Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 01-CV-1191) District Judge: The Honorable Donetta W. Ambrose
Before: Roth, Fuentes and Aldisert, Circuit Judges
The opinion of the court was delivered by: Aldisert, Circuit Judge
This appeal by an employee from a district court order compelling arbitration of her employment discrimination claims requires us to determine whether the entire arbitration agreement between her and her employer was vitiated when the court voided the agreement's attorney's fees and arbitration costs provision for offending federal statutes and ruling case law. After making the excisions, the court ordered the discrimination issues to arbitration. We affirm.
At tension here are two important expressions of public policy. We must respect the "liberal federal policy favoring arbitration agreements," Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983), illustrated by the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-16. Yet, we must face the equally strong policies of (1) invalidating arbitration agreements when "large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum[,]" Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90 (2000), and (2) permitting the award of attorney's fees to a prevailing party pursuant to Title VII, 42 U.S.C. § 2000e-5(k), and the Age Discrimination in Employment Act ("ADEA"), 29 U.S.C. §§ 626(b), 216(b).
The federal policy encouraging recourse to arbitration requires federal courts to look first to the relevant state law of contracts, here Pennsylvania, in deciding whether an arbitration agreement is valid under the FAA. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Pennsylvania courts have held that if an essential term of a contract is deemed illegal, it renders the entire contract unenforceable by either party. Diebler v. Chas. H. Elliot Co., 81 A.2d 557, 560-561 (Pa. 1951) (stating that a bilateral bargain containing both a legal and illegal promise may not be enforced when the illegal portion is the essential consideration for the bargain).
In light of the pro-arbitration federal policy and Pennsylvania contract law, we believe that the make-or-break task before us is to decide whether the stricken portion of the employment arbitration agreement constitutes "an essential part of the agreed exchange" of promises. RESTATEMENT (SECOND) OF CONTRACTS § 184(1) (1981). We conclude that it does not.
"The essence of the [disputed] contract . . . is an agreement to settle . . . employment disputes through binding arbitration." Gannon v. Circuit City Stores, Inc., 262 F.3d 677, 681 (8th Cir. 2001). Accordingly, we agree with the district court that "[t]he provisions regarding payment of arbitration costs and attorney's fees represent only a part 'of [the] agreement and can be severed without disturbing the primary intent of the parties to arbitrate their disputes.' " Spinetti v. Serv. Corp. Int'l, No. 01-11911, 13 (W. D. Pa. Nov. 15, 2001) (opinion and order of court) [hereinafter D. Op.] (quoting Gannon, 262 F.3d at 681). You don't cut down the trunk of a tree because some of its branches are sickly.
Appellant Maryann Spinetti began working for Service Corporation International ("SCI") as a sales counselor on April 10, 1989. On May 29, 1997, SCI presented Spinetti with a document described as a "new personnel policy," but labeled "Principles of Employment" ("Agreement"). The employer told Spinetti to sign the Agreement in order to acknowledge receipt. After a cursory review, she signed the document, and both parties became bound by it.
Her employment was terminated on or about October 23, 2000. The circumstances underlying the termination are irrelevant to the issue on appeal, but essentially involve allegations that Spinetti engaged in inappropriate conduct including treating staff abusively, throwing an object at a co-worker and using vulgar language. She subsequently filed this lawsuit alleging that SCI terminated her employment because of her age and gender in violation of Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e et seq., and the ADEA, 29 U.S.C. §§ 621 et seq. SCI moved to dismiss the complaint and compel arbitration.
Before the district court, Spinetti contended that the arbitration agreement was not enforceable because it prevented her from fully and effectively vindicating her ADEA and Title VII rights. She grounded this argument in the Legal Counsel/Costs provision of the arbitration agreement which required: (1) that each party pay its own costs and attorney's fees, regardless of the outcome of the arbitration; and (2) that each party pay one-half of the compensation to be paid to the arbitrator(s), as well as one-half of any other costs relating to the administration of the arbitration proceeding. Agreeing with Spinetti that these requirements offended ruling case law and federal statutes, the district court severed the attorney's fee and costs provision from the arbitration agreement. However, the district court also granted SCI's motion to dismiss, and compelled the parties to proceed to an arbitration which was to be governed by the remaining provisions of the agreement, relevant case law and the statutory guidelines of Title VII and ADEA. Spinetti appeals the district court's determination and argues that inasmuch as the attorney's fees and costs provision is deemed contrary to law, the court should have voided the entire arbitration agreement instead of merely trimming its offensive portions.
The district court had jurisdiction pursuant to 28 U.S.C. § 1331, and converted the Appellee's Motion to Dismiss and Compel Arbitration into a Motion for Summary Judgment. It granted Appellee's Motion, ordered the parties to proceed with arbitration and instructed the court clerk to mark the case closed. This decision is final within the meaning of FAA, 9 U.S.C. § 16(a)(3), and we have appellate jurisdiction pursuant to 28 U.S.C. § 1291. Green Tree, 531 U.S. at 89 (holding that an order compelling arbitration and dismissing all other claims is final and immediately appealable); Blair v. Scott Specialty Gases, 283 F.3d 595, 602 (3d Cir. 2002) (same). Appellant filed a timely appeal. We review the grant of summary judgment de novo. Id. at 602-603.
The Agreement was designed to resolve employment-related disputes between SCI and its employees through arbitration rather than courtroom litigation. With limited exclusions, not applicable here, the Agreement stated that "all disputes relating to any aspect of Employee's employment with the Company shall be resolved by binding arbitration," including claims brought by the employee against SCI and claims by SCI against the employee. Agreement from SCI Central Region on Principals of Employment, Form: P44, 1. The Agreement directs that an Arbitrator shall apply the statutes, rules or regulations governing arbitrations in the state in which the employee is or most recently was employed by SCI -- in this case, Pennsylvania. Absent such guidance, the Agreement provided, the arbitration proceedings shall be conducted in accordance with the employment arbitration rules of the American Arbitration Association. "In the event of any inconsistency between [the] Agreement and the statutes, rules or regulations to be applied, the terms of the Agreement shall apply." Id. at 3.
Most notably, the Agreement contains the following provision relating to legal fees and arbitration costs:
Each party may retain legal counsel and shall pay its own costs and attorney's fees, regardless of the outcome of the arbitration. Each party shall pay one-half of the compensation to be paid to the arbitrator(s), as well as one-half of any other costs relating to the administration of the arbitration proceeding (e.g., room rental, court reporter, etc.) Id. at 2.
The Agreement has no severability clause and provides that no provision pertaining to arbitration may be modified except by a written agreement ...