In the
United States Court of Appeals
For the Seventh Circuit

No. 00-2355

Craig Penn,

Plaintiff-Appellee,

v.

Ryan’s Family Steak Houses, Inc.,

Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of Indiana, Fort Wayne Division.
No. 99-CV-0530--William C. Lee, Chief Judge.

Argued November 28, 2000--Decided October 17, 2001



  Before Harlington Wood, Jr., Diane P. Wood,
and Evans, Circuit Judges.

  Diane P. Wood, Circuit Judge. Craig Penn
worked as a server at Ryan’s Family Steak
Houses (Ryan’s) in Fort Wayne, Indiana,
from 1996 until 1998. After he was fired,
he filed this suit under the Americans
with Disabilities Act (ADA) alleging that
he had been subjected to a hostile work
environment at Ryan’s and that he was
fired in retaliation for his complaints
about the harassment. In the district
court, Ryan’s filed a motion seeking to
stay the case and compel arbitration,
alleging that Penn was bound by an
arbitration agreement he signed when he
applied for his job at Ryan’s. The
district court found that the arbitration
agreement Penn signed would create an
arbitration panel that was biased in
favor of Ryan’s. In addition, the court
found that Penn had not made a knowing
and voluntary waiver of his right to a
judicial forum for his dispute, an
omission the court found fatal to the
company’s effort to enforce the
agreement. For these reasons, the
district court denied the motion Ryan’s
had filed. Ryan’s brought an
interlocutory appeal of that order
pursuant to 9 U.S.C. sec. 16(a) (1)(A) &
(B). We agree with the district court
that the arbitration contract Penn signed
is unenforceable, although we reach that
conclusion for different reasons.

I

  At the outset, it is important to make
one thing clear: Penn never signed an
arbitration agreement, pre-employment or
otherwise, with Ryan’s. We thus do not
have before us the conventional case in
which the question is whether a
particular dispute falls within the scope
of an arbitration agreement or whether an
alleged agreement between an employer and
its employee to arbitrate various
disputes is unenforceable for some
reason. The document relating to
arbitration that Penn signed was quite a
different animal. Before Penn ever
arrived on the scene, Ryan’s had entered
into a contract with a company called
Employment Dispute Services, Inc. (EDS)
to have EDS provide an arbitration forum
for all employment-related disputes
between Ryan’s and its employees. When
Penn applied for a job at Ryan’s, Ryan’s
required him to execute a contract with
EDS. That contract in turn expressed
Penn’s agreement to use EDS’s services to
arbitrate any employment-related claims
he might have against Ryan’s. The
document went on to state explicitly that
it was a contract with EDS, not with
Ryan’s, although it added that Ryan’s was
a third-party beneficiary of the
contract. EDS’s sole business is
apparently the provision of arbitration
services for employment disputes
according to this model: EDS contracts
with employers to provide an arbitration
forum for any claims the company’s
employees bring against it, and the
companies that contract with EDS then
require their employees to enter into
separate contracts with EDS.

  The arbitration agreement that Penn
signed is largely devoid of specifics
about the obligations it imposes on EDS.
The contract goes on for two pages
detailing the types of claims Penn is
required to arbitrate. The only mention
of any EDS responsibility, however, is a
brief phrase saying that Penn is agreeing
to the contract "[i]n consideration of
the agreement by EDS to provide an
arbitration forum." At the same time he
received and signed the
arbitrationagreement, Penn also received
a copy of EDS’s Rules and Procedures (the
Rules), which set out the specifics of
the services EDS provides in somewhat
more detail. According to that document,
EDS provides parties to disputes before
it with a panel of three arbitrators: one
a member of management at a company that
uses EDS’s services (but not the company
involved in the dispute), one a non-
management employee of one of the EDS
companies, and the third an "[a]ttorney[
], retired judge[ ], or other competent
professional person[ ] not associated
with either party." When an employee
brings a dispute to EDS for arbitration,
EDS provides the parties to the dispute
with a list of three potential
arbitrators in each category (managers,
employees, and neutrals). Each side is
allowed one strike in each category, and
the remaining three arbitrators form the
panel. The Rules also allow each side
unlimited strikes "for cause." Although
the procedure after a potential
arbitrator is struck for cause is not
explained in the Rules, it appears that
EDS would then add another potential
arbitrator to the list so that the
parties could move on to their peremptory
strikes. EDS retains discretion to
determine whether an arbitrator will be
struck for cause and also retains
complete control over whoappears on the
lists of proposed arbitrators.

  The Rules set out limited procedures for
discovery, allowing each side unlimited
document requests, but only one
deposition in the absence of
extraordinary circumstances. The Rules
provide that the arbitrators must apply
the substantive law that would have
applied to the employee’s claim in a
court of competent jurisdiction and that
the decision of the panel will be final
and binding. The panel of arbitrators is
given discretion to set the time and
place of the hearing. Finally, the Rules
charge the chief executive officer of EDS
with interpreting the Rules and deciding
"any issue which may arise relating to
them," and give EDS the power
unilaterally to amend or modify the
Rules.

  In the district court, Penn argued that
the EDS arbitration system is inherently
biased against employees. Relying on
cases such as Hooters of America, Inc. v.
Phillips, 173 F.3d 933, 938-39 (4th Cir.
1999), Penn reasoned that an arbitration
agreement that forces a party to
arbitrate before a biased tribunal cannot
be enforceable. Although Penn raised
objections to several aspects of the EDS
system, the overarching theme of his
challenge was that EDS is no more than a
straw-man for the employers who fund it,
and thus, presumably, any award they
rendered would reflect the kind of
"evident partiality" that the Federal
Arbitration Act (FAA), 9 U.S.C. sec.
10(a)(2), recognizes as a reason for
unenforceability. As Penn notes, with the
exception of relatively insignificant
filing fees, employers pay the cost of
EDS arbitration. Unlike some other
arbitration fora such as the American
Arbitration Association, EDS handles only
employment arbitration, so essentially
all of its funding comes from employers.
In addition, the employers who contract
with EDS are repeat players, and if an
employer becomes dissatisfied with EDS’s
services, EDS stands to lose a
substantial amount of business. On the
other hand, EDS has no incentive to seek
approval from the employees who appear
before it, because the employees are for
all practical purposes captive customers.
For all these reasons, Penn argues, EDS
has a very strong incentive to tilt its
arbitration panels in favor of the
companies that employ it.

  EDS also has ample opportunity to tilt
the scales. As noted above, the contract
Penn signed with EDS provides no details
about the forum that will be provided.
Although the Rules and Procedures do set
out more specifics, EDS retains the right
to modify them at any time without notice
to or consent from the employees who have
entered into the EDS agreements. Even as
the Rules stand, Penn argues, EDS has
substantial opportunity to shade its
procedures in favor of employers. First,
unlike the usual system with two partisan
arbitrators and one neutral, under which
each party has free rein to name its own
advocate, here EDS has complete control
over the names that appear on the lists
for both the employer’s arbitrator and
the employee’s arbitrator. Although both
the employer and the employee have the
right to strike arbitrators from the
lists for cause, this feature is of
little practical help to the employee as
long as EDS controls the three names from
which the employee must choose. Nothing
prevents EDS from finding the stool
pigeons among the employee population and
offering the employee only the
opportunity to choose the least among
three evils. In addition, EDS’s rules
contain very restrictive discovery
provisions, allowing each side only one
deposition in most cases. As Penn points
out, employment disputes are often
extremely fact-intensive battles between
witnesses with sharply different
recollections of events, and a single
deposition is likely to be inadequate in
many cases. Although the Rules allow
parties to petition the arbitration panel
for permission to take additional
depositions in "extraordinary fact
situations," the Rules also explicitly
discourage such requests. If the panels
are indeed predisposed against employees,
as Penn suggests, an employee seeking
permission to conduct additional
discovery would most likely face an
uphill battle. Finally, under the Rules
set out by EDS, EDS has complete
discretion over the location and time of
the arbitration proceedings. This power,
Penn argues, could easily be used to
inconvenience an employee or impose
exorbitant travel expenses on him.

  In response to Penn’s objections, Ryan’s
introduced an affidavit from the Chairman
and co-owner of EDS, James P. LaCoste,
which addressed many of Penn’s concerns.
First, LaCoste averred that the EDS
process for selecting arbitrators
incorporated "numerous safeguards" to
"ensure fairness and neutrality of the
panel." The lists of potential
arbitrators are generated solely by EDS,
LaCoste noted, and employers have
"absolutely no input" into the selection
of potential arbitrators. In addition,
both the management arbitrator and the
employee arbitrator are "neutral" in the
sense that they are not employed by, and
do not have any ties to, the employer
involved in the dispute. The third
arbitrator, according to LaCoste, is a
"neutral, respected attorney." LaCoste
stressed that EDS is "neither controlled,
managed nor influenced by Ryan’s Family
Steak Houses." Finally, in response to
Penn’s concern about being forced to
arbitrate far from home, LaCoste stated
that "[t]he physical location of the
adjudication hearings is the city and/or
county in which the employee was
employed."

  After considering the EDS contract, the
Rules, and LaCoste’s affidavit, the
district court concluded that the EDS
system was inherently biased against
employees and therefore refused to compel
Penn to arbitrate his ADA claim. The
district court accepted Penn’s contention
that EDS had very strong financial
incentives to tilt its scales towards
employers, and against this backdrop, the
court found that the system allowed EDS
entirely too much discretion. The court
was particularly troubled by the fact
that EDS, which the court saw as
essentially an alter-ego for the
employer, had complete control over the
lists of potential arbitrators. The court
was also concerned that the restrictive
discovery provisions would be enforced
unfairly against employees. In the
alternative, the district court applied a
standard borrowed from the Ninth Circuit,
which requires that an employer seeking
to enforce an arbitration agreement show
that the employee knowingly waived a
judicial forum. See, e.g., Prudential
Ins. Co. v. Lai, 42 F.3d 1299, 1305 (9th
Cir. 1994). It held that Ryan’s had not
met that standard in this case.

II

  Arbitration has become a common tool in
resolving employment disputes in recent
years, and employers are increasingly
requiring employees to sign contracts
obligating them to arbitrate disputes as
a condition of employment. The Supreme
Court’s recent decision in Circuit City
Stores, Inc. v. Adams, 121 S. Ct. 1302
(2001), removes any lingering doubts as
to whether these agreements are
enforceable under the FAA. In the wake of
Circuit City, it is clear that
arbitration agreements in the employment
context, like arbitration agreements in
other contexts, are to be evaluated
according to the same standards as any
other contract.

  The Supreme Court has repeatedly
counseled that the FAA leaves no room for
judicial hostility to arbitration
proceedings and that courts should not
presume, absent concrete proof to the
contrary, that arbitration systems will
be unfair or biased. See, e.g., Green
Tree Financial Corp. v. Randolph, 121 S.
Ct. 513, 522 (2000); Gilmer v.
Interstate/ Johnson Lane Corp., 500 U.S.
20, 30 (1991). In this appeal, Ryan’s
argues that the district court violated
these principles when it determined that
the EDS system was inherently biased
against employees. While the district
court was correct to recognize that at
some point an arbitral procedure may
become so biased (perhaps because of
"evident partiality" of the arbitrators,
perhaps for another reason) that an award
would not be entitled to recognition and
enforcement, we are concerned that the
district court placed too much weight on
certain specifics of this system that, in
and of themselves, do not distinguish it
from many others that have passed muster
(such as funding from someone principally
associated with the employer, see Gilmer,
supra, or limited discovery, id. at 30-
32). The court placed little weight on
the safeguards that EDS had built into
its system, particularly the unwritten
rules that LaCoste, who is charged with
interpreting the EDS Rules, described in
his affidavit. Ultimately, though, we
need not resolve whether the EDS system
is so deeply flawed that it should be re
jected on its face (a difficult standard
to meet, as Green Tree makes clear), as
opposed to compelling its use in arbitra
tions and evaluating the enforceability
of particular awards. In this case, we
find that regardless of the merit of
EDS’s system, Penn never entered into an
enforceable contract to participate in
it.

  While the Supreme Court has stressed in
recent years that federal policy under
the FAA favors the enforcement of valid
arbitration agreements, see, e.g.,
Circuit City, 121 S. Ct. at 1307; Gilmer,
500 U.S. at 24, the Court has been
equally adamant that a party can be
forced into arbitration only if she has
in fact entered into a valid, enforceable
contract waiving her right to a judicial
forum. AT&T Technologies, Inc. v.
Communications Workers of America, 475
U.S. 643, 648 (1986) ("[A]rbitration is a
matter of contract and a party cannot be
required to submit to arbitration
anydispute which he has not agreed so to
submit."). Whether the parties have
agreed to arbitrate is determined under
ordinary state law contract principles.
Gibson v. Neighborhood Health Clinics,
Inc., 121 F.3d 1126, 1130 (7th Cir.
1997). Because Indiana was the situs of
all relevant events in this dispute, we
apply that state’s law in analyzing the
contract question. Id. The threshold
question in this case, therefore, is
whether the arbitration agreement that
Penn signed amounted to an enforceable
contract under Indiana law.

  The existence of a valid Indiana
contract depends on mutuality of
obligation. "[T]here can be no contract
unless both parties are bound." Rogier v.
American Testing & Eng’g Corp., 734
N.E.2d 606, 618 (Ind. Ct. App. 2000).
Although mutual promises can form the
consideration for a valid contract,
Hamlin v. Steward, 622 N.E.2d 535, 539
(Ind. Ct. App. 1993), "a contract is
unenforceable if it is so indefinite and
vague that the material provisions cannot
be ascertained." Pepsi-Cola General
Bottlers v. Woods, 440 N.E.2d 696, 699
(Ind. Ct. App. 1982). An illusory
promise, one which "by its terms makes
performance entirely optional with the
promisor," cannot form the basis for a
valid contract, Pardieck v. Pardieck, 676
N.E.2d 359, 364 n.3 (Ind. Ct. App. 1997),
because "a contract is unenforceable if
it fails to obligate [one party] to do
anything." Indiana-American Water Co. v.
Town of Seelyville, 698 N.E.2d 1255, 1260
(Ind. Ct. App. 1998).

  As we have already observed, this case
differs from the typical case in which an
employer and employee agree to arbitrate
their disputes because of the complicated
three-party approach by which Ryan’s
sought to bind Penn to arbitration.
Although Penn obviously was motivated to
sign the arbitration agreement because
Ryan’s otherwise would not have
considered him for employment, the
contract that Penn signed underscores
that it is between Penn and EDS and that
Ryan’s is not a party to the contract.
(We add for the sake of completeness that
if the Penn-EDS contract is not valid,
then the claim Ryan’s has to third-party
beneficiary status also falls by the
wayside.) The first question is therefore
whether the Penn-EDS contract contains
mutual promises and commitments by each
party to the other.

  We conclude that it does not; to the
contrary, the arbitration agreement
between EDS and Penn contains only an
unascertainable, illusory promise on the
part of EDS. The agreement is clear
enough as to what Penn is promising: he
agrees that he will bring any employment-
related dispute that he has with Ryan’s
in the EDS arbitration forum and not in
state or federal court. The agreement
restates this proposition several times
in various ways, and goes into some
detail as to the types of disputes that
are covered by the agreement and the
duration of Penn’s obligation. In marked
contrast to the specificity of Penn’s
obligation is the language describing the
consideration EDS is obligated to provide
Penn in return: EDS commits itself only
"to provide an arbitration forum, Rules
and Procedures, and a hearing and
decision based on any claim or dispute"
that the employee might raise. Nothing in
the contract provides any details about
the nature of the forum that EDS will
provide or sets standards with which EDS
must comply; EDS could fulfill its
promise by providing Penn and Ryan’s with
a coin toss. Although Penn was given the
EDS Rules along with the contract he
signed, and we will assume that the Rules
form part of the contract, adding the
Rules to the mix does nothing to make
EDS’s commitment more concrete, because
the Rules specifically give EDS the sole,
unilateral discretion to modify or amend
them. The contract is therefore
hopelessly vague and uncertain as to the
obligation EDS has undertaken. For all
practical purposes, EDS’s promise under
this contract "makes performance entirely
optional with the promisor." Pardieck,
676 N.E.2d at 364 n.3. The Sixth Circuit
has recently held that these defects with
identical EDS arbitration agreements
render the agreements unenforceable as a
matter of Tennessee and Kentucky law, see
Floss v. Ryan’s Family Steak Houses,
Inc., 211 F.3d 306, 315-16 (6th Cir.
2000).

  This is not the end of our inquiry.
Indiana law does not require that both
promises of obligation be contained in
the contract at issue. It is also
permissible to incorporate such contract
terms by reference in a separate
contemporaneous document. Goeke v.
Merchants Nat’l Bank & Trust Co. of
Indianapolis, 467 N.E.2d 760, 768 (Ind.
Ct. App. 1984). Thus, we may also search
other agreements to locate a promise that
binds EDS, as "consideration for the
promise in one instrument may be
contained in another." Gibson, 121 F.3d
at 1131. The only other contract
involving EDS here is its contract with
Ryan’s, which hypothetically could
contain a promise to take some action in
this contract that would have the effect
of binding it with respect to Penn. But
the EDS-Ryan’s contract also does nothing
to limit EDS’s ability to amend its
procedures, reinforcing our opinion that
its promise to Penn is unenforceable and
illusory. The fact that EDS and Ryan’s
may cancel their agreement with ten days’
notice also does nothing to inspire our
confidence that EDS is incurring any real
detriment here.

  The last place we can look for some
mutuality of obligation is in the
employment application Penn submitted to
Ryan’s. Mutuality can be imposed not only
through a detriment to the promisor but
also through a benefit to the promisee.
Paint Shuttle, Inc. v. Continental Cas.
Co., 733 N.E.2d 513, 523 (Ind. Ct. App.
2000). The application twice states that
all applicants must sign the arbitration
contract with EDS in order to be
considered for employment with Ryan’s.
Perhaps, then, this benefit could be seen
as consideration for Penn’s agreement to
arbitrate.

  We have several problems with such an
approach. First, despite a careful
search, we find no support in Indiana law
for the proposition that a benefit
received from a third party, as opposed
to a benefit received from the other
contracting party in a contemporaneous
document, can be sufficient to create
mutuality. Even in the surety and
guaranty context, the Indiana courts have
always found the promises constituting
consideration in contemporaneous
agreements involving the promisor and
promisee, not third parties. See, e.g.,
Goeke, 467 N.E.2d at 768; Torres v. Meyer
Paving Co., 423 N.E.2d 692, 695 (Ind. Ct.
App. 1981). Second, even if such an
approach were possible, the two
agreements do not seem to relate to the
same basic subject matter. Compare
Leatherman v. Management Advisors, Inc.,
448 N.E.2d 1048, 1050 (Ind. 1983)
(finding no consideration because
agreements had different subject matters,
one relating to employment and the other
to sales accounts). Third, while an offer
of employment may constitute
consideration for a separate agreement,
Advanced Copy Products, Inc. v. Cool, 363
N.E.2d 1070, 1071 (Ind. Ct. App. 1977),
the defendants provide no evidence that
any Indiana court has ever held that a
mere promise to consider an application
for employment would provide
consideration for a separate contract.
Finally, we note that the parties could
have solved their consideration problem
entirely simply by making Ryan’s a party
to the contract. (Perhaps the parties
avoided such a direct provision for fear
that the Supreme Court might use Circuit
City to strike down or restrict such
agreements--a fear that has since proved
unfounded. If so, the half-life of the
kind of system EDS has been using may be
rather short at this point.) While this
may be a formal distinction, the fact
remains that EDS and Ryan’s affirmatively
chose to structure their transaction this
way. Contracts are in part about
formalism, and courts do not simply
rewrite them to provide the necessary
elements of initial contract formation.
Compare General Motors Corp. v. Northrop
Corp., 685 N.E.2d 127, 135 (Ind. Ct. App.
1997) ("Courts do not have the power to
create for the parties a contract which
they did not make.") Therefore, we find
that any promises Ryan’s made to induce
Penn to enter the contract with EDS did
not create an enforceable contract
between those parties.

  For these reasons, we hold that the
arbitration agreement between Penn and
EDS is not enforceable. Given this
holding, we need not decide whether this
circuit should adopt the Ninth Circuit’s
"knowing and voluntary waiver" standard
for evaluating the enforceability of
arbitration agreements in the employment
context, although we question the
continued validity of such an approach in
light of the Circuit City decision. See
121 S. Ct. at 1313 ("We have been clear
in rejecting the supposition that the
advantages of the arbitration process
somehow disappear when transferred to the
employment context."). The decision of
the district court is Affirmed, and the
case is remanded for further proceedings.



  HARLINGTON WOOD, JR., Circuit Judge,
concurring. I completely agree with the
careful and thoughtful analysis of the
foregoing opinion and the result reached,
and only write separately to note a few
practical considerations to put this in
perspective. It was an unfair situation
from its inception.

  Penn was being hired as a waiter in a
chain restaurant, not as a corporate
executive. His employment was only to be
"at will." Likely a substantial share of
his income would be from tips. The
agreement, the rules, the relationships
between the parties, and the
ramifications of the arbitration
arrangement have now reached this court
to sort out. Above his signature this
agreement states that Penn signed it
"knowingly and voluntarily." We doubt it
could have been "knowingly" in view of
its complexities, or even "voluntarily."
Had he questioned its meaning and its
complexities, it is doubtful Penn would
have been hired. However, the agreement
provided that Penn had the right to
consult an attorney, but even if Penn
could have afforded an attorney, the
appearance of any attorney on the scene
would doubtless have foreclosed any job
opportunity. In Ryan’s eyes, Penn would
look like a troublemaker. If he wanted
the waiter’s job, he would be trapped in
an unfair situation until a court could
unravel it.
