## Facts

- Annette R. Phillips worked as a bartender for a Hooters franchise in Myrtle Beach, South Carolina from 1989 to 1996.
- In 1994, Hooters instituted an ADR program requiring employees, as a condition of continued eligibility for workplace benefits (e.g., raises and promotions), to sign an agreement to arbitrate employment-related disputes, including discrimination and sexual harassment claims under federal or state law.
- The agreement incorporated Hooters’ internal “rules and procedures” for arbitration, which Hooters reserved the right to promulgate and modify; employees were told they could obtain a copy upon written request.
- Employees were given five days to accept or reject the arbitration agreement at an all-staff meeting, but were not provided the arbitration rules at that time.
- In 1996, Phillips alleged a Hooters official sexually harassed her by grabbing and slapping her buttocks; after management allegedly dismissed her complaint, she resigned and asserted Title VII claims through counsel.
- Hooters insisted Phillips must arbitrate under the agreement; after litigation began, Hooters produced its arbitration rules.
- The rules gave Hooters substantial procedural advantages, including asymmetrical notice and disclosure requirements and arbitrator selection from a list created solely by Hooters; testimony characterized the rules as wholly one-sided.

## Issues

1. Whether an employer may compel arbitration under the FAA when the arbitration agreement incorporates employer-promulgated rules that are structurally biased and deny basic procedural fairness.
2. Whether promulgating egregiously one-sided arbitration rules constitutes a material breach of the arbitration agreement and the implied duty of good faith and fair dealing, excusing the employee from arbitrating.
3. Whether a court may enforce arbitration by substituting neutral procedures (e.g., different arbitration rules) when the parties did not agree to those terms.

## Decision

- The Fourth Circuit affirmed the denial of Hooters’ motion to compel arbitration under the FAA.
- The court held Hooters materially breached the arbitration agreement by creating arbitration rules so unfair that they destroyed the neutrality expected from the promised arbitral forum.
- Because of Hooters’ breach, Phillips was released from any obligation to arbitrate under that scheme, and her claims could proceed in court.
- The court declined to compel arbitration under alternative, court-selected procedures because courts cannot rewrite the parties’ contract to impose terms not agreed upon.

## Legal Principles

- Arbitration agreements are contracts governed by ordinary principles of contract law, including the implied covenant of good faith and fair dealing.
- A party that reserves unilateral control over arbitration procedures must exercise that power in good faith; designing a process that is egregiously one-sided can constitute a material breach.
- The FAA’s policy favoring arbitration does not require enforcement of an arbitration clause where the party seeking arbitration has undermined the agreed arbitral process through material breach.
- Courts may refuse to compel arbitration when the specified arbitral mechanism is structurally biased and lacks basic even-handedness.
- Courts may not salvage a breached or fundamentally unfair arbitration scheme by imposing substitute rules to which the parties did not agree.

## Conclusion

The court refused to compel arbitration because the employer’s self-authored arbitration rules were so one-sided that they breached the arbitration agreement and the duty of good faith, eliminating the employer’s right to enforce the arbitration clause under the FAA.


Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999)