Update: On September 18, 2014, the Supreme Court of Ohio handed down a merit decision in this case. Read the analysis here.
On April 9, 2014, the Supreme Court of Ohio heard oral argument in the case of Cedar Fair, L.P. v. Jacob Falfas, 2013-0890. The issue on appeal is whether an arbitration panel properly awarded specific performance of a personal services employment contract. This case was argued at the University of Toledo College of Law as part of the Court’s off-site program.
Jacob Falfas was employed by Cedar Fair for 39 years. In 2007, he was promoted to Chief Operating Officer under an employment agreement that ran through 2012, with the possibility of future automatic renewals. In the event that Falfas was terminated, the extent of Cedar Fair’s obligations depended on whether the termination was with or without cause.
It is undisputed that in 2010, Falfas’ employment ended. Cedar Fair claims that Falfas quit. Falfas claims he was fired in breach of the employment agreement. At that point, there was about two and a half years remaining on that particular term.
The employment agreement between the parties contained a mandatory, final, and binding arbitration provision. The parties arbitrated their dispute, resulting in a finding that Falfas was “terminated for reasons other than cause” and that there were insufficient facts to establish that he resigned. The arbitrators found that equitable relief was needed to restore the parties to the positions they held prior to Cedar Fair’s breach of the employment agreement. Therefore, the arbitrators directed that Falfas be reinstated to his former position with back pay and all other benefits to which he was entitled under the agreement.
Both parties filed suit in the common pleas court-Falfas to confirm the arbitrator’s decision; Cedar Fair to modify it. The trial court confirmed the award as it related to back pay, benefits, reasonable costs, expenses, and attorney fees, but modified the award in part by determining that Falfas should not be reinstated to his position. Falfas appealed.
The Sixth District Court of Appeals reversed in the part pertinent to this appeal, finding that the trial court erred in refusing to order reinstatement. Cedar Fair appealed to the Supreme Court of Ohio and the appeal was accepted only on the issue of a court’s authority to order specific performance of a personal services employment contract. Read the oral argument preview of this case here.
Key Sections of the Employment Agreement
Termination without cause would entitle Falfas to salary and certain health benefits for the then-remaining term.
Section 19 (a)– Arbitration Provision
Required arbitration of any dispute arising under the Agreement
“[t]the arbitration panel shall have authority to award any remedy or relief that an Ohio or federal court in Ohio could grant in conformity with applicable law on the basis of the claims actually made in the arbitration.”
At Oral Argument
Cedar Fair’s Argument
The Court should reaffirm a fundamental principle of Ohio contract law, taught in every first year law school class and a staple of contracts hornbooks and textbooks — that a court of equity will not decree specific performance of a contract for personal services. The decision by the Sixth District affirming reinstatement as a remedy in this case was simply wrong. Such a rule makes no sense. Personal services contracts call for the exercise of discretionary authority. They are predicated on mutual trust. Once that trust is gone for whatever reason, that contract doesn’t work for the parties or the public. An agency relationship is predicated on mutual confidence, loyalty and satisfaction. When that’s gone it is to everyone’s benefit that the relationship be severed.
In this case the contract itself provides the remedy for a termination other than for cause. That remedy is base pay and benefits for the remainder of the contract term, which in this case was about two and a half years. Any award beyond that exceeds the arbitrators’ power and must be vacated. In this case, the arbitrators improperly selected a remedy which was not one on which the parties had agreed when they signed the employment contract.
The contract in this case only applies if Falfas had been terminated without cause, but that is not what happened here. Falfas was not terminated pursuant to the contract. He did not resign. Rather, the arbitrators found that the contract had been breached, and properly ordered the remedy of reinstatement with back pay and benefits. The breach was a violation of good faith and fair dealing. As a result of that breach of contract, Falfas was terminated. The arbitrators were the final interpreters of this contract in this case.
Section 19 of the agreement is very expansive. It gives the arbitrators the authority to award any remedy any Ohio court could award. For courts to take over arbitration would destroy arbitration as an effective way to resolve disputes. This Court cannot ignore the arbitration process itself.
There was no evidence in this record that the parties could not get along or be unable to continue to work together. Falfas remains ready, willing and able to perform his old job. In fact, reinstatement is the preferred remedy in this circumstance. It is not fair that Falfas should suffer because Cedar Fair refuses to honor the arbitration agreement.
If Falfas is not reinstated, there is going to be considerable confusion and contention about the back pay and benefits he is owed.
What Was on Their Minds
The Appropriate Remedy in this Case
What remedy is appropriate here, asked Chief Justice O’Connor? Is the only argument over remedy whether Mr. Falfas gets cash in hand or reinstatement?
What remedy do you want, Justice O’Neill asked Cedar Fair’s lawyer? (answer: vacate the arbitral award and enter the correct award)
If the Court were to agree that ordering specific performance was wrong, what should the Court do? Remand the case back to the arbitrators with instructions, asked Justice O’Donnell? If the arbitral award is vacated, where does that leave the parties?
Doesn’t the employment contract talk of legal and equitable relief, asked Justice Lanzinger?
Does Ohio law provide for specific performance of personal services contracts, asked Justice O’Donnell? (no, said Cedar Fair’s lawyer. It is the preferred remedy said Falfas’ lawyer)
In a particularly interesting question of the day, Justice Pfeifer asked whether there was some way that would allow the Court to respect all the law on arbitration, not reinstate Falfas, but let him seek damages over and above what the contact called for?
Problems With Ordering Specific Performance
Did the appellate court misapply Ohio law in determining that specific performance was an available remedy in this case? Isn’t that remedy available for wrongful termination, asked Justice O’Donnell?
Are you using the term “specific performance” to mean reinstatement to the job (probably asked for the benefit of the students), asked Justice O’Neill? (answer: yes)
In a key question of the day, Justice French asked whether the Court could just decide that specific performance is not the remedy this contract provided? What about the fact that the company now has a new CEO?
In a key comment of the day, Justice Lanzinger noted that a personal services contract assumes that the parties wish to continue, and assumes mutual agreement, stating to Falfas’ lawyer that he seemed to be suggesting that the preferred remedy when there was a breakdown was to force a shotgun marriage.
If the Court were to order Mr. Falfas reinstated, would the relationship at Cedar Fair be harmonious, asked Justice O’Donnell? (yes, said Falfas’ lawyer)
Doesn’t it seem impractical in the real world to reinstate someone who has been gone four years, asked Justice Pfeifer? Can any unfairness to Mr. Falfas be solved by reinstating him into the management of the company that has clearly moved on, commenting that fairness, equity and the law all seemed to be on a collision course here.
What Was the Breach Here?
Was the breach the failure to give six months notice, asked Chief Justice O’Connor?
What is the remedy for breach of contract in this case, asked Justice O’Donnell?
If the remedies under paragraph 7 had been offered immediately upon notice of termination, would Falfas be arguing there was a breach, asked Justice Lanzinger, noting the court was trying to get at an understanding of what Falfas considered the breach to be.
The Arbitrators’ Authority
Did the arbitrators exceed their authority in this case, asked Justice O’Neill?
Hasn’t the U.S. Supreme Court held that if you sign up for arbitration, you live or die by what that arbitrator decides? Even if the arbitrator makes a mistake of law, you must live with that, asked Justice French?
How it Looks from the Bleachers
To Professor Bettman
I don’t think there is any way the Court is going to order Falfas reinstated to his former position here. I think the remedy in this case will be limited to back pay and benefits. The way the Court reaches this conclusion may require some threading of a needle, because these days, as Justice French noted, if parties agree to arbitration (and unlike some consumer arbitration, this was clearly one both sides agreed to) the parties essentially agree to live and die by the arbitration.
Falfas’ argument on arbitration might well have gotten a friendlier ear from federal judges these days. But I think the Ohio high court is going to find, as Justice French suggested, that the parties clearly agreed to a contract with an arbitration provision in it, but that provision was expressly limited by what Ohio law allows, and traditionally, specific performance of personal services contracts has not been allowed. So, the remedy of specific performance was simply not one this contract provided. And for good reason, in a situation like this. How could the parties work together after this? So, on that basis, the award is likely to be vacated, and the trial court’s finding re-instated, meaning back pay and benefits for Falfas.
Falfas’ lawyer kept insisting the remedy was not because of a termination without cause, but for breach of contract. He struggled and struggled to explain the difference, to explain just what the breach was, and what difference this made to the remedy. At one point Chief Justice O’Connor became convinced breach of contract had to do with lack of the proper termination notice, but Falfas’ lawyer said that was not it, and the lawyer for Cedar Fair, a very skilled former state solicitor, did make it explicitly clear that for a termination other than for cause, there is no required notice period. In sum, Falfas got no traction with his breach of contract argument.
Falfas’ lawyer got more and more heated and upset as he argued, to the point that Justice O’Donnell sharply rebuked him to stop interrupting and talking over the justices’ questions. That seemed to stun him; at one point he looked on the verge of tears to me. But Justice Pfeifer, generally on the side of employees, even at this level, was then unbelievably kind to him, very gently suggesting the impracticality of reinstating a CEO that the company no longer wants. Pfeifer wondered aloud if is there were some way for the Court to respect all the law on arbitration, not order reinstatement, but award Falfas the right to seek damages over and above what the contact called for.
In the end, I think Falfas will not be reinstated (I’m not much into transactional law, but other than the money, wonder why he’d want to return to a job where no one wants him back.) If that were ordered, I’m sure he’d just be immediately terminated again. Still, at the salary he was making, even without reinstatement he is in for some hefty damages. His lawyer may be right that if the case is remanded for the remedy of back pay and damages, there is likely to be a dispute about the period for which that is owed.
To Student Contributor Elizabeth Chesnut
The issues in the case appear somewhat conflated by Falfas’ argument that his employment ended in breach of his contract rather than termination without cause. This argument was received poorly by the Court. The Justices seem hesitant to depart from an arbitrator’s decision, but this hesitation will not prevent the majority of the Court from finding that Ohio law precludes an award of specific performance for a personal services contract.