In Nesbitt v. FCNH, Inc., No. 14-1502 (10th Cir. Jan. 5, 2016), the Tenth Circuit upheld the denial of a motion to compel arbitration, finding arbitration prohibitively expensive for Plaintiff under the terms of the arbitration agreement.

Plaintiff, a student at a for-profit academic institution offering massage therapy courses, brought a putative class action against the institution under the Fair Labor Standards Act (“FLSA“) and state laws for requiring massage therapy students to perform massages on customers without pay.

Prior to enrolling, Plaintiff signed an arbitration agreement in which she agreed to resolve all disputes with the institution in arbitration. Plaintiff, nevertheless, brought suit in a federal district court. The institution then moved to stay Plaintiff’s lawsuit and compel arbitration pursuant to the arbitration agreement, but the district court denied the institution’s motion. The institution then brought an interlocutory appeal.

On appeal, the Tenth Circuit affirmed the district court’s decision. Under the Federal Arbitration Act, contracts evidencing an intent to resolve disputes through arbitration are generally valid and enforceable; however, federal courts have recognized what is referred to as “the effective vindication” exception to that rule. That exception provides that district courts should invalidate arbitration agreements as a matter of public policy if they operate as a prospective waiver of a party’s right to pursue statutory remedies. The Supreme Court recently recognized that this exception could apply where filing and administrative fees attached to an arbitration are so high as to make access to the forum impracticable.

The Tenth Circuit determined that the effective vindication exception applied here because the arbitration agreement was ambiguous as to whether Plaintiff could be awarded her costs and fees if she prevailed in her action. On the one hand, the agreement stated that the parties would bear their own legal costs. On the other hand, it incorporated the rules of the FLSA and the American Arbitration Association, which would give the arbitrator authority to award fees and costs to Plaintiff if she prevailed. Based on that ambiguity, the court found that it was unlikely that a plaintiff, faced with the mere possibility of being reimbursed for fees, would risk advancing those fees to seek redress in arbitration—effectively deterring her from bringing an arbitration against the institution. Indeed, Plaintiff estimated that it would cost her between approximately $2,000-$12,000 just for the arbitrator’s time.

The court thus upheld the district court’s ruling that the arbitration agreement was void under the “effective vindication” exception.

A version of this post originally appeared in the March 2016 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.