Virgen Parilla v. Iap Worldwide Services Vi, Inc. Worldwide Services, Inc. Gene Ludlow Roy Varner Parilla v. Iap Worldwide Services Vi, Inc. Iap Worldwide Services, Inc. Gene Ludlow Roy Varner

IAP Worldwide Services VI, Inc. ("IAPVI"), IAP Worldwide Services, Inc. ("IAP"), Gene Ludlow, and Roy Varner (collectively, "Appellants") appeal from an order of the District Court of the Virgin Islands denying their motion to compel arbitration pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. Appellee Virgen Parilla, a former employee of IAPVI, brought suit against Appellants alleging, inter alia, discriminatory conduct in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq. Invoking the provisions of an arbitration agreement in Parilla's employment contract, Appellants filed a motion to compel arbitration of Parilla's claims. The District Court denied Appellants' motion, holding that the agreement to arbitrate was unenforceable. For the reasons that follow, we will reverse the District Court's order and will remand to the District Court for further proceedings consistent with this opinion.

On June 6, 2000, IAPVI hired Parilla as an administrative assistant. Upon the commencement of her employment, Parilla entered into an Hourly Employment Agreement ("the Agreement") with IAPVI. The Agreement addressed such employment-related matters as compensation, overtime, insurance, vacation, sick pay, promotions and discipline. Additionally, ¶¶ 16, 17, 19, and 20 of the Agreement pertained to arbitration. Paragraph 16 provides, in relevant part:

Any controversy or claim arising out of or relating in any way to this Agreement, to the breach of this Agreement, and/or to Employee's employment with Employer, or to the suspension or termination of Employee's employment with Employer, including claims against Employer, its owners or subsidiary or parent or affiliated companies, and its or their officers, directors, employees, and agents (including any person or company that manages any portion of the Facility) (all of the foregoing shall be collectively referred to as "Employer" for purposes of sections 16-20) shall be resolved by arbitration and not in a court or before an administrative agency.

App. at 44. Paragraph 17 of the Agreement sets forth all matters that are subject to arbitration, including "[a]ll claims or matters arising out of or relating in any fashion to this Agreement, to the breach of this Agreement, or to Employee's dealings with Employer, Employee's employment or the suspension or termination of Employee's employment with Employer." App. at 44.1

Paragraph 19 sets forth numerous procedures governing an arbitration proceeding. It requires that "[a]rbitration shall take place pursuant to the Federal Arbitration Act, and in accordance with the Rules governing arbitration set forth in the National Rules for the Resolution of Employment Disputes of the American Arbitration Association [(`AAA Rules')], as they shall be amended from time to time." App. at 45. Paragraph 19 also contains a thirty-day notice provision in order for an employee to bring a claim:

Employee must present Employee's claim in written form to the Company within thirty (30) calendar days of the event which forms the basis of the claim, unless a different time for presentation of the claim is provided for by the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. For the purposes of this time limitation, the event forming the basis of a claim arising from discharge of Employee shall be the date of discharge. In no event may Employee bring a claim of any nature against Employer unless the claim is filed as set forth in this paragraph and within the time set forth in this paragraph. The written notice submitted by the Employee shall describe the event forming the basis of the claim, a description of the claim, the relief sought by Employee, and an address and telephone number where Employee can be reached. Notice must be given to the Project/Camp Manager by hand delivery or by certified mail, return receipt requested, and must be received by the Project/Camp Manager on or before the expiration of the thirty (30) calendar days from date of the event forming the basis of the claim, unless a different time for presentation of the claim is provided for by the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. If notice is given by hand delivery, Employee must retain a receipted copy of the notice. If notice is given by certified mail, Employee must retain a copy of the return receipt. In the event that timely notice is not provided to the Company as set forth herein, it is agreed that the Employee has waived Employee's right to assert the claim, and shall have no further remedy against Employer. It is further agreed that this time limitation is to be strictly enforced by the arbitrator.

App. at 45-45A. With respect to the selection of an arbitrator, ¶ 19 provides:

Within fifteen (15) calendar days of receipt of timely notice of a claim from Employee, the Company shall submit a request to the American Arbitration Association to furnish a list of five (5) impartial arbitrators. The parties specifically agree that the list of arbitrators shall consist of individuals who do not reside in the U.S. Virgin Islands or Puerto Rico. The arbitrators shall be selected by the Company and by the aggrieved Employee by alternately striking a name from the list provided. In the event that either party refuses to cooperate in this process of selection, the other party may select any name from the list to serve as arbitrator.

App. at 45A. Paragraph 19 also allocates the costs of arbitration:

Unless Employee elects otherwise, the Company shall advance the arbitrator's fees and expenses and, if the Company is successful in the arbitration, the Employee agrees to reimburse the Company for the arbitrator's fees and expenses if so directed by the arbitrator. Provided, however, that the Company agrees to pay for the arbitrator's transportation and lodging costs incurred. Other than arbitrator's fees and expenses, each party shall bear its own costs and expenses, including attorney's fees.

App. at 45A-45B. Finally, ¶ 20 governs the venue of the arbitration hearing and the arbitration decision:

The arbitration hearing shall take place in St. Croix, U.S. Virgin Islands. The arbitrator, in rendering a decision, may uphold the actions of the Company or may grant relief to Employee. If the arbitrator finds that disciplinary action was merited, the arbitrator may not alter or amend the form of disciplinary action imposed by the Company. The arbitrator shall provide the parties with, at minimum, a written, concise explanation of the basis for the award.

App. at 45B.

In July 2002, Parilla's employment with IAPVI was terminated. She subsequently commenced a civil action against IAPVI, its parent corporation IAP, and two of its employees, Gene Ludlow and Roy Varner. The suit alleged violations of Title VII, Titles 10 and 24 of the Virgin Islands Code, wrongful discharge, breach of contract, misrepresentation, negligent and/or intentional infliction of emotional distress, and sought punitive damages. Invoking the arbitration provisions of the Agreement, Appellants filed a motion to compel arbitration pursuant to § 4 of the FAA, 9 U.S.C. § 4. Parilla opposed this motion.

The District Court denied the motion to compel arbitration. It held that the Agreement was identical in all material respects to an employment agreement that the District Court had examined in a previous case, Plaskett v. Bechtel International, Inc., 243 F.Supp.2d 334 (D.Vi.2003). Adopting its reasoning in Plaskett, the District Court held that certain terms within the arbitration provisions of ¶¶ 16, 17, 19, and 20 of the Agreement were unconscionable. The District Court further held that the unconscionable terms permeated the arbitration provisions and that such terms therefore could not be severed from the remainder of the arbitration provisions. Accordingly, the District Court declined to enforce the whole of the arbitration provisions. Appellants filed a timely notice of appeal, and Parilla filed a timely notice of cross-appeal.

On appeal, Appellants argue that the District Court erred in each of the three instances in which it found arbitration provisions of the Agreement to be unconscionable: (1) the thirty-day notice requirement in order for an employee to bring a claim; (2) the agreement by the parties to bear their own costs, expenses, and attorney's fees as applied to a federal Title VII claim; and (3) Rules 17, 18, and 34 of the AAA Rules regarding confidentiality, which were incorporated into the Agreement. Alternatively, Appellants argue that the District Court erred in refusing to sever the terms it found unconscionable from the remainder of the arbitration provisions. In response, Parilla argues that we should affirm the District Court's conclusion that the three terms are unconscionable and that the entire agreement to arbitrate is accordingly unenforceable. Parilla further urges that, as an alternative basis for upholding the District Court's judgment, we hold three additional terms of the arbitration agreement unconscionable: (4) the agreement that all covered claims are to be resolved through arbitration rather than before an administrative agency; (5) the agreement that no potential arbitrator may reside in the U.S. Virgin Islands or Puerto Rico; and (6) the agreement that if the employee loses the arbitration, the employee will reimburse IAPVI for the arbitrator's fees and expenses if so directed by the arbitrator. We exercise plenary review over the District Court's holding as to whether the parties entered into a valid and enforceable agreement to arbitrate their disputes. Alexander v. Anthony Int'l, L.P., 341 F.3d 256, 263 (3d Cir.2003) (citing Harris v. Green Tree Fin. Corp., 183 F.3d 173, 176 (3d Cir.1999)).

The District Court had jurisdiction over this case under 28 U.S.C. § 1331 and 48 U.S.C. § 1612(a), because the case arose under, inter alia, Title VII, 42 U.S.C. § 2000e, et seq. The District Court exercised supplemental jurisdiction over Parilla's Virgin Islands claims pursuant to 28 U.S.C. § 1367 and 48 U.S.C. § 1612(a). We have jurisdiction over this appeal pursuant to 9 U.S.C. § 16(a)(1)(B), which permits a party to seek immediate appellate review of a district court's order denying a motion to compel arbitration.

Before proceeding to the merits of this appeal, we turn briefly to two additional matters that are characterized by the parties as going to our jurisdiction. Appellants have moved to dismiss the cross-appeal for lack of jurisdiction, correctly pointing out that there has been no final order in the District Court and that the sole basis for appellate jurisdiction, 9 U.S.C. § 16(a)(1)(B), authorizes only appellate review of an order declining to compel arbitration. In response, Parilla insists that her cross-appeal is within our pendent jurisdiction, citing E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, SAS, 269 F.3d 187, 202-203 (3d Cir.2001), and, alternatively, that all of the arguments made in support of her cross-claims can be entertained by the Court as alternative grounds for affirming the judgment of the District Court. We agree with Parilla's alternative argument and express no opinion regarding the existence of pendent appellant jurisdiction. Appellants' motion to dismiss the cross-appeal will be denied as moot.

Second, Parilla has filed a motion to dismiss the appeals of IAP, Gene Ludlow and Roy Varner on the ground that they lack standing to appeal. She insists that being neither parties to the agreement to arbitrate nor third party beneficiaries of that agreement they have no cognizable interest in this controversy. She stresses that the District Court made no finding that these appellants were intended to be beneficiaries of the agreement. Her argument borders on the frivolous.

Paragraph 16 of the Agreement explicitly provides that claims arising out of Parilla's employment with IAPVI, "including claims against ... its owners or subsidiary or parent or affiliated companies, and its or their officers, directors, employees, and agents ... shall be resolved by arbitration and not in a court or before an administrative agency." App. at 44 (emphasis added). As in In re Prudential Insurance Co. of America Sales Practice Litigation All Agent Actions, 133 F.3d 225, 230 (3d Cir.1998), the arbitration agreement reflects a clear and unequivocal intent on the part of the parties to submit to arbitration covered claims against entities who fall into the aforementioned categories. The only factfinding necessary to conclude that IAP, Ludlow, and Varner were intended beneficiaries of the Agreement, therefore, would have been to inquire whether these entities were in fact the parent company and employees of IAPVI. Such specific findings of fact by the District Court were unnecessary, however, as Parilla expressly conceded those facts in her complaint. See Soo Line R.R. Co. v. St. Louis Southwestern Ry. Co., 125 F.3d 481, 483 (7th Cir.1997) (noting the "well-settled rule that a party is bound by what it states in its pleadings"); Keller v. United States, 58 F.3d 1194, 1198 n. 8 (7th Cir.1995) ("Judicial admissions are formal concessions in the pleadings, or stipulations by the party or its counsel, that are binding upon the party making them."); see also Glick v. White Motor Co., 458 F.2d 1287, 1291 (3d Cir.1972) (noting that unequivocal "judicial admissions are binding for the purpose of the case in which the admissions are made[,] including appeals"). Accordingly, we conclude that IAP, Gene Ludlow, and Roy Varner were intended beneficiaries of the Agreement and we will therefore deny Parilla's motion to dismiss them as parties to this appeal.

III. Enforceability of the Arbitration Provisions

We recently addressed the enforceability of arbitration agreements in Alexander, 341 F.3d at 264. We there noted that the FAA establishes "a strong federal policy in favor of the resolution of disputes through arbitration." Id. at 263 (citing Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)). Under the FAA, "such agreements are `enforceable to the same extent as other contracts.'" Id. (quoting Seus v. John Nuveen & Co., 146 F.3d 175, 178 (3d Cir.1998)); see 9 U.S.C. § 2.2 Accordingly, under the FAA, "[a] party to a valid and enforceable arbitration agreement is entitled to ... an order compelling such arbitration." Alexander, 341 F.3d at 263 (citing Seus, 146 F.3d at 179); see 9 U.S.C. § 4.3 It is up to the court, prior to granting such an order, to determine whether the parties entered a valid agreement to arbitrate. Alexander, 341 F.3d at 264 (citing 9 U.S.C. § 2). "We are to look to the relevant state law of contracts in making this determination." Id. (citing Blair v. Scott Specialty Gases, 283 F.3d 595, 603 (3d Cir.2002); Harris, 183 F.3d at 179). Applying the relevant state contract law, a court may also hold that an agreement to arbitrate is "unenforceable based on a generally applicable contractual defense, such as unconscionability." Id. (citing Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). We set forth below the relevant principles of unconscionability and will apply those principles to the arbitration terms at issue in this case. We will then determine whether it is appropriate to sever any unenforceable provisions from the parties' agreement to arbitrate.

In Alexander, a case also arising in the U.S. Virgin Islands, we applied Virgin Islands law, as expressed in the Restatement (Second) of Contracts, to determine whether the terms of an arbitration agreement were unenforceable on grounds of unconscionability. See id. at 264; see also 1 V.I.Code Ann. § 4.4 The relevant provision of the Restatement states:

If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

Restatement (Second) of Contracts § 208 (1981). Applying this provision in Alexander, we explained the contractual defense of unconscionability:

Courts have generally recognized that the doctrine of unconscionability involves both "procedural" and "substantive" elements. Procedural unconscionability pertains to the process by which an agreement is reached and the form of an agreement, including the use therein of fine print and convoluted or unclear language. This element is generally satisfied if the agreement constitutes a contract of adhesion. A contract of adhesion is one which is prepared by the party with excessive bargaining power who presents it to the other party for signature on a take-it-or-leave-it basis. A contract, however, is not unconscionable merely because the parties to it are unequal in bargaining position. An adhesion contract is not necessarily unenforceable. The party challenging the contract therefore must also establish substantive unconscionability. This element refers to terms that unreasonably favor one party to which the disfavored party does not truly assent. According to the commentary accompanying section 208:

[G]ross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms.

[Restatement § 208 cmt. d.] In the end, unconscionability requires a two-fold determination: that the contractual terms are unreasonably favorable to the drafter and that there is no meaningful choice on the part of the other party regarding acceptance of the provisions.

341 F.3d at 265-66 (citations omitted) (internal quotation marks omitted). Moreover, the burden of proving such unconscionability lies with the party challenging the contract provision. See Harris, 183 F.3d at 181 (interpreting Pennsylvania contract law); see also E. Allen Farnsworth, Farnsworth on Contracts § 4.28 & n. 14 (3d ed. 1999) ("The party asserting the defense of unconscionability must prove it.").

B. Application of Unconscionability Principles

The District Court in this case did not expressly hold that the parties' agreement to arbitrate was procedurally unconscionable. Nonetheless, because the District Court explicitly adopted its reasoning in Plaskett, it follows a fortiori that it concluded that the Agreement between Parilla and IAPVI was also procedurally unconscionable. There is record support for the conclusion and, indeed, Appellants did not contest procedural unconscionability in the District Court.5

We next address whether the challenged contract terms are substantively unconscionable.

As noted above, ¶ 19 of the Agreement requires that "Employee must present Employee's claim in written form to the Company within thirty (30) calendar days of the event which forms the basis of the claim, unless a different time for presentation of the claim is provided for by the [AAA Rules]." App. at 45. If such timely notice is not given in the manner directed in the Agreement, ¶ 19 further provides that "it is agreed that the Employee has waived Employee's right to assert the claim, and shall have no further remedy against Employer." App. at 45A. The District Court, adopting its reasoning in Plaskett, held that this provision was substantively unconscionable. We agree.

In Alexander, we confronted a nearly identical thirty-day notice provision and held that such a provision "is clearly unreasonable and unduly favorable to [the employer]." 341 F.3d at 266. Citing with approval to Plaskett, we stated that "[i]n addition to providing an apparently insufficient time to bring a well-supported claim, such an obligation prevents an employee from invoking the continuing violation and tolling doctrines." Id. at 267. We also noted that the unfair advantage this provision gives the employer "is only compounded by the fact that [the employer] is apparently not required to provide detailed and written notice to an employee of any of its own claims within a strictly enforced thirty-day time period." Id. Accordingly, we held that "the thirty-day time restriction [was] substantively unconscionable." Id.

Appellants attempt to distinguish Alexander on the ground that, unlike that case, the thirty-day notice provision here incorporates the AAA Rules. Appellants claim that the incorporation of the AAA Rules saves the provision from unconscionability because AAA Rule 4(b) provides an alternative time limit for presenting a claim. Rule 4(b)(i)(1) states that a party may initiate an arbitration by:

Fil[ing] a written notice (hereinafter "Demand") of its intention to arbitrate at any regional office of the AAA, within the time limit established by the applicable statute of limitations if the dispute involves statutory rights. If no statutory rights are involved, the time limit established by the applicable arbitration agreement shall be followed.

App. at 167. Appellants therefore contend that the thirty-day notice provision is not a strict limitation, but rather provides an exception that allows an employee to initiate a statutory claim within the applicable statute of limitations. The District Court rejected this argument, holding that Appellants had misread Rule 4(b). It concluded that Rule 4(b) governs only the manner of initiating an arbitration; even if an employee complied with that rule, an arbitrator would not be able to afford the employee any remedy unless the employee presented the claim to the employer within thirty days. We agree. AAA Rule 4(b) cannot be read as an exception to the thirty-day notice provision, and it does not absolve Parilla of the contractual obligation to present a claim to IAPVI within thirty days. Consistent with Alexander, we hold that this arbitration term is unconscionable.

Paragraph 19 of the Agreement provides that "[o]ther than arbitrator's fees and expenses, each party shall bear its own costs and expenses, including attorney's fees." App. at 45B. The District Court, adopting its reasoning in Plaskett, held this provision to be substantively unconscionable, but only as applied to Title VII claims and not as to claims arising under Virgin Islands law. See Plaskett, 243 F.Supp.2d at 340-41.6 The District Court's reasoning has been undermined by our subsequent holding in Alexander.

In Alexander, we recognized Plaskett's rationale but nevertheless held that, even though both parties may have surrendered eligibility for costs, expenses, and attorney's fees under Virgin Islands law, "[s]uch a relinquishment ... clearly helps [the employer], the party with a substantially stronger bargaining position and more resources, to the disadvantage of an employee needing to obtain legal assistance." 341 F.3d at 267. We therefore held this provision to be unconscionable as to any claim. Given this holding in Alexander, we have no choice but to hold that the provision requiring each party to "bear its own costs and expenses, including attorney's fees" is substantively unconscionable with respect to both Parilla's Title VII claim and her claims under Virgin Islands law.

Paragraph 19 of the Agreement provides that "[a]rbitration shall take place pursuant to the Federal Arbitration Act, and in accordance with the ... National Rules for the Resolution of Employment Disputes of the American Arbitration Association [(`AAA Rules') ]." The District Court, adopting its reasoning in Plaskett, held that AAA Rules 17,7 18,8 and 34(b) and (c),9 as incorporated by reference into the Agreement, were unconscionable to the extent they provide for confidentiality. Those rules provide, in accordance with the traditional arbitration practice, that the arbitrator will "maintain the confidentiality of the arbitration," may control who is present during any portion of the proceedings, and "shall provide written reasons for the award unless the parties agree otherwise." The rules also provide that while all awards will be "publicly available," the names of the parties will not be publicly available "unless a party expressly agrees to have its name made public in the award." In support of its conclusion that these rules, while facially neutral, favor the employer and unduly burden the employee, the District Court gave the following explanation:

[T]he ability of a party to unilaterally prevent the inclusion of its name in the award favors the repeat participant and makes it difficult for a potential plaintiff to build a case of intentional misconduct or to establish a pattern or practice of discrimination by a particular company.

Plaskett, 243 F.Supp.2d at 343. Without further explanation, the District Court went on to hold that "[s]imilarly, AAA Rule 18 making the arbitration itself confidential and AAA Rule 17 allowing the arbitrator to hold closed hearings also favor [the employer] and unduly burden [the employee]." We conclude that the District Court erred in so holding.

The unconscionability doctrine seeks to prevent substantial unfairness between contracting parties having grossly unequal bargaining power. The District Court did not and could not, we believe, identify any such unfairness as between Parilla and the Appellants resulting from the confidentiality provisions which the District Court refused to enforce. Each side has the same rights and restraints under those provisions and there is nothing inherent in confidentiality itself that favors or burdens one party vis-a-vis the other in the dispute resolution process. Importantly, the confidentiality of the proceedings will not impede or burden in any way Parilla's ability to obtain any relief to which she may be entitled.10

The District Court's concern was not about any potential unfairness between two contracting parties vis-a-vis each other. Rather, that concern related to whether allowing an employer the right to prevent its name from appearing in an award in one proceeding would make it more difficult for claimants in subsequent proceedings to prove their cases. This concern has to do, not with unfairness between contracting parties, but with public policy and, more specifically, with whether confidentiality in arbitration proceedings of this kind is consistent with the public policy reflected in Title VII, the Virgin Islands' civil rights laws, 10 V.I.Code Ann. §§ 1-10, and the Virgin Islands Wrongful Discharge Act ("WDA"), 24 V.I.Code Ann. §§ 76-79.

Concerns similar to those noted by the District Court were presented to the Supreme Court in Gilmer v. Interstate Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991), in support of an argument that the arbitration of an age discrimination claim under the arbitration rules of the New York Stock Exchange ("NYSE rules") was inconsistent with the policy underlying the ADEA. The petitioner there noted that arbitrators often did not issue written opinions and that this would result, inter alia, in "a lack of public knowledge of employers' discriminatory policies...." Gilmer, 500 U.S. at 31, 111 S.Ct. 1647. Under the NYSE rules, while written opinions stating the basis for an award were not mandated, written awards containing the names of the parties and a summary of the issues were required. Accordingly, the Supreme Court's rejection of the petitioner's argument is not controlling here. Nevertheless, its response persuades us that it would not find confidentiality in Title VII arbitrations unenforceable as against public policy.

In the course of upholding the agreement to arbitrate ADEA claims under the NYSE rules, the Court pointed to the ADEA's flexible approach to the resolutions of claims, noting that the United States Equal Employment Opportunity Commission ("EEOC") is directed to pursue "informal methods of conciliation, conference, and persuasion," id. at 27, 111 S.Ct. 1647, all of which produce no publicly available records. In specific response to the concerns about some arbitrations remaining outside the public domain, the Court pointed out that such "concerns apply equally to settlements of ADEA claims, which ... are clearly allowed." Id. at 32, 111 S.Ct. 1647.

This suggests to us that the Supreme Court would not view as a fatal defect the fact that, under Appellants' employment contract, some resolutions of Title VII claims will remain outside the public domain. This rationale, we conclude, applies equally to claims brought under the Virgin Islands' civil rights laws and the WDA. While it is true that the Virgin Islands has adopted a strong public policy prohibiting discrimination in all its forms, see 10 V.I.Code Ann. § 1,11 nothing in these statutes prohibits parties from settling such claims privately. Moreover, we do not perceive the potential for confidentiality in arbitrations as posing a substantial threat to employees' future ability to prove a case under these statutes. As in Gilmer, the governing arbitration rules provide for discovery and "there has been no showing in this case that [those] discovery provisions ... will prove insufficient to allow [plaintiffs] ... a fair opportunity to present their claims." Id. a