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Cost-shifting clause is severed
October 07, 2005 by Ross Runkel at LawMemo

(1) When will a cost-shifting clause in an arbitration agreement be unlawful? (2) If unlawful, does the whole agreement go down in flames?

Federal circuit courts handle the first question a number of ways. One way is to consider whether such a provision is unconscionable as a matter of state law. Another way, quite popular among federal courts, is to apply federal law - interpreting what the US Supreme Court has said about the Federal Arbitration Act (FAA). Courts split three ways on the federal law question. Here are my shorthand versions of these three ways:

• If the cost to the employee would include either unreasonable costs or any of the arbitrator's fees or expenses, then the clause is unlawful. Example: Cole v. Burns International Security Services, 105 F.3d 1465 (D.C. Cir. 1997); Armendariz v. Foundation Health Psychcare Services, 6 P.3d 669 (Cal. 2000).

  My view on this: Cannot be supported either by the text of the FAA or the language of Supreme Court cases. The California case is based on California law.

• If the employee can prove that the actual costs, in the context of the employee's actual income and savings, will be a substantial hurdle, then the clause is unlawful. Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549 (4th Cir. 2001), and cases collected.
• If the clause would deter a substantial number of similarly situated litigants, then the clause is unlawful. Example: Morrison v. Circuit City Stores, 317 F3d 646 (6th Cir en banc 01/30/2003).

Scovill v. WSYX/ABC (6th Cir 10/06/2005) is an example of the third method. However, the court ruled that the whole arbitration agreement does not get thrown out. It gets severed (the agreement had a severance clause), and then the employee is ordered to arbitrate without the cost-shifting clause.

• The trial court estimated the arbitration costs would be at least $15,310, based on a filing fee of $3,250, a service fee of $1,250, arbitrator's fees ($1,260 per day) for a four-day hearing plus another 4 1/2 days of motions, discovery, and decision-making.
• The cost was weighed against the individual's situation: recently lost his job, uncertain future income, children to support, no large savings.

My view: The 6th Circuit is pretending to analyze "similarly situated litigants," but it really simply looks at the specific facts for the litigant at hand, and assumes they are typical.

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