Arbitration agreement is unenforceable if costs are too high, court says.

An employee who can show that it would cost him or her much more to arbitrate an employment discrimination claim than to bring it before a court should not be forced into arbitration, even if the employee has signed a contract agreeing to arbitrate employment disputes, a New York federal court recently ruled. (Ball v. SFX Broadcasting, No. 00-CV-1090 (N.D.N.Y. Aug. 21, 2001).)

The decision marks the first time a court has invalidated a mandatory arbitration agreement because a plaintiff could show that it would cost more to arbitrate than litigate an employment claim, said John Higgins of Latham, New York, who represented the two plaintiffs in the case.

"It's the first decision where a court has ruled that these kind of agreements are unenforceable per se," Higgins said.

Previous courts that have considered the same issue have required employees seeking to avoid mandatory arbitration to show financial incapacity to pay for it. The New York court took its ruling one step further, finding that an agreement is unenforceable if the plaintiff merely shows "a likelihood that he or she will be responsible for significant arbitrators' fees, or other costs which would not be incurred in a judicial forum."

The plaintiffs, Karen Ball and Tracy Christopher, worked for a New York radio station in 1996 when it was bought by SFX Broadcasting. As a condition of continued employment, the women had to sign an agreement containing a clause requiring that all disputes involving terminations, discrimination, or retaliation be resolved by binding arbitration. The agreement also provided that all parties would bear their own arbitration costs.

Both women became pregnant. Shortly after, Ball was fired and Christopher left her job, claiming that she was constructively discharged when she could no longer tolerate the harassment and discrimination she faced at work because of her gender and pregnancy.

Ball and Christopher sued SFX and others, claiming sex and pregnancy discrimination, and retaliation. The defendants moved to dismiss the lawsuit on the basis that the women had agreed to arbitrate their claims.

Because Ball had previously litigated the arbitration issue in state court and lost, federal court Judge David Hurd said she was precluded from bringing her claims in federal court. But Christopher's claims were not only viable, they belonged in federal court, Hurd wrote, given the U.S. Supreme Court's recent decision in Circuit City Stores, Inc. v. Adams. (121 S. Ct. 1302 (2001).)

That case held that employees can be required to honor their commitments to arbitrate Title VII claims, but only if the arbitration process meets "minimal fairness requirements." The employee should not be "compelled to forfeit [substantive rights] in agreeing to the mandatory arbitration," the Supreme Court held.

Applying that ruling to Christopher's claims, the New York federal court found that making her pay half the arbitration costs--including $1,000 a day for the arbitrator, $150 for each day of hearings, and $500 for any counterclaim filed--effectively nullified her substantive right to seek redress in a judicial forum for alleged discrimination.

A showing that arbitration costs would probably significantly exceed court costs "is sufficient to demonstrate that the challenged arbitration agreement does not provide an effective mechanism for the vindication of statutory rights," Hurd wrote.

Plaintiff attorney Higgins said the decision "affects not only Tracy, but also employees everywhere who are or were employed by the defendants and who signed these agreements. We have a list of radio stations all over the country, about 55 to 60, where they did the same thing," he said.

And if the decision is upheld--Ball is appealing the dismissal of her claim, and SFX has filed a notice of appeal as well--it could have even greater impact. "The decision is significant. It places a minimal due process test on an employer's right to require mandatory arbitration as a condition of employment or continued employment," Higgins said.