDSI’s arbitrator selection process, the
Floss
Court held that the plaintiffs were not bound by their arbitration agreements because, as a matter of Tennessee law, EDSI had not provided adequate consideration for the plaintiffs’ promise to submit any dispute that they may have with Ryan’s to arbitration with EDSI.
Floss,
In response to the holding in Floss, EDSI amended its rules and the Arbitration Agreement in 2000. As under prior versions, the 2000 rules give EDSI the right to modify or amend the rules after the date the claimant signs the Arbitration Agreement. The rules, however, include the following additional language: “[I]n the event these Rules and Procedures are modified after a Claimant has signed an Agreement, the claimant shall have the option to have his or her claim adjudicated under the Rules and Procedures that were in effect on the date the Agreement was signed or the Rules and Procedures that are in effect on the date their claim is filed with EDSI.”
Ryan’s maintains' that these linguistic changes to the rules and the agreement cure the consideration problem that the Floss court identified; they argue that EDSI’s promise is not illusory because Plaintiffs can insist on the rules in effect at the time they entered into their Arbitration Agreements. Plaintiffs disagree, arguing that EDSI still maintains the right to modify or amend the rules without notice or consent.
We hold that Plaintiffs have the better argument because they signed the identical Arbitration Agreement at issue in Floss. Their agreements explicitly reserve EDSI the right to modify or amend the rules from time to time, without providing Plaintiffs the- right to insist on the rules in effect at the time that they executed their respective agreements. Although the 2000 version of the rules purport to afford Plaintiffs the right to enforce the rules in effect at the time of execution, Plaintiffs’ agreements do not incorporate that right. Each of their agreements statés that “My Agreement ... contains the entire understanding and agreement of the parties regarding these subjects” and that “My Agreement may not be altered or amended, except in writing signed by the President of EDSI and Me.” 5 There is no evidence in the record that any of Plaintiffs agreed in writing with the EDSI’s President to adopt the 2000 version of the rules or that Plaintiffs provided any new consideration for EDSI’s new promise to disregard (upon Plaintiffs’ request) any post-execution amendments to its rules. Accordingly, as far as the named Plaintiffs are concerned, EDSI still retains the unfettered contractual right to alter or amend the rules and procedures, including the right to eliminate the rule added in 2000 that purports to give the claimant the right to enforce the rules and procedures that existed at the time that he or she executed the agreement. - Therefore, Plaintiffs’ Arbitration Agreements are no different from the agreements at issue, and held to be unenforceable, in Floss due to inadequate consideration from. EDSI. 6
Arguably, the consideration for Plaintiffs’ promises to arbitrate derives from a source other than EDSI, such as a promise by Ryan’s, which claims to be a third-party beneficiary of the contracts between EDSI and Plaintiffs. See Restatement (Seoond) of CONTRACTS § 71(4) (“The performance or return promise [as consideration for a promise] may be given to the promisor or to some, other person. It may be given by the promisee or by some other person.”). We hold, however, that Ryan’s has not provided adequate consideration.
EDSI is bound by its promise to Plaintiffs only to the extent that Ryan’s is bound to submit to the forum, for without Ryan’s consent EDSI can provide no benefit to Plaintiffs.' EDSI/Ryan’s Contract contains an escape clause whereby Ryan’s can cancel its Contract with EDSI on ten days notice.... This provision stands in clear contrast to the mutual termination clause found in the Arbitration Agreement, thus negating any consideration that Plaintiffs might be deemed to receive from EDSI’s promise to provide the forum. Similarly, the ten-day escape clause eliminates consideration that might otherwise exist or flow from Plaintiffs’ “third-party beneficiary” status, as alluded to in the Arbitration Agreement.
Geiger v. Ryan’s Family Steak Houses, Inc.,
Without any supporting Tennessee authority, Ryan’s argues that the fact that it would not consider Plaintiffs’ employment applications without their prior agreement to arbitrate constitutes sufficient consideration for Plaintiffs’ promises to arbitrate. One district court has rejected this argument under Indiana law, holding that “merely a promise to consider an applicant’s application, not employ her, ... standing alone, .will not bear the weight required to allow us to construe the Arbitration Agreement as a binding contract.”
Geiger,
4. Knowing and Voluntary Waiver of Right to File Suit in Federal Court
Citing this Court’s holding in
KMC Co. v. Irving Trust Co.,
According to
Morrison,
to evaluate whether a plaintiff has knowingly and voluntarily waived his or her right to pursue employment claims in federal court, the following factors must be evaluated: (1) plaintiffs experience, background, and education; (2) the amount of time the plaintiff had to consider whether to sign the waiver, including whether the employee had 'an opportunity to consult with a lawyer; (3) the clarity of the waiver; (4) consideration for the waiver; as well as (5) the totality of the circumstances.
Id.
(quoting
Adams v. Philip Morris, Inc.,
First, most of the plaintiff class have not completed high school, and most were in dire financial circumstances at the time of application. The average annual salary for a top-paid Ryan’s restaurant worker ..is approximately $16,000, while minimum wage employees make approximately $11,00.0 .annually. Accordingly, the district court .did. not err in concluding that the experience, background, and level of education of the plaintiffs was “low to mid-level.” .
Second, Plaintiffs typically were hired on the spot after a brief'interview, during which the hiring manager hurriedly presented them with various documents that
Additional evidence suggests that, on those occasions when Ryan’s managers would discuss the agreement, they would provide misleading information. Plaintiff Julie Oaks’s manager explained that the arbitration agreement meant that if Oaks ever had any problems with Ryan’s, she “had to ‘go through Ryan’s’ before [she] could go to an attorney.” Paul Heuther, a former manager at various Ryan’s restaurants, explained that “supervisors at Ryan’s told us during manager meetings with them, that if it came up to tell any job applicant that the arbitration agreement meant that problems would be handled ‘up the chain of command,’ and that we would handle problems ‘in house’ first, and if the problem could not be resolved there, then it would be taken to the supervisor to resolve.” It is no surprise, therefore, that many of the plaintiffs do not even recall executing agreements that preclude them from vindicating their rights in state or federal court.
Third, the Arbitration Agreement’s waiver provision states that the claimant agrees that any disputes with Ryan’s “which would otherwise be decided in court, shall be resolved only through arbitration in the EDSI forum and NOT THROUGH LITIGATION IN STATE OR FEDERAL COURT.” (J.A. 303) (emphasis in original). The district court found that the waiver provision is explicit, but not clear because it does not use more commonly understood waiver language about forgoing the right to have claims heard at “trial” or by a “jury.”
Cf. Buraczynski v. Eyring,
Like the district court, we hold that an analysis of the above-stated factors support the conclusion that Plaintiffs did not knowingly and voluntarily execute their Arbitration Agreements. Accordingly, the district court did not err in refusing to enforce them on this ground.
5. Mutual Assent
The district court found that there was strong evidence that the Arbitration Agreements between Plaintiffs and EDSI did not result from a meeting of the minds in mutual assent. We agree.
It is well-settled under Tennessee law that a contract must result from a meeting of the minds of the parties in mutual assent to the terms.
Higgins v. Oil, Chemical and Atomic Workers Int’l Union, Local No. 3-677,
As legal support, the district court relied on
Howell v. NHC Healthcare-Fort Sanders, Inc.,
The court affirmed the denial of the motion to compel arbitration, holding that the defendant failed to meet its burden of showing that the parties actually bargained over the arbitration provision or that it was within the reasonable expectation of the ordinary person under the circumstances.
Id.
at 734-35. The court relied on the following facts to reach this conclusion: (1) the admission agreement was eleven pages long, but the arbitration provision was in the middle of page ten and did not adequately explain how the arbitration procedure would work; (2) the agreement was presented to the plaintiff on a “take-it-or-leave-it” basis while he was attempting to admit his wife to the nursing home; (3) the plaintiff had no real bargaining power; (4) the plaintiffs educational limitations were obvious; and (5) the agreement • was not adequately explained - regarding the jury trial waiver.
Id.
at 734-35. Significantly, the court noted that the fact that the plaintiff could not
Although the facts of the Howell case arguably are more sympathetic than the facts in the instant case, we hold that Ryan’s failed to meet its burden of showing Plaintiffs and EDSI actually bargained over the Arbitration Agreement or that it was within the reasonable expectation of the ordinary person considering the circumstances. As discussed in greater detail in the’ preceding discussion (whether Plaintiffs’ waiver of their jury trial rights was knowing and voluntary), Plaintiffs were presented with the Arbitration Agreement in a hurried fashion and told to simply sign if they wanted to be considered for employment. The agreements were presented to Plaintiffs on a “take it or leave it” basis, and Plaintiffs had no real bargaining power; they had to sign the agreements if they wanted to be considered for employment. Although the Arbitration Agreements state that Plaintiffs had the right to consult an attorney, in reality, they had no opportunity to exercise that right because they had to sign the agreements on the spot. Plaintiffs educational limitations (many have not completed high school and were seeking jobs that would provide them poverty-level wages) also were obvious. Finally, on those occasions when Ryan’s managers took it upon themselves to explain the Arbitration Agreement, they gave inaccurate information about the arbitration process and did not tell them that they were waiving their right to a jury trial. For these reasons, the district court correctly held that Plaintiffs did not mutually assent to arbitrate their employment disputes when they executed them agreements with EDSI.
6. Unconscionable Adhesion Contracts
The district court held that Plaintiffs’ Arbitration Agreements were unenforceable adhesion contracts. Under Tennessee law, an adhesion contract is “a standardized contract form offered to consumers of goods and services on essentially a ‘take it or leave it’ basis, without affording the consumer a realistic opportunity to bargain and under such conditions that the consumer cannot obtain the desired product or service except by acquiescing to the form of the contract.”
Buraczynski,
We Lave some concerns about whether Plaintiffs demonstrated the final element of an adhesion contract: “the absence of a meaningful choice for the party occupying the weaker bargaining position.”
Cooper, supra,
III.
In addition to refusing to enforce Plaintiffs’ arbitration agreements on state law grounds, the district court held that the agreements are unenforceable because they do not allow Plaintiffs to effectively vindicate their rights under the FLSA. We agree for the reasons discussed below.
A. Standard of Review
This Court reviews
de novo
a district court’s decisions regarding the arbitrability of a particular dispute.
Floss,
B. Analysis
Even if there is no 'contract-based defense to the enforceability of an arbitration agreement, a court cannot enforce the agreement as to a claim if the specific arbitral forum provided under the agreement does not “allow for the effective vindication of that claim.”
Floss,
The Arbitration Agreements and related rules and procedures at issue in this case demonstrate that EDSI’s arbitral
We have serious reservations as to whether the arbitral forum provided under the current version of the EDSI Rules and Procedures is suitable for the resolution of statutory claims. Specifically, the neutrality of the forum is far from clear in light of the uncertain relationship between Ryan’s and EDSI. [Plaintiffs] Floss and Daniels suggest that EDSI is biased in favor of Ryan’s and other employers because it has a financial interest in maintaining its arbitration service contracts with employers. Though the record does not clearly reflect whether EDSI, in contrast to the American Arbitration Association, operates on a for-profit basis, the potential for bias exists. In light of EDSI’s role in determining the pool of potential arbitrators, any such bias would render the arbitral forum fundamentally unfair. See Cole v. Burns Int’l Security Services,105 F.3d 1465 , 1482 (D.C.Cir.1997) (“At a minimum, statutory rights include both a substantive protection and access to a neutral forum in which to enforce those protections.”).
Id.
at 314;
see also McMullen, supra,
The record in this case removes any of the uncertainties surrounding the relationship between Ryan’s and EDSI that the Court noted in
Floss.
EDSI is clearly a for-profit business, and Ryan’s annual fee accounted for over 42% of EDSI’s gross income in 2002. Given the symbiotic relationship between Ryan’s and EDSI, Ryan’s effectively determines the three pools of arbitrators, thereby rendering the arbitral forum fundamentally unfair to claimants who are applicants or employees.
See Geiger,
The bias is.exacerbated by the lack of a protocol governing EDSI’s selection of potential adjudicators from the three pools. The individuals in the.supervisor and employee pools are neither randomly selected nor chosen by a disinterested person for their skills. Instead, all members of these two pools are chosen by the small number of employers who, like Ryan’s, have signed alternative dispute resolution agreements with EDSI: Golden Corral Steak Houses, K & W Cafeterias, Papa John’s Pizza, Sticky Fingers Restaurants, The Cliffs at Glass, Inc., and Wieland Investments, Inc. In addition, the rules do not prevent a supervisor of a signatory company from sitting on an adjudication panel with a non-supervisory employee from the same company, including someone whom the supervisor directly supervises. Further, EDSI has no policy in place that prohibits' a signatory company from discussing the arbitration process’or specific, claims with its employee adjudicators or from attempting to improperly influence its employee adjudicators.
Finally, the limited discovery that the EDSI forum provides could significantly prejudice employees or applicants. The rules allow “just one deposition as of right and additional depositions only at the discretion of the (arguably biased) panel, with the express policy that depositions ‘are not encouraged and shall be granted in extraordinary fact situations only for good cause shown.’”
Geiger,
IY.
For all the foregoing reasons, we AFFIRM the district court’s holdings that state law contract defenses preclude enforcement of Plaintiffs’ arbitration agreements and that Plaintiffs’ arbitration agreements are unenforceable under the FAA because they do not allow for effective vindication of their FLSA claims.
Notes
. Named Plaintiff Vickie Atchley executed her agreement in 1994. At that time, the Arbitration Agreement was not included in the same package of documents as the employment application. Plaintiffs Walker and Ricketts executed their agreements in 2000 and 1998, respectively.
. Employment claims or charges handled by a state or federal agency are exempted from the agreement.
. The rules applicable from 1993 through 1998 state that they apply to resolve disputes involving individual or employer claims and/or claims of several parties, "including group or class actions.” EDSI excised the reference to "group or class actions” from the 1999 and 2000 versions of the rules.
. The arbitration takes place in the city or county in which the employee was employed, unless the employee requests a different location.
. Plaintiff Atchley’s agreement, executed in 1994, refers to "EDR” (Employment Dispute Resolution, Inc.), the former name of EDSI.
.
But see Gardner v. Ryan's,
. See Section III.B., infra.
. Plaintiffs also complain that the current EDSI rules omit any reference to class actions, and the district court refused to compel arbitration because the rules appear to prohibit the arbitration of class actions. It does not appear, however, that arbitration procedures are required to provide for class actions.
See Gilmer,