10th Circuit: Arbitration agreement did not allow plaintiff effective vindication of rights

In Nesbitt v. FCNH, Inc., the Tenth Circuit has affirmed a trial court’s decision refusing to enforce an arbitration agreement because it did not allow the plaintiff to effectively vindicate her rights.

Rhonda Nesbitt sued defendants, claiming that they violated the Fair Labor Standards Act by requiring her to perform free massage services while attending their massage therapy school. The defendants moved to compel arbitration based on an agreement that plaintiff had signed. Ms. Nesbitt provided an affidavit that she could not afford the required arbitral fees and costs. The trial court denied the motion because the agreement did not allow Ms. Nesbitt to effectively vindicate her rights.

The Supreme Court has suggested, in at least two cases, that an arbitration agreement may be invalid on public policy grounds if it requires a plaintiff to participate in an arbitration forum whose fees and costs “make access to the forum impracticable.” For example, arbitration agreements sometimes require the parties to split payment of the arbitration fees, while the parties to a lawsuit in court don’t have to pay the judge’s salary. If such fees are higher than a plaintiff can afford, the arbitral forum wouldn’t be an effective means of vindicating the plaintiff’s rights.

The Tenth Circuit, in an opinion by Judge Briscoe, affirmed and rejected each of the defendant’s arguments as follows:

1.  Defendants argued that Ms. Nesbitt could have avoided the problem by opting out of the arbitration agreement while still a student, which the agreement evidently would have allowed her to do. The Court rejected this argument because “the availability of an opt-out clause” is relevant “only to the threshold question of ‘whether the parties agreed to submit their claims to arbitration'” in the first place.

2.  Defendants argued that Ms. Nesbitt had failed to show that she could not effectively vindicate her rights because she did not pursue deferred or reduced arbitration fees, as allowed by the rules of the American Arbitration Association (AAA). The Court rejected this argument because a reduction of fees was entirely within the arbitrator’s discretion, because an employee in the plaintiff’s position probably would not advance such fees based on the “mere possibility” that they might be reimbursed.

3.  The Court found that Defendants waived their right to argue that Ms. Nesbitt did not prove the cost of litigating her claims in federal court so that they could be compared to the costs of arbitrating them. In a footnote, the Court said that even if preserved, it would reject this argument because attorneys often represent plaintiffs in court on a contingency fee basis.

4.  The Court also rejected Defendants’ argument that the arbitration agreement was silent as to the allocation of costs. Indeed, the agreement did not expressly metion arbitration fees and arbitrator costs, but it did invoke the AAA’s rules, which contained provisions addressing fees and costs.

In sum, companies that wish to design enforceable arbitration agreements must contemplate shouldering the expense of arbitration costs and fees themselves, and draft agreements expressly providing that plaintiffs are not to bear those costs and fees.

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