Who pays for arbitration?

Adopting Federal Approach, Court Holds That Preliminary InquiryIs Necessary to Determine Whether Party, Who Agreed Arbitration, Can Afford Its Fees

The Court of Appeals has been through many kinds of arbitrability threshold issues, and issues of enforcement of arbitration awards, too, but here’s a new one for it: under a provision requiring the parties to share the costs of an arbitration that they agreed to, what happens when the claimant, alleging wrongful dismissal by her employer, says she can’t afford it?

Arbitration has several advantages over litigation, so the assumption goes, and it has been widely assumed that expedition and economy are among them.  In this case the bill of the arbitrator, the American Arbitration Association (AAA), presented in advance, was for $42,300.  (There’s nothing like that kind of charge for a litigation; and attorneys’ fees, which would have to be added, would presumably be similar in either forum.)  In this suit in the brokerage area the AAA, applying its own
employer-pays rule, presented the bill to the broker/employer, D, who refused to pay it on the ground that P, the employee, had agreed to share it.  Not having been paid by anyone, the AAA cancelled the arbitration.

Now P brought this Article 78 proceeding to compel D to pay the bill or else to compel the AAA to render a default award against D for nonpayment.  That brought the issue of the obligation to pay squarely before the New York courts, which find,
the Court of Appeals included, that the AAA employer-pays rule is superseded in this case by the parties’ agreement.

The background is that after P was hired by D to sell securities, D issued a manual requiring all employees to agree to the arbitration of disputes before the AAA and requiring that the parties share equally the fees and costs of the arbitrator.  The
provision adopting the AAA rules was made subject and subordinate, however, to any contrary provision in the parties’ agreement.  The fee-sharing provision in this agreement is such a contrary provision; that’s how it comes to govern.

A majority of the appellate division held the “equal share” provision unenforcible as against public policy, but the Court of Appeals rejects that in Brady v. Williams Capital Group, L.P., …. N.Y.3d …., …. N.Y.S.2d …. (March 25, 2010).  Citing federal cases, the Court finds the provision valid and alights on a 2001 Fourth Circuit decision, Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d 549, as most closely in point.  Bradford holds that the inquiry about enforcing a fee-splitting provision should examine “the claimant’s ability to pay …, the expected cost differential between arbitration and litigation …, and whether the cost differential is so substantial” that it would discourage the claimant from pursuing an arbitration.

The Court of Appeals, acknowledging the state’s public policy favoring arbitration agreements in an opinion by Judge Jones, also finds a “strong policy requiring the invalidation of such agreements” if they contain “terms that could preclude a litigant
from vindicating” the asserted right in an arbitral forum.  The Court therefore concludes that in this context, the issue of a litigant’s financial ability is to be resolvedon a case-by-case basis and that the inquiry should at minimum consider … (1) whether the litigant can pay …; (2) what is the expected cost differential between arbitration and litigation …; and (3) whether the cost differential is so substantial as to deter [the arbitration].

That will be an interesting hearing. “Employee” versus “employer” produces an almost knee-jerk assumption that the employee is likely to be unable to pay for dispute resolution, but that may not be the case here.  The Court recites some of the annual earnings the employee enjoyed before her 2005 firing, which in some of the latter years passed $300,000 and even $400,000.

The Court refuses to say what the next step should be if the trial court on remand does find the “equal share” clause unenforcible.  It offers the trial court this follow-up choice, however: sever the clause – relieving the claimant of the obligation to share the cost – and enforce the arbitration agreement without it, or direct the claimant to choose between sharing the cost of arbitration or instead suing on the claim in court.

It would be instructive to count the supposed advantages of arbitration as it was born early in the 20th century in commercial cases, and compare them with the “advantage” list as it stands today.  One suspects that a “dis” would prefix some of the “advantages”.

Will Brady produce a parade of I-can’t-afford-it claims, each generating an additional threshold question that requires extensive litigation just to determine whether there may be an arbitration?  Is that expeditious or economical?  We’ll keep
an eye out.

New York State Law Digest

No. 604 April 2010

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Published on March 10, 2011 at 6:02 pm  Comments Off on Who pays for arbitration?  
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