Employee Battles Over Discharge, Arbitration Agreement


As arbitration agreements make their way into more and more employment contracts, fired employees are finding countless ways to attack the agreement itself or the way the process is handled.

Recently, an employee of a Montana title pawn filed a wrongful discharge action, but first he had to fight the arbitration agreement he had signed.

A man whose first name was Michael was hired by a Montana title loan company after negotiating and signing a non-competition agreement as well as an arbitration agreement.

On July 10, 2008, after Michael was hired, a Georgia title pawn company acquired the Montana title lender. The new owner fired Michael on Sept. 19, 2008 and then dissolved the Montana title lender, effective March 16, 2009.

On March 30, 2009, Michael filed a wrongful discharge action against both companies (collectively called Title Pawn). Both were served on April 14, 2009.

The new owners removed the case to federal court, and filed an answer in that forum. Its answer included, as its first affirmative defense, a request to arbitrate.

Ultimately, the federal court sent the case back to state court for lack of diversity, finding that although the Montana title lender was a dissolved corporation, it could still be sued under Montana law.

Court Moves

Upon return to the state court, Michael moved for entry of default against the Montana title lender for failure to plead or otherwise defend. Default was entered by the Clerk of Court the same day, June 1, 2009.

The Montana title lender filed its answer and a motion to set aside the entry of default on June 3, 2009. The Montana District Court granted the Montana title lender’s motion on June 12, 2009.

On Aug. 17, 2009, Title Pawn filed a motion to compel arbitration under the parties’ arbitration agreement. After a hearing, the Montana District Court granted Title Pawn’s motion, finding that its requested arbitration was timely under the terms of the arbitration agreement because it had requested arbitration in its answer; that it had not waived its right to seek arbitration by removing the action to federal court; and finally, that the arbitration agreement was within the reasonable expectations of each party, was not unconscionable, and was not a contract of adhesion.


In 1962, the California Supreme Court noted that a “contract of adhesion” refers to a standardized or sometimes called a “boilerplate” contract that is prepared entirely by one party to the transaction for the acceptance of the other; such a contract, due to the disparity in bargaining power between the draftsman and the second party, must be accepted or rejected by the second party on a “take it or leave it” basis, without opportunity for bargaining and under such conditions that the “adherer” cannot obtain the desired product or service except by acquiescing in the form agreement.

The California Supreme Court also noted that Professor Frederick Kessler in 1943 wrote in the Columbia Law Review that, “Standard contracts are typically used by enterprises with strong bargaining power. The weaker party, in need of the goods or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses. His contractual intention is but a subjection more or less voluntary to terms dictated by the stronger party, terms whose consequences are often understood only in a vague way, if at all.”

Motion to Set Aside Default

Michael filed an appeal, which was eventually heard by the Montana Supreme Court. The Montana Supreme Court noted that when considering a motion to set aside entry of default, courts are guided by these general principles: every case should be decided on its merits, and judgments by default are not favored. Rule 55(c) of the Montana Rules of Civil Procedure provides:
“For good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside… No default of any party shall be entered, and no default judgment shall be entered against any party, except upon application of the opposing party. Any stipulation for extension of time between the parties or their counsel, whether in writing or made verbally before the court, shall be effective to extend the time for serving and/or filing any appearance, motion, pleading or proceeding, according to the terms of such stipulation. In any case if a party in default shall serve and file an appearance, motion, pleading or proceeding prior to application to the clerk for default, then such defaulting party shall not thereafter be considered in default as to that particular appearance, motion, pleading, or proceeding.”

When default is entered, said the Supreme Court, but no judgment has been entered on the default, the standard announced in the 1989 case of Cribb v. Matlock Communications, Inc, applies.

The court in the Cribb case discussed the following factors to consider upon a motion to set aside entry of default under Rule 55(c): (1) whether the default was willful; (2) whether the plaintiff would be prejudiced if the default should be set aside; and (3) whether the defendant has presented a meritorious defense to plaintiff’s claim.

The standard for setting aside entry of default is more flexible than the “excusable neglect” standard for setting aside a default judgment.

This issue was one of judicial discretion and, said the Supreme Court, there clearly was not an abuse of discretion.

Given the procedural posture of the case, and the Montana title lender’s immediate motion to set aside the entry of default, the Supreme Court said it concluded it was not a manifest abuse of discretion to grant the title lender’s motion to set aside the entry of default.

Motion to Compel Arbitration

Michael next argued that Title Pawn failed to file its motion to compel arbitration within 90 days, as required by the arbitration agreement. The court noted that the arbitration agreement between the parties stated, in relevant part.

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