• New Standard for Enforcing Cost-Sharing Provisions in Arbitration Agreements in New York
  • April 21, 2010 | Authors: Joseph M. Martin; John A. Snyder
  • Law Firms: Jackson Lewis LLP - White Plains Office ; Jackson Lewis LLP - New York Office
  • The New York Court of Appeals, the State’s highest court, has announced a new standard for determining the enforceability of a fee-splitting or cost-sharing provision in an arbitration agreement. Matter of Lorraine C. Brady v. The Williams Capital Group, LLP, 2010 NY Slip Op. 2434 (Mar. 25, 2010).  The Court articulated a new 3-prong standard of review that calls for examining at least the following factors:  (1) whether the employee can pay the arbitration fees and costs; (2) the anticipated difference in expected cost between arbitration and litigation in court; and (3) whether the cost differential is so significant that it would unduly defer the commencement by the litigant of the arbitration.

    The Facts
    In January 1999, Lorraine Brady began working as a salesperson for investment banking firm Williams Capital Group.  A year later, the employer adopted an employee manual that it required employees to sign as a condition of continued employment.  The manual provided for arbitration of all disputes.  It said the employee and the employer agreed to share equally the fees and costs of the arbitrator, and further agreed that any arbitration would be in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association.  Brady was terminated on February 28, 2005.  She commenced arbitration with the AAA against the employer on December 22, 2005, claiming discriminatory termination in violation of state and federal law. 

    In accordance with AAA’s “employer pays” rule, which requires the employer to pay the arbitrator’s fee, the AAA-selected arbitrator submitted a bill to the employer after several months of prehearing discovery.  The bill was for $42,300.  The employer insisted that Brady pay half in accordance with the parties’ arbitration agreement in the employee manual.  Brady refused, claiming enforcement of the agreement’s fee-splitting provision was void as against public policy, and pointing out she was unable to afford the cost after 18 months of unemployment following her termination.

    Several months later, the AAA cancelled proceedings for lack of payment of the arbitrator’s bill.  Brady went to state court to compel the employer to pay the arbitrator’s fee so arbitration would restart or to compel the AAA to enter a default judgment against the employer for failing to pay.

    Decisions of Lower Court
    Relying on Brady’s earnings during the five years she was with the employer (which ranged from $100,000 to $450,000 annually), the trial court dismissed Brady’s suit, finding that she had the ability to pay her share.

    The Appellate Division, however, reversed.  It concluded that splitting arbitration fees violated public policy because employees may be prevented from pursuing their rights in arbitration for lack of adequate finances.  Relying on Brady’s 18 months of unemployment since leaving her employer, the court found Brady’s finances to be “precarious” and stated that requiring her to pay the arbitrator “effectively precluded her from vindicating her rights.”

    Decision of Court of Appeals
    The New York Court of Appeals rejected the approach taken by both lower courts.  Noting that it had not articulated previously a standard for the enforceability of a cost-sharing provision, the Court stated, “[A]rbitration is a creature of contract and it has long been the policy of this State to interfere as little as possible with the freedom of consenting parties in structuring their arbitration relationship.”

    Following a review of prior decisions on the United States Supreme Court and several federal appellate courts (the Third, Fourth and Sixth Circuits), New York’s highest court held that a three-prong analysis, “at a minimum,” should be applied in determining the enforceability of cost-sharing provisions:

    1. whether the litigant can pay;
    2. how much more it would cost to proceed with arbitration versus litigation; and
    3. whether the cost differential was so substantial as to effectively deter a litigant from proceeding with arbitration.

    While a full hearing often may be required, the Court of Appeals stated that in some instances a written record of the financial ability of a litigant to pay would suffice.  It directed that such a record should be made by the lower court.  Consistent with this case-by-case approach, the Court said it did “not see the need to detail the precise documentation a court should request to resolve this issue.  Such matters are best left to the court’s discretion.” 

    The case is returned to the trial court for a hearing on Brady’s financial ability to pay one-half of the arbitration fees.

    The Takeaway
    The Court of Appeals re-emphasized New York State’s strong policy favoring arbitration agreements and embraced arbitration as a valid form of dispute resolution.  However, it is clear that agreements with fee-splitting provisions may require employers to overcome a former employee’s claims of financial inability to pay his or her share.  Employers should consider agreeing to an expedited discovery or arbitration process, or stipulating a limitation on the number of days or the locale of arbitration to limit the potential costs of trying to defeat a claim that cost-sharing is too burdensome.

    In addition, employers must continue to consider:

    • Selection of applicable rules and arbitration forum that will govern the arbitration proceeding, whether AAA, JAMS or another dispute resolution service.
    • Whether to apply or supersede any general rules utilized by dispute resolution services. 
    • The language of the agreement.  This should be crafted to help ensure the employee will not be able to argue successfully that he or she did not knowingly and voluntarily waive the right to initiate a court proceeding.
    • Whether to include a jury trial waiver for matters found not to be amenable to arbitration.