There’s only one case today, but it is an instructive one on a significant issue in employment and consumer arbitration.

Effective Vindication

Although discovery and motion practice may be limited in arbitration, the process comes with other costs that are not present in court-based litigation.  Arbitrators charge a fee; judges are paid by the state, federal, or tribal government.  Arbitral tribunals charge administrative fees which are often calculated on a per-hearing basis; in court, the number of days of trial does not affect the amount which the parties pay to use the courtroom.  The filing fees in arbitration may run to thousands of dollars; the check to the court clerk is relatively small.

In addition, an arbitration clause may impose limitations on remedies which a court, as a matter of law, could not consider.  For example, the contract may attempt to limit the time within which to bring a claim to something less than would be imposed by other statutes of limitations.[1]  The agreement may bar remedies such as punitive damages or attorneys’ fee recoveries that a statutory action would provide.

Based on these limitations, claimants, particularly employees and consumers, often challenge arbitration clauses on the basis that either the language of the agreement or the burdens of the arbitral process bar them from “effectively vindicating” their rights.  Cruz v. Aersale, Inc., 2024 U.S. Dist. LEXIS 556 (D.N.M. January 2, 2024), is textbook on the issue.

Plaintiff brought a claim under the Fair Labor Standards Act.  His employment agreement contained an arbitration clause which required that the “cost of the arbitrator and court reporter” would be “shared equally by both parties, or as determined by the arbitrator.” It further mandated that the employee “submit any dispute . . . within one (1) year from the date the dispute first arose.” Finally, as relevant to the decision, it provided that each party would bear its own attorneys’ fees.  In a lengthy opinion replete with citations, Magistrate Judge Fouratt examines each of these claims.  He opines that, even though an arbitrator might eventually allocate the attorneys’ fees and arbitration costs to the employer, the prospect of fronting the significant expense of the arbitration would make pursuing arbitration of Cruz’s claims “prohibitive and impractical.” [2]  The case assembles various authorities on the size of costs which courts have held to be impediments to a party’s resolution of his or her dispute.  It also provides a roadmap to the evidence that a plaintiff might use in supporting such a position.

The court, further, holds that both the requirement that the Plaintiff pay his own attorneys’ fees and that he file an arbitration demand within one year of the onset of the claimed violation deny Cruz rights guaranteed under the FLSA.  The time limitation “required Cruz to forego availing himself of the more expansive and remunerative limitations period in the  FLSA.”  Likewise, the court holds, requiring Cruz to pay his own fees is “incomplete and potentially misleading” in light of the FLSA’s “mandatory award of attorneys’ fees to a prevailing plaintiff.”

The Magistrate Judge, then, deals with Defendant’s request that the Court blueline the agreement to sever the offending terms.  Taking a practical approach, he holds that the in terrorem effect of such provisions requires the invalidation of the entire arbitration provision. “Each of these terms can be a daunting obstacle to the ordinary claimant but together they may have deterred untold numbers of potential claimants from ever pursuing their claims. . .  [J]udicially reconstructing an arbitration provision the original text of which may have intimidated previous claimants from ever filing a claim does not square with the Court’s sense of equity.” For the same reason, the court refuses to hold that defendant’s offer to waive the offending provisions is sufficiently curative.

Besides being of value to litigators, the case has two lessons for those drafting arbitration clauses.  First, be sure you are not over-reaching.  If you try to bind the counterparty too tightly, you may, like the Wall Street hog, get slaughtered and lose your entire right to arbitrate.  Secondly, include a savings clause under which the parties agree that any invalid provision is to be stricken from the contract, while the balance thereof remains in full force and effect. While the absence thereof did not control the court’s decision, Magistrate Judge Fouratt points out in dictum that this agreement had no such provision.

The decision runs forty-six pages, but is worth your time.

If you are in the track of the upcoming storm area, be safe.  Those of us along the shore in New England are watching the closely.  We may finally get snow. 

David A. Reif, FCIArb
ReifADR
Dreif@Reifadr.com
ReifADR.com

[1] On the other hand, there is case law holding that, absent a specific state statute to the contrary, an arbitrator may enter an award on a claim that would otherwise be time-barred.

[2] Defendant’s perhaps naïve suggestion that counsel advance these costs leads Magistrate Judge Fouratt to opine that “fronting several thousand dollars of non-reimbursable arbitration costs in pursuit of low-dollar claims is an approach to generating revenue the court believes the American plaintiff’s bar would find decidedly unattractive.”