Provisions in arbitration agreements that require an employee to share the costs of the arbitration proceeding are subject to a case-by-case analysis to determine whether they violate public policy following the decision of the Appellate Division, First Department, in Brady v. Williams Capital Group, L.P., 878 N.Y.S.2d 693 (1st Dep’t 2009).
Pursuant to the arbitration agreement with her employer, the plaintiff in Brady commenced an arbitration before the American Arbitration Association (“AAA”), claiming she was terminated for discriminatory reasons. After engaging in considerable pre-hearing discovery, the AAA sent the employer, Williams, a bill for $42,300, representing advance payment of the arbitrator’s compensation. Williams demanded that the former employee pay half of the bill in accordance with the fee-splitting provision of the parties’ arbitration agreement. After Brady refused to pay her share and Williams refused to pay the entire amount, the AAA advised the parties that AAA rules supersede the parties’ fee-splitting provision and the AAA rules require the employer to pay the costs of arbitration. Nonetheless, Williams maintained its unwillingness to pay and, as a result, the AAA cancelled the arbitration.
Brady sued to either compel Williams’ payment of the fee and revive the arbitration or force AAA to enter a default judgment in her favor. After the lower court dismissed her complaint, she appealed, and the First Department reversed.
The Appellate Division first addressed whether the AAA’s rules, which call for the employer to pay required arbitration fees, as the AAA asserted, would apply in the face of the parties’ agreement to split such fees. The court determined that the parties’ agreement to split fees superseded the AAA’s rules because the intent of the parties was clear.
The court next addressed whether it was against public policy to force Brady to pay one half of the arbitration fees. In 1991, the United States Supreme Court ruled in Green Tree Fin. Corp-Ala. v. Randolph, 531 U.S. 79 (2000), that arbitration agreements are unenforceable if the costs are so high that they “preclude a litigant . . . from effectively vindicating her statutory rights in the arbitration forum.” Green Tree held that a “risk” of “prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.” The First Department adopted the Fourth Circuit’s interpretation of Green Tree, found in Bradford v. Rockwell Semiconductor Syst., Inc., 238 F.3d 549 (4th Cir. 2001), and thus settled upon a case-by-case analysis evaluating a “claimant’s ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and [determining] whether the cost differential is so substantial as to deter the bringing of claims.”
In discussing this standard, the majority wrote that “outof- pocket expenses for an employee filing a legal suit are minimal.” The court proceeded to evaluate whether Brady provided a showing of “individualized prohibitive expense.” Despite her history of earnings ranging from $100,000 to $400,000, the court determined that because the claimant was out of work for eighteen months and was still unemployed at the time of the arbitration, she demonstrated that she could not afford the cost associated with the arbitration and was “effectively precluded from vindicating her rights in the AAA forum.” Brady’s showing of “precarious” finances consisted of her attorney’s affidavit attesting to an estimate of arbitration costs and her statement regarding her earned income from the preceding six years.
Plaintiffs challenging fee-splitting provisions typically seek to avoid arbitration altogether and proceed in court. In Brady, however, it was the employer that contended that invalidation of the fee-shifting provision should invalidate the entire arbitration agreement, with the result that the employee would be forced to pursue her claims in court. The arbitration agreement, however, included a severability provision stating that the rendering of any provision void or unenforceable would not render the entire agreement unenforceable. Consequently, the court struck the feesplitting provision and enforced the remainder of the arbitration agreement.
Thus, employers who include fee-sharing provisions in their arbitration agreements must realize that each claimant will have the opportunity to contend, based upon the unique facts of his or her situation, that requiring the payment of such fees violates public policy. Moreover, employers should take care to ensure that severability provisions in such agreements produce the result they desire. Employers who do not wish to arbitrate claims if they may be at risk of bearing the full cost of such proceedings may wish to reconsider their commitment to arbitration.