• Sixth Circuit Determines Enforceability of Cost-Splitting Provisions in Arbitration Agreements
  • April 30, 2003
  • Law Firm: Ford & Harrison LLP - Atlanta Office
  • The Sixth Circuit Court of Appeals recently held that the enforceability of cost-splitting provisions in mandatory arbitration agreements must be determined on a case-by-case basis, taking into consideration whether the provision would have a chilling effect on a class of potential litigants similarly situated to the plaintiff. In Morrison v. Circuit City, the court reviewed two separate arbitration agreements and found that they were not enforceable because they would have such a chilling effect. The court also held, however, that the cost-splitting provisions were severable from the agreements and that the agreements were enforceable, minus the cost-splitting provisions.

    In analyzing the enforceability of the cost-splitting provision, the Sixth Circuit examined the approaches taken by other federal appeals courts. Some courts have found that cost-splitting provisions in mandatory arbitration agreements are per se unforceable - that is they are always unenforceable regardless of the circumstances. The Sixth Circuit rejected this position. The Fourth Circuit has adopted an analysis that requires the plaintiff to present evidence of his or her ability to pay arbitration costs, the difference between the expected arbitration costs and the costs of litigation, and whether the difference is so substantial that it would deter litigants from bringing claims in the arbitral forum. The Sixth Circuit rejected this procedure, holding that requiring the plaintiff to come forward with concrete estimates of expected arbitration costs asks too much of the plaintiff at the initial stage of the proceedings.

    The court also rejected the analysis adopted by the First and Seventh Circuits, which requires the parties to proceed with arbitration and then have a court determine if the cost of arbitration is prohibitive. The Sixth Circuit noted that this puts the plaintiff in a catch-22. "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."

    The Sixth Circuit adopted a case-by-case approach that gives litigants the opportunity, prior to arbitration, to demonstrate that the potential costs of arbitration are great enough to deter them and similarly situated individuals from pursuing arbitration. This approach differs from that adopted by the Fourth Circuit because it looks at the chilling effect on similarly situated potential litigants, not just the individual plaintiff. The Sixth Circuit held that in determining whether the cost-splitting provision would deter a substantial number of similarly situated potential litigants, the reviewing court should define the class of such potential litigants by job description and socioeconomic background.

    The court noted that this analysis will yield different results in different cases. For example, in many cases, high-level managerial employees and others with substantial means can afford the costs of arbitration, thus making cost-splitting provisions in such cases enforceable. In the case of other employees, however, this standard will render cost-splitting provisions unenforceable in many situations.

    Employers considering including cost-splitting provisions in mandatory arbitration agreements should be aware of the different standards used by different courts in evaluating whether such provisions are enforceable. The varying standards could mean that an arbitration agreement will be enforced in one part of the country, but not in another.