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Cost-Sharing In The Arbitration Of Statutory Employment Claims

Over the last ten years, the United States Supreme Court has decided three important cases affirming the enforceability of pre-dispute arbitration agreements applicable to employment disputes.1  These pro-arbitration decisions have encouraged many employers to make greater use of arbitration agreements with employees as a way of reducing the costs and distraction of litigating employment disputes.  However, despite the Supreme Court’s strong endorsement of arbitration as an equitable mechanism for adjudicating employment-related grievances, there remains a strong undercurrent of judicial voices that have imposed additional limits and restrictions not mandated by the High Court.

One issue where judges continue to have widely divergent views is the extent to which parties to an arbitration agreement may agree prior to any dispute to share the costs associated with arbitration.  There seems to be a general consensus that if the costs of arbitration are sufficiently high, an arbitration agreement covering employment disputes may effectively preclude arbitration by employees who do not have the necessary means to pay for the costs.  By contrast, there appears to be little consensus as to how high the arbitral costs must be to render the arbitration agreement unenforceable, and at what point in the proceedings the evaluation of the costs of arbitration is to be made.
There are widely conflicting decisions within the Second Circuit as to the circumstances under which the costs of arbitration will be a sufficient basis to deny enforcement of an arbitration agreement.  For example, in Ball v. SFX Broadcasting, Inc., No. 00 Civ. 1090, 2001 U.S. Dist. LEXIS 12510 (N.D.N.Y.  August 21, 2001) (Hurd, J.), the Court held that the significant additional costs incurred by a Title VII plaintiff in an arbitral forum rendered the agreement unenforceable as to her claims for sex and pregnancy discrimination.  The Ball court rejected the approach followed by other courts of examining the individual financial situation of a particular plaintiff on a case-by-case basis in determining the enforceability of cost-sharing arrangements.  Instead, the court adopted a per se rule finding the agreements unenforceable where the costs imposed on plaintiffs would be substantial.  

By contrast,  the courts in Rajjak v. McFrank & Williams, No. 01 Civ 0493, 2001 WL 799766 (S.D.N.Y. July 13, 2001) (Preska, J.) and Arakawa v. Japan Network Group, 56 F. Supp.2d 349 (S.D.N.Y. 1999) (Stein, J.) have held that agreements that provide for cost-sharing are unenforceable only when the employee’s personal finances would substantially deter the employees from seeking to enforce statutory rights, and that a district court can pass on the appropriateness of the arbitral fees after the arbitrator has made his or her decision.

In this article, we analyze the Ball, Arakawa, and Rajjak decisions and make certain recommendations as to how employers might choose to draft their arbitration agreements to maximize the likelihood of judicial acceptance and enforcement.

Background

The Federal Arbitration Act (FAA) generally requires the enforcement of arbitration agreements and is broadly applied.  The Supreme Court has endorsed arbitration of employment disputes as a legitimate alternative to traditional judicial proceedings. While the Court has made clear that a party agreeing to arbitrate employment-related disputes could be compelled to live by the terms of his or her agreement “without contravening the policies of congressional enactments giving employees specific protection against discrimination prohibited by federal law,” the Court has cautioned that “a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial forum.”2  In order for an arbitration clause to be enforceable, therefore, the arbitral forum must provide the plaintiff with an opportunity to vindicate his or her statutory rights.3

The Supreme Court’s decisions do not define or identify which elements must be present in an agreement to arbitrate employment-related disputes in order to preserve an employee’s substantive rights in a manner consistent with Congressional enactments and, therefore, be enforceable by the courts.  More specifically, the Supreme Court has not ruled on whether an employee’s substantive rights are jeopardized when the employee must risk paying the costs of an arbitral forum.  Moreover, the Second Circuit has not addressed this issue, and decisions of lower courts within the Second Circuit have reached differing results.

Decisions from other circuits, however, have addressed this issue.  In the widely cited case of Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997), the D.C. Circuit concluded that Congressional intent would be undermined should employees be forced from judicial fora and instead be required to incur additional expenses in seeking relief through arbitration.  The prohibited costs, however, are only those that are analogous to a judge’s salary or other expenses a plaintiff would not incur if the employee were to litigate his or her claim in a judicial forum.  La Prade v. Kidder, Peabody & Co., Inc., 246 F.3d 702 (D.C. Cir. 2001).4  

Other circuits have held that arbitration costs would be prohibitively expensive to many employees and therefore arbitration does not provide an effective mechanism for the vindication of statutory rights as required under the FAA.  See Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir. 1999).  Still other circuits, however, have engaged in a case-by-case analysis of the plaintiff’s own financial circumstances in determining whether arbitration is a viable forum for the employee to bring his or her claim.  See, e.g., Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549, 556 n.5 (4th Cir. 2001).

Ball v. SFX

In Ball v. SFX Broadcasting, Inc., No. 00 Civ. 1090, 2001 U.S. Dist. LEXIS 12510 (N.D.N.Y.  August 21, 2001) (Hurd, J.), one federal judge in the Second Circuit appears to have moved away from the consensus which appeared to be building that the mere possibility that a plaintiff would be required to share the arbitrator’s fees does not render the agreement per se invalid.  In Ball, the two plaintiffs – Ball and Christopher – were employees of a radio station.  Following acquisition of the station by SFX, all employees were required to sign a new employment agreement as a condition of their continued employment.  The agreement contained an arbitration clause, providing that “[a]ny dispute or claim…shall be subject to final and binding arbitration,” according to the Model Employment Arbitration Rules of the American Arbitration Association (AAA), and that “the parties mutually may agree to share the costs of an arbitrator’s travel to the parties’ city and related costs” should the AAA not have an office in the city of the employee’s employment.

In their federal court action, both Ball and Christopher alleged that they were discriminated against on the basis of sex and pregnancy, and that they were retaliated against for their complaints of discrimination.  Previously, Ball had filed an action in state court and sought a stay of arbitration.  The state court, however, ordered arbitration, and the Third Department affirmed. Thus, Ball had unsuccessfully litigated the validity of the arbitration agreement in state court, whereas Christopher had not litigated the issue in any forum.  The arbitrator also ruled against Ball on the merits of her discrimination claims in arbitration.  

In the subsequent federal action, defendants moved to dismiss Ball and Christopher’s complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, or for lack of jurisdiction under Rule 12(b)(1), and to confirm the arbitrator’s decision against Ball.  Defendants also moved to compel Christopher to arbitrate her claims as an alternative to dismissal.  The court found that Ball was boundby the previous state court decisions and arbitration awards and therefore granted dismissal as to her claims.

The court then turned to the claims of plaintiff Christopher.  The court noted that Supreme Court jurisprudence clearly provides that an employee cannot be required to forfeit any substantive rights as a condition of employment.  The court noted, however, that the Supreme Court had not answered the question of what minimal fairness requirements must be met in order to conclude that an employee is not being required to give up such substantive rights in entering into a mandatory arbitration agreement.

The Ball court noted that other circuits were split as to whether the issue should be decided based on the personal financial situation of each plaintiff, or whether cost-sharing provisions are invalid per se.

The Ball court opted for the latter route, finding that the rejection of a per se rule was not required by Supreme Court jurisprudence.  The Ball court stated that the plaintiff need only carry the burden of showing that there was a likelihood of substantial arbitration costs, rather than proving the costs would be burdensome given the personal financial situation of the particular plaintiff.  According to the Ball court, the focus is whether the plaintiff is exposed to substantial arbitration costs which would not be incurred in a judicial forum.  Because plaintiff Christopher showed a likelihood that she would be responsible for significant arbitration costs, the arbitration agreement was held to be unenforceable.

Despite its holding, the Court went on to note that the plaintiff Christopher had made a showing that her personal financial situation rendered arbitration prohibitively expensive for her.  Christopher submitted evidence that she had accepted a new job on a commission basis, was the sole source of support for her four children, and could expect fees much greater than she would incur in an arbitral forum, including: a $1,000 arbitrator’s fee; a $500 counterclaim fee; $150 per day hearing fees; and $150 per day postponement fees.  The defendants argued that the costs of arbitration were not properly before the court, since under the National Rules for the Resolution of Employment Disputes the AAA may defer or reduce the administrative fees in the event of extreme hardship.  The Court found that the “mere possibility” that the plaintiff might obtain relief from the fees did not negate the fact she had shown a likelihood of incurring them.

Arakawa and Rajjak

By contrast to Ball, other courts in the Second Circuit have held that the mere possibility that plaintiff would be saddled with arbitrator’s costs would be insufficient to deny arbitration of plaintiff’s statutory claims.  For example, in Arakawa v. Japan Network Group, 56 F.Supp.2d 349 (S.D.N.Y. 1999) (Stein, J.), a former employee brought a Title VII sexual discrimination suit against her former employer, and the employer sought to enforce arbitration.  The plaintiff resisted on the grounds that, inter alia, the agreement was invalid due to its requirement to split the fees and costs of arbitration.  Arakawa would be required to pay a $250 filing fee and $75 in administration fees for each day of the arbitration.  The plaintiff alleged that she was a “working person” and did “not have unlimited means” to bear the costs of arbitration.  Nevertheless, Judge Stein held, as a matter of law, that these administrative fees could not represent such a burden as to make arbitration an inadequate forum for the resolution of arbitration claims.

The Court then turned to the arbitrator’s fees.  The arbitration agreement  provided that the plaintiff would pay one-half of any other expenses associated with the arbitration, which the Court indicated “arguably includ[ed] the arbitrator’s compensation.”  Noting the split in the circuits as to this issue, the Court found that the mere possibility that plaintiff would be required to pay the arbitrator’s fees did not make the agreement unenforceable as a matter of law.  The Court held that in order to render the agreement unenforceable, the plaintiff’s personal financial situation had to be such that the costs substantially deter the plaintiff from seeking to enforce his or her rights.  The Court ordered arbitration, noting that at this stage in the litigation, the amount of fees the plaintiff may be forced to bear was undetermined, and the Court maintained jurisdiction as to any subsequent petition by plaintiff challenging the amount of the arbitrator’s fees.

Similarly, in Rajjak v. McFrank & Williams, No. 01 Civ 0493, 2001 WL 799766 (S.D.N.Y. July 13, 2001) (Preska, J.), an action for religious discrimination, the arbitration agreement at issue provided that the employee agreed to reimburse the company for all its costs, including attorney’s fees, should the company prevail in arbitration.  The plaintiff filed an action in federal court, and the defendant sought to compel arbitration.  The plaintiff argued that because of the potential costs, the fee-shifting provision denied the plaintiff access to the arbitral forum and left him with no remedy for violations of the anti-discrimination statutes.  The Court, following the decision in Arakawa, held that it was unclear whether the plaintiff would have to pay any fees at all.  The court noted that the arbitral panel could waive the plaintiff’s fees in the case of financial hardship.  Further, in examining the plaintiff’s own financial situation, the court noted that Mr. Rajjak’s combined family income of $25,519 for his family of four did not suggest that the costs of arbitration would present a barrier to the vindication of Mr. Rajjak’s rights.  Finally, the Court retained jurisdiction to rule on a later date as to the fairness of the arbitration fees.

Drafting Considerations

Given that this area of law remains unsettled, employers wishing to maximize the likelihood that their employment arbitration agreements will be enforced should consider taking a conservative approach and insert a clause in the arbitration agreement specifically providing that the employer will pay the costs of arbitration in certain circumstances.  The clause need only provide for the employer to pay for arbitration of statutory arbitration claims such as Title VII,  ADEA, ADA, and the like.  Courts have permitted cost-sharing as to non-statutory claims, such as breach of contract.  Further, courts have held that the ban on cost sharing extends only to costs not traditionally associated with a judicial forum.  Therefore, the employer need not pay for arbitral filing fees and other such expenses, at least to the extent that they do not exceed the costs for their judicial analogs.  

Employers wishing to take a more aggressive approach to the issue of cost-sharing may take the position that cases like Rajjak are correct statements of the law and that the Ball court’s view of cost-sharing is incorrect.  Employers choosing this approach may draft an arbitration clause which provides that the employer will pay the relevant costs of the arbitration, in whole or part, only where the employee demonstrates that he or she lacks sufficient means to prosecute his or her claims in an arbitration.  Of course, employers electing to use such a clause should be prepared to defend this clause in litigation, at least until the Supreme Court or the Second Circuit Court of Appeals has resolved the conflicting views of the district courts.

1 See Circuit City Stores, Inc. v. Saint Clair Adams, 121 S. Ct. 1302, 1313 (2001) (employment); Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000) (Truth In Lending Act); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (employment).
2 Circuit City Stores, Inc. v. Saint Clair Adams, 121 S. Ct. 1302, 1313 (2001) (citations omitted).
3 See Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000).
4 It should be noted that cost-sharing is only an issue in the context of vindication of employees’ statutory rights.  Arbitration agreements may provide for cost-sharing for non-statutory claims (e.g., breach of contract disputes) without running afoul of the FAA.   See Brown v. Wheat First Securities, Inc.,  Nos. 00-7171 and 7173, 2001 U.S. App. LEXIS 17074 (D.C. Cir. July 31, 2001).

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