Fee-Splitting Provisions In Arbitration Agreements Subject To Scrutiny

Reductions in force, particularly in the financial sector, have resulted in a staggering number of employees without work in 2009, some of whom already have brought or likely will bring claims relating to their employment loss. Many firms seeking to avoid the heavy costs of litigation have relied on arbitration agreements as a more efficient and less expensive alternative to resolving employment disputes in court. These agreements often include a provision allocating responsibility for payment of arbitration costs between employers and employees. In Brady v. Williams Capital Group, L.P., 2009 WL 1151322, _ N.Y.S. 2d _ (N.Y.A.D. 1st Dep't April 30, 2009), a New York appellate court issued an important reminder that employers need to scrutinize any fee splitting provisions in their current arbitration agreements. After engaging in a case-specific analysis focused on the plaintiff's ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and whether the cost differential was so substantial as to deter the plaintiff from bringing her claims, the Brady court severed a fee-splitting provision in an arbitration agreement it found to be violative of public policy and compelled Williams Capital to pay all arbitration costs.

In or about January 2000, Plaintiff Lorraine Brady, a commissioned saleswoman at Williams Capital, signed the company's newly adopted employee manual as a condition of continued employment, thereby agreeing to arbitrate any employment disputes and to split the fees and costs associated with the arbitration. When Williams Capital terminated Brady's employment in February 2005 after six years of employment, Brady commenced an arbitration with the American Arbitration Association (AAA) against Williams Capital claiming discriminatory termination. After the parties engaged in extensive pre-hearing discovery, the AAA sent Williams Capital a bill for $42,300 which represented the entire advance payment for the arbitrator's compensation pursuant to the AAA's own "employer pays" rule. Williams refused to pay the entire advance payment and demanded that Brady pay her portion in accordance with their arbitration agreement. Brady refused to pay her portion, and the AAA thereafter cancelled the arbitration for non-payment. Relying on the AAA's rule that requires an employer to pay the arbitrator's compensation, Brady commenced an action, seeking to revive the arbitration and compel Williams to pay the entire arbitrator's fee. The appellate court determined that the fee-splitting provision in the arbitration agreement was unenforceable as a matter of public policy based on the facts in Brady's case. The court anchored its decision on a recent line of seven Circuit Court decisions requiring courts in the employment discrimination context to engage in a case-by-case analysis focused on the claimant's ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and whether the cost differential is so substantial as to deter the bringing of claims. Despite an earning history ranging from $100,000 to $400,000 annually during her employment with Williams, Brady had established that her finances were "precarious" as a result of her lack of gainful employment during the 18-month period following her termination by Williams Capital. The court determined that requiring her to pay half of the arbitration costs in accordance with the arbitration agreement, which already amounted to $21,150 with additional costs likely to be incurred, would effectively preclude her from vindicating her rights in arbitration. In what it considered the proper remedy, the court severed the fee-splitting provision and required Williams Capital to shoulder the costs of the arbitration, subject to reallocation of the costs by the arbitrator at a later time, rather than voiding the entire agreement.

The Brady case illustrates the pitfalls of including a fee-sharing provision in arbitration agreements in the employment context. Since the ruling in Armendariz v. Foundation Psychare Services, Inc., 24 Cal.4th 83 (2000), employers in California have borne the vast majority of all costs of arbitration to avoid a ruling that their arbitration agreements are procedurally and substantively unconscionable. While various federal Circuit and district courts -- and now New York's appellate court -- have taken a less bright-line approach than California, employers should beware of any such fee-sharing provisions which likely will be viewed with skepticism, especially when challenged by employees who have not secured new employment and, thus, arguably do not have sufficient income to share the arbitration costs. If your arbitration agreement contains a fee-splitting provision, please contact any of the attorneys listed to the left or your usual Crowell & Moring contact to discuss the law in the specific jurisdiction where the arbitration agreement is in effect and the likelihood of challenges to your agreement.