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When Do Cost Provisions in an Arbitration Agreement Effectively Deny a Party a Forum in Which to Vindicate Statutory Rights?

April 6th, 2010 Arbitrability, Authority of Arbitrators, Employment Arbitration, New York Court of Appeals, United States Supreme Court Comments Off on When Do Cost Provisions in an Arbitration Agreement Effectively Deny a Party a Forum in Which to Vindicate Statutory Rights? By Philip J. Loree Jr.


Under the federal Federal Arbitration Act statutory claims are generally arbitrable if they fall within the scope of the arbitration agreement, but arbitrator and arbitration-service-provider fees that may impose undue financial burdens on employees or other individuals seeking to vindicate those rights.   Cost provisions in arbitration agreements allocate these fees and costs, and even when the allocation is 50-50, disputes may arise concerning whether they are so burdensome as to effectively deny one of the parties a forum in which to pursue his or her claims.   

In Green Tree Financial Corp v Randolph, 531 U.S. 79 (2000), the United States Supreme Court acknowledged that “the existence of large arbitration costs could preclude a litigant from effectively vindicating her federal statutory rights in the arbitral forum.”  531 U.S. at 90.  And it said that “where, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring costs that would deter the party from arbitrating the claim.”  531 U.S. at 92.   While the Court did not purport to enunciate the standards courts should apply in evaluating challenges to cost provisions, it held that the “risk” of  “prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.”  531 U.S. at 91.


The New York Court of Appeals Weighs In 

On March 25, 2010 the New York Court of Appeals adopted as a matter of New York State law the federal approach to evaluating challenges to costs provisions.  See Re Brady v. Williams Capital Group, L.P., No. 36, slip op. (N.Y. Ct. App. March 25, 2010).  In Brady the dispute was between an “investment bank and broker-dealer of debt equity securities” and “a[n NASD] ‘registered’ salesperson of fixed income securities,” and it arose under state and federal discrimination laws.  Slip op. at 2, 3 & 4.  The court below held that the 50-50 cost-sharing provision in question violated public policy and should be excised from the arbitration agreement.  Slip op. at 6.  The Court of Appeals reversed and remanded the matter to the trial court for a hearing on whether the employee was financially able to pay arbitration fees and costs, and set forth the governing standards.  Slip op. at 1-2.   

The Court decided hat the “case-by-case, fact-specific approach employed by the federal courts.  .  .  properly acknowledge[s] and balance[s]” the “competing interests” “of the strong State policy favoring arbitration agreements and the equally strong policy requiring the invalidation of such agreements when they contain terms that could preclude a litigant from vindicating his/her statutory rights in the arbitral forum.”  Slip op. at 10-11 (citations omitted).  Adopting the approach outlined in Bradford v. Rockwell Semiconductor Sys., Inc . 238 F.3d 549, 556 (4th Cir. 2001), the Court held that “the issue of a litigant’s financial ability is to be resolved on a case-by-case basis and that the inquiry should at minimum consider the following questions:  (1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum.”  Slip op. at 11.   The Court said that “a full hearing is not required in all situations,” but “there should be a written record of the findings pertaining to a litigant’s financial ability.”  Slip op. at 11.  The Court did “not see the need to detail the precise documentation a court should request to resolve this issue,” leaving that “to the [trial] court’s discretion.”  Slip op. at 11. 

The Court did “not decide what the remedy should be if the ‘equal share’ provision is found unenforceable.”  In that event, it directed the trial court to “decide, in the first instance, whether to sever the clause and enforce the rest of the Arbitration Agreement, or to offer petitioner a choice between accepting the ‘equal share’ provision or bringing a lawsuit in court .”  Slip op. at 11.

What if the Parties Clearly and Unmistakably Agree to Arbitrate the Issue Whether a Cost Provision is Unconscionable or Otherwise Unenforceable?

There is a tie-in between the issue addressed in Brady and the issue before the United States Supreme Court in Rent-A-Center West v. Jackson, No. 09-497.  As readers may recall, Rent-A-Center concerns who decides unconscionability questions when the parties, in their predispute arbitration agreement, clearly and unmistakably agree that arbitrators decide arbitrability questions.  (Rent-A-Center is discussed here, here, here and here.) 

We understand that one of the policy arguments the employee, Jackson, makes on appeal is that allowing arbitrators to decide whether a cost provision is unconscionable or otherwise unenforceable may effectively deny the arbitration agreement’s challenger from having a forum in which to assert his or her unconscionability claim.  If the arbitration clause’s cost provisions are so onerous as to deter the challenger from arbitrating even the threshold issue of unconscionability, then it may be deprived of a forum in which to resolve its statutory claims.  While the issue is not presented in Rent-A-Center – the lower courts already ruled that the cost provision was not unconscionable, and Jackson does not challenge those findings on appeal – it has the potential to arise in a future case if the Supreme Court rules that arbitrators decide unconscionability claims where the parties clearly and unmistakably so agree. 

The potential for such a case is not a legitimate reason for the United States Supreme Court to affirm the Ninth Circuit’s ruling in Rent-A-Center.  Should the issue arise in a future case it could be dealt with by finding that the disputed cost provisions do not apply to the clear and unmistakable agreement to arbitrate arbitrability, allowing the type of limited court hearing prescribed by Brady, or reviewing under Section 10’s deferential standards the arbitrator’s findings on financial ability.  While the relative merit and effectiveness of each of these alternative approaches may stir debate, that debate is better left for a case that properly presents it.     

In any event, enabling a court to address the limited issue of whether a cost provision deters arbitration would not necessarily deprive the arbitrators from ruling on whether the cost provision is unconscionable or unenforceable for some reason other than the challenger’s ability to pay.  Suppose a cost provision purported to shift all costs of the arbitration on to the employee.  Such a provision might be challenged as unconscionable without regard to the challenger’s ability to pay, depending on applicable state law.  And if the challenger could pay, then the issue of whether the cost provision was otherwise unconscionable under state law would be one for the arbitrators to decide where the parties clearly and unmistakably so agreed.

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