Walker v. Ryan's Family Steak House (6th Cir 03//2005)
http://caselaw.findlaw.com/data2/circs/6th/036468p.pdf

Walker and other former employees sued claiming violations of the Fair Labor Standards Act (FLSA). The employer responded with a motion to compel arbitration under an agreement signed at the time the employees applied for their jobs. The trial court refused to enforce the arbitration agreement; the 6th Circuit affirmed.

The employer had a three-party arbitration arrangement. (1) Potential employees signed an agreement with Employment Dispute Services, Inc. (EDSI), an arbitration service-provider, agreeing to use EDSI as an arbitration forum. In theory, the employer could enforce that contract as a third-party-beneficiary. (2) The employer and EDSI had a contract in which the employer agreed to use EDSI to resolve employee disputes. In theory, an employee could enforce that contract as a third-party-beneficiary.

(1) The 6th Circuit held that the arbitration agreements were unenforceable  under Tennessee law for three main reasons. (a) Lack of consideration. EDSI provided no consideration to the employees because EDSI retained the right to modify its arbitration rules at any time. The employer provided no consideration because it was not obligated to submit its employment disputes to EDSI. (b) No knowing and voluntary waiver of the right to a jury trial. Plaintiffs were poorly educated, in dire financial circumstances, were hired quickly with no time to read the arbitration policy, and possibly got misleading information from managers. (c) Lack of mutual assent. The arbitration language was on page 10 of an 11 page contract; it was a take-it-or-leave it deal in which the employees had no bargaining power; the employees were poorly educated; and the agreement was not adequately explained.

(2) The 6th Circuit held that the arbitration agreements were unenforceable  under the Federal Arbitration Act (FAA) because they did not allow for effective vindication of their FLSA claims. The main reason was the court's finding that the EDSI arbitration forum was not neutral. EDSI is a for-profit company and the employer provided 42 percent of its gross income during one year. Said the court, "[the employer] effectively determines the ... pools of arbitrators." Also, EDSI had no protocol for selecting potential arbitrators out of its pools of arbitrators.