October 01, 2001
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.
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.
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
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
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 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 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.
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.
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.
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.
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).