     Case: 15-10531   Document: 00513404235     Page: 1   Date Filed: 03/02/2016




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT


                                 No. 15-10531                  United States Court of Appeals
                                                                        Fifth Circuit

                                                                      FILED
MICHAEL NELSON,                                                   March 2, 2016
                                                                 Lyle W. Cayce
             Plaintiff - Appellant                                    Clerk

v.

WATCH HOUSE INTERNATIONAL, L.L.C.,

             Defendant - Appellee




                Appeal from the United States District Court
                     for the Northern District of Texas


Before STEWART, Chief Judge, and OWEN and COSTA, Circuit Judges.
CARL E. STEWART, Chief Judge:
      Plaintiff-Appellant Michael Nelson (“Nelson”), a former employee of
Defendant-Appellee Watch House International, L.L.C. (“Watch House”),
appeals the district court’s order granting Watch House’s motion to compel
arbitration and dismissing Nelson’s claims. The district court held, inter alia,
that the parties’ arbitration agreement was not illusory under In re
Halliburton Co., 80 S.W.3d 566 (Tex. 2002). Because we conclude that the
parties’ agreement contains no Halliburton-type savings clause that requires
advance notice before termination is effective, we REVERSE and REMAND.
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                                       I.
     On March 18, 2010, Watch House offered Nelson a position as a
Recurrent Training Instructor for the Federal Air Marshal Program at Dallas,
Texas. That same day, Watch House sent Nelson an electronic copy of its
employee handbook, entitled, “Employee Handbook, Safety, Arbitration Plan
and Drug/Alcohol Policy.” Pertinent here, the employee handbook contained
Watch House’s Arbitration Plan (the “Arbitration Plan” or the “Plan”), which
included the following language:
     As a condition for reviewing your application for employment and
     if employed, continued employment . . . [Company] and the
     Applicant/Employee designated below mutually agree to arbitrate
     claims relating to his/her being considered for employment and
     subsequent employment, if any, as specified below.
     The Company and Applicant/Employee each voluntarily promise
     and agree to submit any claim covered by this agreement to
     binding arbitration. We further agree that arbitration pursuant
     to this agreement shall be the sole and exclusive remedy for
     resolving any such claims or disputes. . . .
     It is mutually agreed that this document shall govern and apply to
     the resolution of all claims and/or disputes between and among
     Applicant/Employee and the Company . . . concerning: (1) Any
     federal, state, or local laws, regulations, or statutes prohibiting
     employment discrimination (such as, without limitation, race,
     color, sex, national origin, age, disability, religion) and harassment
     . . . [and] (4) Any claim for failure to hire or wrongful discharge of
     any kind. . . .
     This agreement is issued with the authority of the Company and
     is binding on the Company. This Agreement may not be altered
     except by consent of the Company and shall be immediately
     effective upon notice to Applicant/Employee of its terms,
     regardless of whether it is signed by either Agreeing Party. Any
     change to this Agreement will only be effective upon notice to
     Applicant/Employee and shall only apply prospectively.
     Watch House employed Nelson from March 31, 2010, until March 12,
2014. Nelson alleges that, during this time, his coworkers harassed him based

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                                         No. 15-10531
on his religion and his race. Nelson specifically alleges that his coworkers
made racial comments based on his being in an interracial relationship, which
he eventually reported to his supervisor. About fifteen days after reporting the
racial comments, Watch House terminated Nelson.
       Nelson filed suit in federal district court, alleging, inter alia, that he was
discharged in violation of Title VII of the Civil Rights Act of 1964 and Chapter
21 of the Texas Labor Code.              Watch House moved to compel arbitration
pursuant to the Arbitration Plan.              Nelson opposed that motion, primarily
arguing that: (1) he did not fall within the Plan’s definition of “employee,”
because he did not sign the Plan and the Plan defines “employee” as “the
individual whose signature is affixed hereto;” and (2) the Plan was
unenforceable because it was illusory under, inter alia, In re Halliburton Co.,
80 S.W.3d 566 (Tex. 2002), and Lizalde v. Vista Quality Markets, 746 F.3d 222
(5th Cir. 2014). 1 The district court disagreed, granting Watch House’s motion
to compel and dismissing Nelson’s lawsuit without prejudice.
       Nelson timely appealed. On appeal, Nelson raises three arguments: (1)
that the Arbitration Plan is illusory because it fails to include a savings clause
related to existing claims and disputes and requiring advance notice of
termination; 2 (2) that Nelson does not fall within the Plan’s definition of


       1  On appeal, Watch House appears to argue that Nelson waived his argument that the
Arbitration Plan is illusory by failing to raise it in the district court. See, e.g., AG Acceptance
Corp. v. Veigel, 564 F.3d 695, 700 (5th Cir. 2009) (“Under this Circuit’s general rule,
arguments not raised before the district court are waived and will not be considered on appeal
unless the party can demonstrate ‘extraordinary circumstances.’”). Our review of the record
reflects that Nelson adequately briefed his argument to the district court such that there has
been no waiver.
        2 Nelson also argues that the Arbitration Plan is illusory because the first page of

Watch House’s employee handbook, which contains the Plan, states, “[T]he procedures,
practices, policies and benefits described here may be modified or discontinued from time to
time,” and because Watch House’s Handbook and Policy Acknowledgement form states,
“[T]he Company reserves the right to . . . revoke [its] policies and practices and any of [its]
terms at any time with or without notice.” Because we conclude that the language in the
Arbitration Plan alone renders the Plan illusory, we need not reconcile language contained
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                                    No. 15-10531
“employee” and so is not bound to arbitrate; and (3) that the district court
abused its discretion in considering inadmissible evidence in ruling on Watch
House’s motion. Because we agree with Nelson’s first argument, we need not
reach the latter two issues.
                                          II.
      We review de novo the district court’s grant of Watch House’s motion to
compel arbitration. Lizalde, 746 F.3d at 225. We first consider whether Watch
House and Nelson agreed to arbitrate this particular type of dispute. See, e.g.,
Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th Cir. 2012). This
requires that we ask two questions: “(1) whether there is a valid agreement to
arbitrate between the parties; and (2) whether the dispute in question falls
within the scope of that arbitration agreement.” Id. (quoting JP Morgan Chase
& Co. v. Conegie ex rel. Lee, 492 F.3d 596, 598 (5th Cir. 2007)). Nelson does
not challenge that his employment-related claims fall within the scope of the
Arbitration Plan. Rather, he challenges the first question, arguing that the
Plan is illusory and, therefore, unenforceable.
      Though the Federal Arbitration Act “reflects a liberal federal policy
favoring arbitration,” id. at 205 (internal quotation marks and citation
omitted), that policy “does not apply to the determination of whether there is
a valid agreement to arbitrate between the parties,” Morrison v. Amway Corp.,
517 F.3d 248, 254 (5th Cir. 2008).              Instead, “to determine whether an
agreement to arbitrate is valid, courts apply ordinary state-law principles that
govern the formation of contracts.” Carey, 669 F.3d at 205 (internal quotation
marks and citation omitted).




in other Watch House documents. Cf. Sharpe v. AmeriPlan Corp., 769 F.3d 909, 915–16 (5th
Cir. 2014); Torres v. S.G.E. Mgmt., L.L.C., 397 F. App’x 63, 65–66 (5th Cir. 2010).
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      Both parties agree that Texas law governs.           Under Texas law, an
arbitration agreement, “like other contracts,” must be supported by
consideration. Lizalde, 746 F.3d at 225 (quoting Mendivil v. Zanios Foods,
Inc., 357 S.W.3d 827, 831 (Tex. App.–El Paso 2012)).          Though a mutual
agreement to arbitrate claims is sufficient consideration to support an
arbitration agreement, the agreement is illusory “[w]here one party has the
unrestrained unilateral authority to terminate its obligation to arbitrate.” Id.;
see also Carey, 669 F.3d at 205 (“Under Texas law, an arbitration clause is
illusory if one party can ‘avoid its promise to arbitrate by amending the
provision or terminating it all together.’” (quoting In re 24R, Inc., 324 S.W.3d
564, 567 (2010) (per curiam))).
      This is not to say, however, “that if a party retains any ability to
terminate the agreement, the agreement is illusory.” Lizalde, 746 F.3d at 226.
In Halliburton, the seminal Texas case, an employee argued that an
arbitration agreement was illusory because it purported to grant an employer
the unilateral right to terminate or modify an arbitration agreement. See 80
S.W.3d at 569–70. In concluding that the arbitration agreement was not
illusory, the Texas Supreme Court relied upon two key provisions—the
agreement provided that “no amendment shall apply to a Dispute of which . . .
[employer] had actual notice on the date of amendment” and that “termination
shall not be effective until 10 days after reasonable notice of termination is
given to Employees or as to Disputes which arose prior to the date of
termination.” Id. at 569–70.      Because of these two provisions, the Texas
Supreme Court held that the employer could not “avoid its promise to arbitrate
by amending or terminating [the arbitration agreement] altogether.” Carey,
669 F.3d at 206 (quoting Halliburton, 80 S.W.3d at 570); see also In re 24R,
Inc., 324 S.W.3d 564, 567 (Tex. 2010) (explaining that the Halliburton court
“held that because the [arbitration agreement] contained a ‘savings clause’—
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including a ten-day notice provision and a provision that any amendments
would only apply prospectively—that prevented the employer from avoiding its
promise, the arbitration agreement was not illusory” (citing Halliburton, 80
S.W.3d at 570)).
      Following Halliburton, we have had several occasions to consider
whether parties’ arbitration agreements were illusory. See, e.g., Sharpe v.
AmeriPlan Corp., 769 F.3d 909, 918 (5th Cir. 2014); Lizalde, 746 F.3d at 225–
26; Carey, 669 F.3d at 205–09; Morrison, 517 F.3d at 253–57. Most recently,
we articulated a simple, three-prong test to determine whether a Halliburton-
type savings clause sufficiently restrains an employer’s unilateral right to
terminate its obligation to arbitrate. See Lizalde, 746 F.3d at 226. “[R]etaining
termination power does not make an agreement illusory so long as that power
(1) extends only to prospective claims, (2) applies equally to both the employer’s
and employee’s claims, and (3) so long as advance notice to the employee is
required before termination is effective.” Id. (citing Halliburton, 80 S.W.3d at
569–70).
      Despite Lizalde’s three-part test, Appellees argue that cases from our
circuit pre-dating Lizalde and decisions from the Texas Supreme Court suggest
that an employer’s unilateral right to terminate an arbitration agreement does
not render the agreement illusory so long as the agreement meets the first
prong of Lizalde, i.e., so long as the employer’s termination power extends only
to prospective claims. This argument is unsupported by our precedent and
decisions from Texas courts.
      It is true that, at times, we have held that arbitration agreements failed
to meet Halliburton solely because the agreement contained no express
limitation on an employer’s power to make unilateral changes to an arbitration
agreement that have “retroactive effect,” meaning “changes . . . that would
strip the right of arbitration from an employee who has already attempted to
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invoke it,” Carey, 669 F.3d at 205, or changes that apply to “disputes which
had arisen and of which [the employer] had notice prior” to the change,
Morrison, 517 F.3d at 257. However, consistent with Lizalde’s three-prong
test, we have never published a decision holding that an arbitration agreement
satisfied Halliburton where the agreement applied only to prospective claims
but did not also require advance notice.                 See Sharpe, 769 F.3d at 918
(prospective claims only and 10-day notice window); Lizalde, 746 F.3d at 224–
26 (prospective claims only and 10-day notice window). Nor has the Texas
Supreme Court so held. See, e.g., In re Odyssey Healthcare, Inc., 310 S.W.3d
419, 424 (Tex. 2010) (per curiam) (prospective claims only and 14-day notice
window); In re AdvancePCS Health, L.P., 172 S.W.3d 603, 607–08 (Tex. 2005)
(per curiam) (prospective claims only and 30-day notice window); Halliburton,
80 S.W.3d at 569–70 (prospective claims only and 10-day notice window). 3
       Though the Texas Supreme Court has not yet had the occasion to discuss
Lizalde’s three-part formulation, numerous decisions from Texas’ intermediate
appellate courts suggest that Lizalde appropriately tracked Halliburton and
its progeny. See, e.g., Temp. Alts., Inc. v. Jamrowski, No. 08-13-00166-CV, ___
S.W.3d ___, ___ 2014 WL 2129518, at *4–5 (Tex. App.–El Paso May 21, 2014)
(collecting cases). Indeed, in Temporary Alternatives, Inc., the Texas Court of
Appeals, El Paso Division, rejected the same argument that Watch House
makes today.        See id. at *4–5. At issue there was whether the parties’



       3 In a line of decisions, the Texas Supreme Court has discussed Halliburton, but not
specifically applied it to hold that an arbitration agreement was or was not illusory. See, e.g.,
In re 24R Inc., 324 S.W.3d at 566–68 (discussing Halliburton, but holding that a stand-alone
arbitration agreement did not grant the employer a unilateral termination right such that a
Halliburton-type savings clause was required); J.M. Davidson, Inc. v. Webster, 128 S.W.3d
223, 227–32 (Tex. 2002) (discussing Hallburton but remanding for the trial court to resolve
an ambiguity). Nothing about these cases’ discussion of Halliburton in dicta suggest that the
Texas Supreme Court would hold that an arbitration agreement that limits termination only
to prospective claims, but that does not require advance notice, would survive Halliburton.
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arbitration agreement, which did not require advance notice of termination but
which did limit termination only to prospective claims, adequately restrained
the employer’s unilateral termination power as required by Halliburton. Id.
at *1, 4. The employer argued that such a limitation to only prospective claims,
alone, was sufficient because “‘Halliburton did not set the minimum floor
restrictions that must be contained in a savings clause, but . . . only required
some restrictions on the right to amend or terminate.” Id. at *4. The court
rejected this argument, reasoning that decisions from numerous Texas Courts
of Appeals “upheld arbitration agreements . . . not solely because they
prevented the employer from reneging on the agreement once arbitration
commenced, but because the savings clause mechanisms as a whole created
notice windows allowing employees to avail themselves of the opportunity to
arbitrate outstanding claims before the policy changed.” Id. at *4 (collecting
cases).
      Temporary Alternatives, Inc.’s, rejection of this argument is consistent
with Lizalde’s three-part test, which provides that a Halliburton-type savings
clause is insufficient unless it provides both advance notice and a limitation to
only prospective claims. See Lizalde, 746 F.3d at 226. Under the rule of
orderliness, we are bound by Lizalde’s advance notice requirement unless a
subsequent Texas appellate court has clearly rejected our prior interpretation
of Texas law. See, e.g., F.D.I.C. v. Abraham, 137 F.3d 264, 268–69 (5th Cir.
1998) (“[O]ne panel of this court cannot disregard, much less overrule, the
decision of a prior panel. Adherence to this rule is no less immutable when the
matter determined by the prior panel is the interpretation of state law. . . .
Thus, when a panel is considering a governing question of state law on which
a prior panel has ruled, the subsequent panel’s obligation to follow that ruling
is not alleviated by intervening decisions of intermediate state appellate courts
unless such ‘subsequent state court decisions . . . are clearly contrary to a
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previous decision of this court.’” (quoting Pruitt v. Levi Strauss & Co., 932 F.2d
458, 465 (5th Cir. 1991)). As discussed above, no Texas appellate court has
done so; rather, Temporary Alternatives, Inc., has followed Lizalde.
      In sum, having carefully reviewed case law from our circuit and Texas
courts, we are convinced that Lizalde’s three-part test remains an accurate
statement of Texas law. Accordingly, we now turn to applying Lizalde to the
language of Watch House’s Arbitration Plan at issue.
                                       III.
      There is no dispute here that Watch House’s Arbitration Plan satisfies
the second prong of Lizalde by applying equally to claims made by both Watch
House and Nelson. See Lizalde, 746 F.3d at 226. Rather, Nelson focuses our
attention on the following language in the Plan:
      This agreement may not be altered except by consent of the
      Company and shall be immediately effective upon notice to
      Applicant/Employee of its terms, regardless of whether it is signed
      by either Agreeing Party. Any change to this Agreement will only
      be effective upon notice to Applicant/Employee and shall only
      apply prospectively.
Nelson argues that this language renders the Plan illusory because, inter alia,
it fails to include a Halliburton-type savings clause that requires advance
notice of termination. We agree.
      As mentioned supra, much of the parties’ briefing is dedicated to whether
Watch House’s Arbitration satisfies the first prong of Lizalde, i.e., whether the
Plan truly extends only to prospective claims. See id. at 226. We need not
resolve that issue today. Even if there is some question as to whether the Plan
applies only to prospective claims and therefore survives the first prong of
Lizalde, the Plan unquestionably fails the third, advance notice, prong. See id.
      A comparison between the language of the arbitration agreement that
we approved in Lizalde and the language of Watch House’s Arbitration Plan is
illustrative. See id. at 224. In Lizalde, the parties’ agreement provided that
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“Company shall have the right to prospectively terminate [the Arbitration
Agreement]. Termination is not effective for Covered Claims which accrued or
occurred prior to the date of the termination. Termination is also not effective
until ten (10 days) after reasonable notice is given to Claimant.” Id. We held
that   this   language   sufficiently   restrained   the    employer’s   unilateral
termination power as required by Halliburton, because it restricted
termination of the agreement “to prospective claims, [did] not apply to claims
which accrued prior to termination, and [was] not effective until ten days after
reasonable notice is given to the employee.” Id. at 226.
       The same cannot be said of Watch House’s Arbitration Plan. Here, the
Plan provides that Watch House may make unilateral changes to the Plan,
purportedly including termination, and that such a change “shall be
immediately effective upon notice to” employees. Watch House’s retention of
this unilateral power to terminate the Plan without advance notice renders the
Plan illusory under a plain reading of Lizalde, which is supported by recent
decisions from Texas intermediate courts. See, e.g., Temp. Alts., Inc., 2014 WL
2129518, at *4–5 (collecting cases).
                                        IV.
       For these reasons, we conclude that Watch House’s Arbitration Plan was
illusory from the outset. Therefore, Nelson is not bound by the Plan, and
Watch House may not compel arbitration based on the Plan. Accordingly, we
REVERSE the district court’s grant of Watch House’s motion to compel, and
REMAND for proceedings consistent with this opinion.




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