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Making Them Pay For It – The Dashed Promise of Arbitration Fee-Shifting

Charles F. Forer, Esq. on 1/10/2013

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Eckert Seamans Cherin & Mellott, LLC. Mr. Forer practices all types of Alternative Dispute Resolution. He is a former co-chair of both the Philadelphia Bar Association’s Alternative Dispute Resolution Committee and the Fee Disputes Committee.

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Bob´s succinct advice: "Make the other side pay upfront." Bob figured the mere threat of payment could make potential adversaries walk away from a commercial dispute rather than fight it out in court or in an arbitration proceeding. Bob further insisted that a properly drafted arbitration provision would, in Bob´s words, "disincentivize" the other side from defending itself:

Your vendors, your customers, your suppliers and your employees all know how easy it is to make a mountain out of a molehill. They know you will pay them – or, rather, "pay them off" – if they threaten you. They know the last thing you want is to hire a lawyer to defend yourself. So make them pay for it. At the outset. Nip the problem in the bud.

Bob´s solution: an arbitration provision that forced his client´s small-fry vendors, customers, suppliers and employees to arbitrate their claims and to pay substantial upfront arbitration costs. "Make it prohibitively expensive and your adversaries will vanish."

Of course, Bob´s subtly drafted arbitration provision did not say the other side would pay "exorbitant" fees. It was democratic: "Each side shall equally share the cost of the [three] arbitrators´ fees, in the amount and manner determined by the arbitrators, forty-five days before the first day of hearing."

Several months later, Bob´s client got into a dispute with a customer, "Boot Paper Company," about paper quality. The amount at issue: $60,000.00.

In the old days, Bob´s client would have resolved the dispute quickly by taking whatever the other side offered so the dispute would go away. Not now. At Bob´s breathless urging, his client filed an arbitration demand, seeking the whole $60,000.00 from Boot Paper. Bob´s prediction: "They will fold. They cannot afford to front half of the costs of the arbitration provider and the three arbitrators."

Three weeks later, Boot Paper Company did the unexpected. It moved to dismiss the arbitration because of an "unenforceable" arbitration agreement. The first sentence in its motion: "The arbitration provision calls for fee-splitting, which would deter Boot Paper Company from defending itself."

Bob´s now former client hired new counsel to engage in the expensive motion practice of demonstrating that the arbitration provision was enforceable. Just before slamming Bob´s office door, the former client grumbled: "You told me your strategy would eliminate my legal fees. But now I have to pay a lawyer to convince the court I can assert my claims against Boot Paper in an arbitration proceeding."

Was Boot Paper´s motion frivolous? Should it have surprised Bob?

Where the claimant seeks to vindicate a statutory right, the Third Circuit has instructed that an arbitration agreement is "only appropriate `so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum´ allowing the statute to serve its purpose." Blair v. Scott Specialty Gases, 283 F.3d 595, 607 (3d Cir. 2002) (quoting Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28, (1991)). And, again in the context of a claim to vindicate a statutory right, the Supreme Court has warned that "the existence of large arbitration costs could preclude a litigant such as [plaintiff] from effectively vindicating her federal statutory rights in the arbitral forum." Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 90-91 (2000).

Courts will consider whether parties seeking to vindicate statutory rights can afford arbitration fees or, as Bob hoped, whether the fees deter a party from pursuing its claims. In the Third Circuit, the "initial burden of proof [is] on the party resisting arbitration to demonstrate that arbitration would be prohibitively expensive by showing `the likelihood of incurring such costs.´" Blair v. Scott Specialty Gases, 283 F.3d at 607 (quoting Green Tree, 531 U.S. 79 at 92). The party resisting arbitration must come forward with evidence to show that the projected fees would apply to the specific arbitration in question. Id. The burden of proof then shifts to the party seeking to enforce the arbitration provision to rebut the allegation that the movant cannot afford the costs of arbitration. Id. at 607-08.

This is a fact-intensive approach. The court must focus on "ability to pay the arbitration fees and costs . . . ." Antkowiak v. TaxMasters, Inc., 2012 U.S. Dist. LEXIS 35388, *3 n.1 (E.D. Pa. March 13, 2012). This exercise often will require discovery. Which means it can be expensive trying to demonstrate that arbitration is expensive. See, e.g., Blair v. Scott Specialty Gases, 283 F.3d at 609 ("Without some discovery, albeit limited to the narrow issue of the estimated costs of arbitration and the claimant´s ability to pay, it is not clear how a claimant could present information on the costs of arbitration as required by Green Tree and how the defendant could meet its burden to rebut the claimant´s allegation that she cannot afford to share the cost.").

It gets even more costly: "In making the determination regarding whether a cost provision renders arbitration prohibitively expensive, the Third Circuit has required a party challenging an expense provision to show (1) the projected costs that would apply and (2) the party´s inability to pay those costs." Antkowiak v. TaxMasters, Inc., 2012 U.S. Dist. LEXIS 35388, *3; see, e.g., Tomcykoski v. Continuing Care Rx, Inc., 2009 U.S. Dist. LEXIS 53961, *16 (M.D. Pa. June 24, 2009) ("Without showing the potential costs of arbitration and balancing this against the costs of litigation, plaintiff has not met her burden to prove the substantive unconscionability of the arbitration agreement.").

Sometimes a court expeditiously can decide these issues. See, e.g., Hurdle v. Fairbanks Capital Corp., 2002 U.S. Dist. LEXIS 18357, *21 (E.D. Pa. Sept. 17, 2002) ("Nothing in Green Tree requires courts to undertake detailed analyses of the household budgets of low-level employees to conclude that arbitration costs in the thousands of dollars deter the vindication of employees´ claims in arbitral fora."); Giordano v. Pep Boys – Manny, Moe&Jack, Inc., 2001 U.S. Dist. LEXIS 5433, *23-*24 (E.D. Pa. March 29, 2001) ("a fairly low-level employee of Pep Boys earning a relatively low wage of $400.00 per week" could not afford arbitration fees).

Other times, there will be a "gray area," see id. at *24, and the court then must scrutinize whether the party resisting arbitration can afford to pay arbitration costs. See, e.g., Hill v. Wackenhut Services International, 865 F. Supp. 2d 84, 95 (D.D.C. 2012) (rejecting claim that arbitration provision was not enforceable because it required fee-splitting: plaintiffs "provide no record support as to whether or how the costs of arbitration would discourage them from being able to pursue their claims"); Camacho v. Holiday Homes, Inc., 167 F. Supp. 2d 892, 896-97 (W.D. Va. 2001) ("[plaintiff] has presented substantial evidence that the costs of arbitrating her claims would preclude her from vindicating her federal statutory rights").

If the parties do not provide enough evidence on affordability, the appellate court could remand the case for yet additional discovery. See, e.g., Blair v. Scott Specialty Gases, 283 F.3d at 610 ("a remand is appropriate in light of [plaintiff´s] affidavit of her limited financial capacity . . . . [Defendant] should also be given the opportunity to meet its burden to prove that arbitration will not be prohibitively expensive, or as has been suggested in other cases, offer to pay all of the arbitrator´s fees.").

There are no easy way outs. See, e.g., Spinetti v. Services Corp. Int´l, 240 F. Supp. 2d 350, 354 n.3 (W.D. Pa. 2001) ("Admittedly, this case-by-case analysis may seem contrary to the arbitration process´s ability to minimize costs and streamline litigation."), aff´d, 324 F.3d 212 (3d Cir. 2003). This is bad news to folks, like Bob´s former client, who signed up for arbitration because it supposedly offered cost savings and speedy results.

After reading Boots Paper´s motion to dismiss the arbitration proceeding, Bob told anyone who would listen: "These cases talk about whether an arbitration provision discourages statutory claims. They have nothing to do with a commercial contract where a party contends that arbitration costs would prevent it from defending itself."

Only one person listened to Bob. Her retort: "Maybe yes. Maybe no. But doesn´t your arbitration provision invite lots of litigation and legal costs? Is that in keeping with the promise of arbitration." You think, Bob?

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