Sixth Circuit axes fee-sharing provisions in mandatory arbitration contracts.

Clauses in mandatory arbitration agreements that require employees to bear some of the costs of arbitrating discrimination claims are unenforceable if they are so onerous that they deter potential litigants of comparable economic means from seeking relief for similar claims, an en banc panel of the Sixth Circuit recently ruled. (Morrison v. Circuit City Stores, Inc., 317 E3d 646 (6th Cir. 2003).)

Several circuit courts have thrown out fee-sharing provisions that were deemed too burdensome on the specific plaintiffs challenging them, but the Sixth Circuit broke new ground by ruling that reviewing courts should consider not the particular worker's ability to pay but that of all workers who are "similarly situated." Any fee-sharing clause that might "chill" these potential litigants' claims, the court held, must be struck down.

The decision, stemming from two consolidated employment discrimination cases, may have far-reaching implications for employers and employees alike, said Kelly Mulloy Myers, a Cincinnati lawyer who represented one of the plaintiffs. Although the ruling is controlling only in the Sixth Circuit, other federal appeals courts that have not yet considered the fairness of fee-sharing clauses may be influenced by the Sixth Circuit's reasoning, especially because it was issued by an en banc panel, Myers said. This would be a boon for employees.

"Employers will need to edit their arbitration agreements as necessary to comply with this decision" and others that have struck down fee-sharing clauses, she said, or face the possibility that the agreements will be challenged in court.

In the cases at issue before the Sixth Circuit, two workers--Lillian Morrison, a Circuit City store manager, and Mark Shankle Sr., a Pep Boys mechanic and salesperson--had signed arbitration agreements when they were hired. Morrison's agreement provided that she would pay half of the arbitration costs, not including attorney fees. But she could limit her share to 3 percent of her most recent annual compensation if she paid it within three months of an award. The agreement also limited Morrison's recovery to one year of back pay and two years of front pay, and it capped punitive damages at the greater of $5,000 or the total of her front- and back-pay awards. Shankle's agreement required him to pay half of his arbitration costs 10 days before the first hearing.

Morrison and Shankle sued their employers, alleging, among other claims, employment discrimination in violation of Title VII. The defendants moved to compel arbitration. Circuit City's request was granted; the one filed by Pep Boys was denied, with the trial court finding the fee-splitting clause in Shankle's agreement unenforceable.

The Sixth Circuit noted that the U.S. Supreme Court held in Green Tree Financial Corp.-Alabama v. Randolph that the enforceability of fee-splitting clauses in arbitration agreements should be decided case by case. If a provision was so financially burdensome that it effectively denied a plaintiff a chance to vindicate his or her federal statutory rights, it could not be enforced, the Court held. (531 U.S. 79 (2000).)

But that decision stopped short of saying what a plaintiff would need to show to "support the conclusion that the provision, at minimum, is unenforceable," the Sixth Circuit majority wrote.

It then stepped into the breach: "In order to protect the statutory rights at issue, the reviewing court must look to more than just the interests and conduct of a particular plaintiff. A particular plaintiff may be determined to pursue his or her claims, regardless of costs. But a court considering whether a cost-splitting provision is enforceable should consider similarly situated potential litigants, for whom costs will loom as a larger concern, because it is, in large part, their presence in the system that will deter discriminatory practices. Nothing in Green Tree suggests that a case-by-case analysis should not treat similar cases similarly."

The court criticized other federal court decisions that required plaintiffs to arbitrate claims first to determine whether sharing the costs would be prohibitive.

"This approach places plaintiffs in a kind of 'Catch-22,'" the court observed. "They cannot claim, in advance of arbitration, that the risk of incurring arbitration costs would deter them from arbitrating their claims because they do not know what the costs will be, but if they arbitrate and actually incur costs, they cannot then argue that the costs deterred them, because they have already arbitrated their claims."

Instead, the reviewing court should weigh the financial means of a "substantial number of similarly situated potential litigants" against "average or typical arbitration costs, because that is the kind of information that potential litigants will take into account in deciding whether to bring their claims in an arbitral forum."

Applying this test to Morrison's and Shankle's cases, the court concluded that the fee-sharing provisions in their arbitration agreements were too onerous. Morrison would have to pay at least $1,622 within three months of any award or risk incurring her full share of arbitration costs, which ranged between $3,750 and $14,000 in an average employment case, the court noted.

"Faced with this choice--which really boils down to risking one's scarce resources in the hopes of an uncertain benefit-it appears that a substantial number of similarly situated persons would be deterred from seeking to vindicate their statutory rights under these circumstances," the court wrote.

Shankle's share of estimated arbitration costs would be prohibitive for most mechanics and salespeople, the court found. "Even without a searching inquiry into Shankle's income and overall financial situation, we conclude that [the provision in his contract] would deter a substantial number of similarly situated potential litigants from seeking to vindicate their statutory rights in an arbitral forum," the majority wrote. The decision does not set out the specific data plaintiffs will need to support an argument that a class of similarly situated litigants would be deterred from pursuing a discrimination claim, but Myers said certain types of evidence seemed obvious.

"We'd want the typical costs of arbitration. Numbers from the American Arbitration Association showing typical costs will be important. And we'll need to show the wage income of the individual plaintiffs class of employees, but not necessarily that individual's. One thing that's certain after the Sixth Circuit's decision is that we don't need to show the particular financial situation of the person litigating the case," she said.

The court also threw out the limitation on damages in the Circuit City agreement, finding that it "significantly undermines Title VII's remedial purpose of making victims of discrimination whole and its deterrent purposes of forcing employers to eliminate and prevent discriminatory practices in the workplace."

ATLA filed an amicus brief in the case. It is available on the association's Web site at www.atla.org/courts/amicus/morr.pdf.