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Cost-Sharing Arbitration Provisions Thrown Out

February 18, 2003

Court finds two different arrangements "unenforceable"

Cost-splitting provisions in mandatory arbitration agreements will require closer attention following a recent decision by the Sixth Circuit Court of Appeals in two consolidated cases. The Court, which hears appeals from federal courts in Michigan, Ohio, Tennessee, and Kentucky, threw out the arbitration agreements used by Circuit City and Pep Boys, respectively, because it found that the cost-splitting provisions in each placed an unreasonable financial burden on the employees who were required to arbitrate disputes with their employer.

In the Circuit City case, Morrison v Circuit City Stores, Inc., the arbitration agreement required the employer to advance all of the costs of arbitration except for a $75.00 filing fee. After arbitration, the parties were required to split the costs of the arbitration unless the arbitrator specifically required the losing party to pay all costs (which was not a required result). For the employee’s part, if he or she paid within 90 days of the arbitration, his/her costs were capped at the higher of $500 or 3 percent of the employee’s most recent annual earnings. If he/she failed to pay within 90 days, however, the entire half of the arbitration costs were due.

Put in context, the employee in the Circuit City case would have had her costs capped at $1,622 if she paid within 90 days – 3 percent of her $54,060 salary.

The Pep Boys agreement, by contrast, described in the Shankle v Pep Boys case, was far simpler. It required the employee to split the cost of arbitration with the employer – and to pay the money up front, 10 days before the arbitration begins. As with Circuit City’s provision, the arbitrator was free to award the winning party its costs and attorneys’ fees, but was not required to do so.

The Pep Boys employee would have likely faced a $1,500-$3,000 bill 10 days prior to the arbitration.

Provisions Should Not Deter Employees From Vindicating Their Rights

The problem with these provisions, the Court found, was that they imposed a barrier on litigating a dispute that employees would not face in court. Citing a study that found an employee would spend 3 to 50 times more arbitrating an average employment discrimination case than he or she would in court, the Court said the cost-splitting provisions used by Circuit City and Pep Boys would likely deter a "substantial percentage" of employees with potential claims.

Provisions May Be OK in Some Circumstances

Although federal appeals courts covering other states have banned cost-splitting provisions entirely, the Sixth Circuit took a less restrictive approach. It said that courts should review cost-splitting provisions on a case-by-case basis, breaking down the employees to whom the provisions would apply by income, job description, and socio-economic background to determine whether a group of similarly situated employees would be deterred from bringing their claims. In short, courts are now to look to the employee’s ability to pay in light of both the average cost of pursuing a typical arbitration claim and general socio-economic factors to determine whether a cost-splitting provision is enforceable.

What Should You Do?

If you have mandatory arbitration agreements in place with your employees in Michigan, Tennessee, Kentucky, or Ohio that require the employee to share the costs of the arbitration, you should review the burden that a typical arbitration would impose on both an individual employee (and remember, as the Court noted, that arbitrations typically come at a time when the employee – or ex-employee – may be more financially stressed than normal) as well as various classes of employees covered by the arbitration agreement. It may be that you will need to have tiered cost-splitting provisions based on classes of employees (i.e., more highly compensated employees are required to pay more, while employees earning less face the barest minimum of cost-sharing) in order for such provisions to pass muster.

We encourage you to seek input from counsel as you go about this review so that you have the benefit of legal judgment regarding what cost-splitting provisions, if any, will be enforceable in the future.

If you have any questions regarding this matter, or would like more specific input, you may contact Megan Norris, at (313) 496-7594 or norris@millercanfield.com.