On Appeal from the U.S. District Court for the District of the Virgin Islands, (D. V.I. No. 3-06-cv-00039), District Judge: Honorable Curtis V. Gomez.
The opinion of the court was delivered by: Fuentes, Circuit Judge
Before: McKEE, Chief Judge, FUENTES and NYGAARD, Circuit Judges
Rajae Nino brought this action against his former employer, alleging that he was discriminated against on account of his gender and national origin. After litigating the matter before the District Court for fifteen months, the employer invoked an arbitration provision in Nino's employment contract and moved the District Court to compel the parties to arbitrate their dispute. Nino opposed the motion, arguing (1) that the arbitration agreement was unconscionable and, therefore, unenforceable, and (2) that by engaging in extensive litigation of this dispute, the employer had waived its right to compel arbitration. The District Court concluded that although the arbitration agreement contained unconscionable terms, those provisions could be severed from the contract and the remainder of its terms could be enforced. The Court then concluded that the employer did not, through its litigation conduct, waive its right to compel arbitration. We disagree.
In our view, the pervasively one-sided nature of the arbitration agreement's terms demonstrates that the employer did not seek to use arbitration as a legitimate means for dispute resolution. Instead, the employer created a system that was designed to give it an unfair advantage through rules that impermissibly restricted employees' access to arbitration and that gave the employer an undue influence over the selection of the arbitrator. We hold that it is not appropriate, in the face of such pervasive one-sidedness, to sever the unconscionable provisions from the remainder of the arbitration agreement. We further conclude that the employer, by engaging in protracted litigation of this matter before belatedly seeking to arbitrate its dispute, waived its right to compel arbitration. We will thus reverse the District Court's order compelling the parties to arbitrate.
Diamonds International ("DI") is one of the world's largest jewelry retailers.*fn1 Nino is a Jordanian national who, in January 2000, agreed to work for DI as a salesperson and gemologist. Because Nino did not have a United States work visa when he was hired, he was assigned to DI's Aruba store, where he was paid $450 per week, plus commissions and housing. DI helped Nino obtain a United States work visa, after which it transferred him to its Alaska store. In September 2000, DI asked Nino to transfer to its St. Thomas location, and he agreed.
Upon his arrival at the St. Thomas store, Nino was given a copy of the company's standard employment contract. The following are some of the procedures and deadlines contained in the contract that we find most troublesome. Article IV of the contract sets forth a grievance and arbitration procedure that the contract describes as "the sole, final, binding and exclusive remedy for any and all employment[-]related disputes." (J.A. at 80.) The remedial process outlined in Article IV requires an aggrieved employee to satisfy a series of requirements before he is eligible to arbitrate a dispute. First, the employee must file with his manager a detailed written grievance within five days of having received notice of the action complained of; the manager is then required to respond with a decision within two days. If the employee is unsatisfied with the manager's decision, he must re-file the grievance with the managing director within two days of having received the manager's decision; the managing director is then required to respond with a decision within five days. If the employee is not satisfied with the managing director's decision, he must file a written request for arbitration with the managing director within five days of having received the decision.
The contract makes clear that "[t]he time limits provided for above are binding and may not be waived except by written agreement of both parties," (id. at 82), meaning that an employee who does not file grievances within the applicable time frame loses the opportunity to arbitrate a dispute altogether. The contract insulates DI against a comparable risk of default-it provides that if DI fails to respond to an employee's grievance on a timely basis, "the last decision given by [DI] shall be a final and binding resolution of the grievance." (Id.)
If an employee satisfies these grievance filing requirements, DI must submit a request to the American Arbitration Association ("AAA") for a panel of four arbitrators. The parties then select a single arbitrator from this list according to the following method:
From the panel the Employer will strike the first arbitrator for whatever reason is unacceptable to the Employer. The Employee will then be allowed to strike one arbitrator from the remaining names of panel members. This process will continue until there remains one arbitrator who will be the arbitrator for this grievance or the parties can decide on an arbitrator that would be mutually acceptable.
(Id. at 81.) Stated more directly, DI is permitted to strike two members from the list of potential arbitrators, but the employee is permitted to strike just one.
The contract provides that the arbitration must take place at DI's place of business "at a date and time mutually convenient to both parties but in no event more than thirty (30) days after the selection of an arbitrator has been made." (Id.) The contract further provides that the parties are entitled to be represented by counsel at their own expense, that discovery may be had by either party pursuant to the Federal Rules of Civil Procedure, and that the fees and expenses of the arbitrator and stenographer are to be borne equally by the parties. Under the contract, the arbitrator "may make any award deemed legal and appropriate," and in doing so, "must interpret, apply and be bound by the Employer's rules, regulations, policies and procedures as well as applicable federal, state, local and common laws." (Id. at 81-82.)
On the same day that Nino signed the employment contract, he signed a separate one-page document entitled "Diamonds International AGREEMENT," in which Nino acknowledged that he had received DI's employee handbook. (Id. at 84.) In this one-page agreement, Nino also acknowledged that DI was authorized "to unilaterally amend its rules, regulations, policies, and procedures without prior notice to its employees." (Id.) Nino further acknowledged "that the grievance procedure set forth in the employee handbook is my exclusive remedy for my employment-related disputes." (Id.)
The employee handbook, in turn, sets forth a process for dispute resolution that partially resembles, but is not identical to, the grievance process described in the employment contract. Specifically, the process described in the handbook differs from the contract in that it does not mention a right to arbitration, it requires employees to file the initial grievance within two (rather than five) days of the complained-of action, and it makes the decision of the managing director final as to all decisions except terminations, which may be further appealed to a management panel for final resolution. The materials that DI provided to Nino do not purport to reconcile the differences between the contract and the handbook, nor do they explain which of these two dispute resolution mechanisms actually applies to an employee's grievances.
While the precise details of Nino's allegations of discrimination are not central to the issues presented in this appeal, we summarize them to provide the basis for his federal complaint. Nino, who is a gay man, did not initially disclose his sexual orientation to his co-workers in St. Thomas. According to his allegations, Nino's co-workers began to fixate upon the issue of his sexual orientation, making increasingly hostile comments during his employment. Eventually, Nino revealed to his co-workers that he was gay. According to the complaint, this revelation served only to intensify the harassment by his co-workers, which escalated to both verbal and physical assaults to which DI's management turned a blind eye.
According to Nino's allegations, on February 2, 2005, one of Nino's co-workers, Jason Lettsome, falsely accused Nino of "coming on" to him. (J.A. at 43.) Nino reported this incident to the store manager, and Lettsome in turn complained to the manager that Nino "acted and talked like a female" when he interacted with Lettsome. (Id.) In response to these complaints, the manager wrote up both Nino and Lettsome for being disruptive. Shortly thereafter, Nino was suspended for one week without pay and was threatened with termination. The rationale behind Nino's suspension was that Nino had allegedly used a profanity when he was informed that he was being written up, although Nino contends that this was a pretext for discrimination. Nino did not return to work following his suspension, and he alleges that he was constructively discharged, i.e., that he was compelled to resign due to the hostile working environment. Nino did not file a grievance with DI related to his suspension and eventual resignation.
On March 3, 2006, Nino filed a complaint against DI and Wendy Tarapani, a manager of DI's St. Thomas store, alleging, inter alia, that he had been discriminated against on the basis of gender and national origin.*fn2 As the seventh of the ten affirmative defenses asserted in its answer to the complaint, DI contended that Nino was "contractually barred to any remedy other than one achieved by arbitration." (Id. at 54.) Notwithstanding this invocation of arbitration in its initial pleading, DI actively litigated this case for fifteen months between June 2006, when it was served with the complaint, and September 2007, when it finally filed a motion to dismiss based upon the arbitration clause. In particular, the parties conferred and submitted a joint proposed case management order (which was silent as to the question of arbitration); they attended no fewer than ten pretrial conferences before the magistrate judge, throughout which DI was silent as to the matter of arbitration; and they engaged in extensive discovery, including service and supplementation of disclosures pursuant to Federal Rule of Civil Procedure 26, service and supplementation of written discovery, and attending four depositions.
On September 26, 2007, after litigating this dispute for fifteen months with no mention of the arbitration clause apart from the affirmative defense asserted in its answer to the complaint, DI filed a motion to dismiss Nino's claims on the grounds that the parties' contract made arbitration the sole method of resolving employment-related disputes. Nino opposed the motion on the grounds that the one-sided nature of the arbitration clause made it unconscionable and that, through its litigation conduct, DI had waived any right to enforce the clause.
The District Court granted DI's motion to dismiss. The Court initially noted that aspects of the arbitration clause were unconscionable. The Court held, however, that the unconscionable provisions were severable from the remainder of the arbitration agreement, because they did not constitute an "essential part of the agreed exchange" between Nino and DI. Restatement (Second) of Contracts § 184. The Court thus held that the remainder of the arbitration agreement was enforceable. Additionally, the Court determined that DI had not waived its right to enforce the arbitration clause, notwithstanding its fifteen-month delay in filing the motion to compel arbitration, because DI had raised arbitrability as an affirmative defense in its answer to Nino's complaint, and because DI had not engaged in dispositive motion practice prior to moving to compel arbitration. Nino filed this timely appeal of the District Court's dismissal order.
The District Court had jurisdiction over this case under 28 U.S.C. § 1331 and 48 U.S.C. § 1612(a). We have jurisdiction pursuant to 9 U.S.C. § 16(a)(3). See Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 89 (2000) (explaining that "where... the District Court has ordered the parties to proceed to arbitration, and dismissed all the claims before it, that decision is 'final' within the meaning of § 16(a)(3), and therefore appealable"). "We exercise plenary review over questions of law concerning the applicability and scope of arbitration agreements." Zimmer v. CooperNeff Advisors, Inc., 523 F.3d 224, 228 (3d Cir. 2008) (citation omitted). We likewise exercise plenary review over the District Court's determination of whether DI, through its litigation conduct, waived its right to compel arbitration. See Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 215 (3d Cir. 2007). We review the District Court's factual findings for clear error. See Zimmer, 523 F.3d at 228.