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MANDATORY ARBITRATION OF STATUTORY by yaohongm

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									MANDATORY ARBITRATION OF STATUTORY
       EMPLOYMENT CLAIMS

    ABA Section on Labor and Employment Law
    Equal Employment Opportunity Committee
             2003 Midwinter Meeting
                March 19-21, 2003




              By: Janice Goodman
                  Justin M. Swartz


          Goodman & Zuchlewski, LLP
               500 Fifth Avenue
                  Suite 5100
             New York, NY 10110
                (212) 869-1940
                                                TABLE OF CONTENTS


EFFECTIVE VINDICATION OF STATUTORY RIGHTS .....................................................2

         Cost-Splitting Provisions ...................................................................................................3

                   Cost-Splitting is Per Se Unenforceable ................................................................4
                   Case by Case Analysis of Cost-Splitting ..............................................................6

         Limitations on Remedies . ................................................................................................9

                   Limitations on Attorneys’ Fees .............................................................................9
                   Limitations on Other Statutory Remedies .........................................................10

         Altering Burdens of Proof ...............................................................................................11
         Limited Discovery ............................................................................................................12
         Unfair or Biased Rules ....................................................................................................13
         Prohibitions of Class Actions ..........................................................................................13
         Truncated Limitations Periods .......................................................................................15
         Hearing Time Limit .........................................................................................................16
         Waiver of Right to Appeal ..............................................................................................16
         Confidentiality Provisions ...............................................................................................17

SEVERABILITY OF OFFENSIVE CLAUSES .......................................................................17

CONTRACT DEFENSES ...........................................................................................................20

         Consideration / Illusory Promise / Mutuality of Obligation ........................................20
         Unconscionable Contracts of Adhesion .........................................................................22
         No Agreement to Arbitrate ............................................................................................25
         Knowing and Voluntary Waiver ....................................................................................26
      MANDATORY ARBITRATION OF STATUTORY EMPLOYMENT CLAIMS

                                       By:    Janice Goodman
                                              Justin M. Swartz

        In 1991, the Supreme Court approved mandatory arbitration of claims brought pursuant to
the Age Discrimination in Employment Act (“ADEA”) for employees in the securities industry
who executed a U-4 government registration form. Gilmer v. Interstate/Johnson Lane Corp., 500
U.S. 20 (1991). The Court held that “although all statutory claims may not be appropriate for
arbitration, individual agreements to arbitrate statutory employment claims should be enforced to
the same extent as are other arbitration agreements unless Congress has evinced a contrary intent
in the statute’s text or its legislative history, or where there is an inherent conflict between
arbitration and the purpose of the statute. Id. at 24-26. Although Gilmer was limited to the
governmental registration forms required of employees in the securities industry, over the next
decade, the circuit courts, almost uniformly, interpreted Gilmer broadly, and upheld pre-dispute
mandatory arbitration agreements with regard to statutory employment discrimination claims.
See e.g., Desiderio v. NASD, 191 F.3d 198 (2d Cir. 1999); Koveleskie v. SBC Capital Mkts.,
Inc., 167 F.3d 361 (7th Cir. 1999), cert. denied, 528 U.S. 811 (1999); Willis v. Dean Witter
Reynolds, Inc., 948 F.2d 305, 309 (6th Cir. 1991)1. The sole exception was the Ninth Circuit,
which, after reviewing the legislative history of the Civil Rights Act of 1991, held that Congress
intended to preclude employers from requiring individuals, as a conditions of their employment,
to prospectively waive their rights to bring Title VII claims in a judicial forum, finding that such
an agreement was not voluntary. Duffield v. Robertson Stephens & Co., 144 F.3d 1182, 1185-
1198 (9th Cir. 1998), cert. denied 525 U.S. 982 (1998). The Supreme court denied certiorari in
Duffield, 525 U.S. 982 (1998).

       In 2001, in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001), the Supreme Court
addressed the question left unanswered in Gilmer: whether Section 1 of the Federal Arbitration
Act (“FAA”), 9 U.S.C. Sec. 1 (2002), excludes employment contracts from its coverage. The
Court held that Section 1 of the FAA does not exclude all contracts of employment, but only
employment contracts of transportation workers. Id. at 119.2

       1
         There is authority, however, that claims under the Fair Labor Standards Act may not be
compelled to arbitration. Louis v. Geneva Enterprises, Inc., 128 F. Supp. 2d 912 (E.D. Va. 2000)
(citing Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981); Tran v. Tran,
54 F.3d 115, 118 (2d Cir. 1995); but see e.g., Keuhner v. Dickinson & Co., 84 F.3d 316, 320 (9th
Cir. 1996); Carter v. Countrywide Credit Indus., 189 F. Supp. 2d 606, 614 (N.D. Tex. 2002).
       2
           Legislation has been introduced to reverse the Circuit City holding. The Preservation
of Civil Rights Protection Act, S. 2435 and H.R. 2282, would amend the FAA to exclude
contracts of employment. In the House of Representatives, the bill was sponsored by Rep.
Dennis Kucinich (D-OH). In the Senate, the bill was sponsored by Senators Edward
Kennedy (D-MA) and Russ Feingold (D-WI). See
http://www.nela.org/news/mandatoryarbitration.htm for information on various efforts to
eliminate mandatory arbitration of employment disputes.
        The Circuit City decision did not, however, disturb Duffield’s holding, as it dealt with an
entirely unrelated issue. In Circuit City, the Supreme Court held that employment arbitration
agreements signed by “non-transportation” workers were within the scope of the FAA. Duffield
addresses whether predispute mandatory arbitration agreements as a condition of employment are
“voluntary,” an issue not addressed or mentioned in Circuit City. Circuit City does not address
the question of under what circumstances a particular federal statute, such as Title VII, may limit
the enforceability of an arbitration agreement.

          Nevertheless, after Circuit City, by a 2-1 decision, the Ninth Circuit repudiated Duffield.
 It held that, “[i]n Circuit City, the Supreme Court so directly undermined the reasoning behind
Duffield, that we conclude it has lost its status as valid precedent.” EEOC v. Luce, Forward,
Hamilton, & Scripps, 303 F.3d 994, 1002 (9th Cir. 2002). The EEOC initially filed a petition for
en banc review which it subsequently withdrew. The Court of Appeals, however, granted the
individual complainant permission to petition for rehearing en banc. On February 7, 2003, the
court agreed to rehear the case en banc, and ordered that the three-judge panel opinion not be
cited as precedent. EEOC v. Luce, Forward, Hamilton, & Scripps, 2003 U.S. App. LEXIS 2109,
Nos. 00-57222, 01-55321 (9th Cir. Feb. 7, 2003).

        Although broad attacks on mandatory arbitration of statutory employment discrimination
claims have almost uniformly failed, employees have successfully attacked one-sided overboard
arbitration agreements drafted by employers and made a condition of employment. This paper
summarizes recent court decisions regarding those arbitration provisions that courts have
generally voided. Section I reviews the various provisions which courts have held are
unenforceable. Section II reviews the courts’ decisions regarding severability of unacceptable
provisions. Section III reviews court decisions rejecting arbitration agreements based on general
principals of contract law.

I.     EFFECTIVE VINDICATION OF STATUTORY RIGHTS

         The law is clear that pre-dispute mandatory arbitration of statutory claims is appropriate
only “so long as the prospective litigant effectively may vindicate [her] statutory cause of action
in the arbitral forum”. Gilmer, 500 U.S. at 28 (citation omitted); Green Tree Fin. Corp.-Ala. v.
Randolph, 531 U.S. 79, 90 (2000) (citation omitted). Courts have read this language to mean
that arbitration agreements may not be enforced if they “undermine the relevant statutory
schemes.” Cole v. Burns Int’l Security Systems, 105 F.3d 1465, 1468 (D.C. Cir. 1997).
“[O]bviously Gilmer cannot be read as holding that an arbitration agreement is enforceable no
matter what rights it waives or what burdens it imposes.” Id. at 105 F.3d 1465, 1482 (D.C. Cir.
1997).

        Since Gilmer, federal courts have shown an ever growing concern about whether pre-
dispute mandatory arbitration agreements allow employees to effectively vindicate their rights
under anti-discrimination statutes, and have closely scrutinized these agreements. See Halligan
v. Piper Jaffrey, Inc., 148 F.3d 197, 202-03 (2d Cir. 1998), cert. denied, 119 S.Ct. 186 (1999)


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(discussing post-Gilmer controversy over mandatory arbitration); Phillips v. CIGNA Inv., Inc.,
27 F. Supp. 2d 345, 349 (D. Conn. 1998) (citing “conflicting national goals of eliminating
discrimination in the workplace, on one hand, and enforcing arbitration agreements, on the
other).

       This enhanced scrutiny of pre-dispute mandatory arbitration clauses has emerged in part
because employers have not been satisfied merely with changing the dispute resolution forum,
but have regularly drafted arbitration clauses intended to “tilt the playing field” in their favor.
Chisolm v. Kidder Peabody Asset Management, Inc., 966 F. Supp. 218 (S.D.N.Y. 1997), aff’d.
164 F.3d 617 (2d Cir. 1998). Notwithstanding Gilmer’s admonition that mandatory arbitration
agreements may not be used to prevent litigants from effectively vindicating their statutory rights,
many employers reacted to Gilmer by attempting to impose self-serving arbitration rules
designed to curtail plaintiffs’ ability to prevail on their statutory claims, and to limit potential
recoveries.

        Among the unfair provisions that employers insert into arbitration agreements and have
been routinely questioned by the courts are provisions that: (A) require employees to pay high
costs and fees just to gain access to arbitration, (B) limit or eliminate the statutory remedies
available to employees, (C) alter burdens of proof, (D) substantially curb discovery, (E)
promulgate unfair rules and procedures, (F) limit employees’ right to bring class actions, (G)
truncate limitations periods, (H) place time limitations on hearings, (I) waive the right to appeal,
and (J) keep awards and identities of parties confidential.

        A.      Cost-Splitting Provisions

        Arbitration agreements often contain clauses that require employees to pay half of the
costs and fees required to initiate arbitration. In addition to the prohibitive initial fees, arbitration
agreements require employees to pay a share of per diem arbitrators’ fees.

        Courts have recognized that the high costs of arbitration place a burden on the employees
that they do not face in federal court and that could substantially deter employees from
vindicating their rights. Studies have shown that the average arbitrator’s fee in an employment
dispute is $2,000. LeRoy & Feuille, “When Is Cost and Unlawful Barrier to Alternative Dispute
Resolution,” 50 UCLA L. Rev. 143 (October, 2002). A review of decisions in the securities
industry reflects the exorbitant cost that arbitration can bring. Some examples of the high forum
fees that employees have been ordered to pay to vindicate their rights are:

        $25,650         Sobol v Kidder Peabody & Co., Inc., 49 F. Supp. 2d 208 (S.D.N.Y. 1999)
        $41,400         Wolfe v Charles R. Schwab, NASD Arbitration Docket No. 1993-003197
        $24,800         Livingston v Shearson, NASD Case No. 93-00770
        $55,000         Kidder, Peabody v Fletcher, NYSE docket No. 1992-002062.

        While the Supreme Court has not decided whether imposition of forum fees on the


                                                   3
employee in discrimination cases renders arbitration agreements unenforceable, the Court has
recognized that “it may well be that the existence of large arbitration costs could preclude a
litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum.” Green
Tree Financial Corp.-Alabama v Randolph, 531 U.S. 79, 90 (2000). In Green Tree, plaintiff
appealed the district court’s order compelling arbitration of her claims under the Truth in
Lending Act. The arbitration agreement in Green Tree was silent on the allocation of the costs of
arbitration. Plaintiff argued that the agreement prevented her from effectively vindicating her
statutory rights because of the risk that she would be responsible for high costs. Because the
agreement was silent on whether and how much of the costs would be on the plaintiff, the Court
held that “[t]he risk that Randolph will be saddled with prohibitive costs is too speculative to
justify the invalidation of an arbitration agreement.” Id at 90-91. Although the Court did not rule
that imposition of fees was an impermissible burden per se, it returned the case to the lower court
to allow the plaintiff to make a showing that she will be saddled with prohibitive costs in
arbitration.

        Before and after Green Tree courts have routinely invalidate cost-splitting provisions.
The only split among the Courts is whether provisions requiring employees to pay high
arbitration costs are invalid per se, or whether the employee challenging the cost provision must
show that the costs are prohibitive.

                       1.      Cost-Splitting is Per Se Unenforceable.

        Three courts of appeal, the Tenth, Eleventh, and D.C. Circuits, have held that provisions
in arbitration agreements that require plaintiffs to bear substantial arbitration costs are invalid per
se because they prevent litigants from effectively vindicating their statutory rights. Green Tree
does not undermine these holdings, because the arbitration agreement before the Green Tree
Court was silent on responsibility for costs. See Gambardella v Pentec.Inc. 218 F. Supp. 2d 237,
245-46 (D. Conn. 2002).

        In the seminal case on cost-splitting provisions, the D.C. Circuit held that an employee
cannot be required to pay “all or part” of an arbitrator’s fee in order to pursue her statutory
employment discrimination claim. Cole v. Burns Int’l Security Serv.,105 F.3d 1465, 1468 (D.C.
Cir. 1997). In Cole, the arbitration agreement was ambiguous as to the parties’ responsibility for
the costs of the arbitration. The court compelled arbitration, but resolved the ambiguity in favor
of the employee, requiring the employer to bear the all costs of arbitration. Id. at 1468. The
court reasoned that “to prevent employees who are seeking to vindicate statutory rights from
gaining access to a judicial forum and then require them to pay for the services of an arbitrator
when they would never be required to pay for a judge in court” would “undermine Congress’
intent.” Id. at 1484.

        The Tenth Circuit echoed Cole’s concerns in Shankle v. B-G Maint. Mgmt. of Colo., Inc.,
163 F.3d 1230 (10th Cir. 1999), and refused to enforce an arbitration agreement that contained a
cost-splitting provision. The agreement in Shankle required the employee to pay one-half of the


                                                   4
fees and costs mandated by the American Arbitration Association’s (the “AAA”) rules. The
court estimated these fees to be between $1,875.00 and $5,000.00. Id. at 1232. Such an
arrangement, the court held, “clearly undermines the remedial and deterrent functions of the
federal anti-discrimination laws.” Id.

        Likewise, in Paladino v. Computer Tech, Inc.,134 F.3d 1054 (11th Cir. 1998), a majority
of an Eleventh Circuit panel held that the risk that a Title VII plaintiff would be required to pay a
$2,000.00 filing fee was “a legitimate basis” for concluding that the clause contravenes statutory
policy. Id. at 1062 (Cox, J., joined by Tjoflat, J. concurring in court’s refusal to compel
arbitration on other grounds).

        Other circuit courts have expressed discomfort with cost-splitting provisions. See Circuit
City Stores v. Adams, 279 F.3d 889, 894 (9th Cir. 2002) (holding that the requirement that
plaintiff split arbitrator’s fees with defendant contributes to unconscionability of agreement);
Floss v. Ryan’s Family Steakhouses, Inc., 211 F.3d 306, 314 (6th Cir. 2000) (observing that an
arbitration policy forcing employees to pay one-half of the arbitrators fee prevents employees
from pursuing federal statutory claims against employers while striking down arbitration clause
on other grounds); Brooks v. Travelers Ins. Co., 297 F.3d 167, 171-72 (2d Cir. 2002) (expressing
discomfort with an arbitration clause that required the parties to bear equally any costs of
arbitration beyond the first day of the hearing, but declining to decide the issue because the
employer abandoned its effort to compel arbitration).

         Even after Green Tree, several district courts have followed suit, striking down cost-
splitting provisions as unenforceable per se. In Ball v. SFX Broad., Inc., 165 F. Supp. 2d 230
(N.D.N.Y. 2001), the court struck down an arbitration clause that imposed substantial costs on an
employee seeking to vindicate her rights under Title VII holding that “the imposition of such
costs . . . has no parallel in the litigation arena” and that “it simply cannot be said that, under such
circumstances, arbitration is ‘a reasonable substitute for a judicial forum.’” (citing Cole, 105 F.3d
at 1484); see also Bailey v. Ameriquest Mortgage Co., 2002 Dist. LEXIS 1343, No. 01-545, at *17
(D. Minn. Jan. 23, 2002) (following Cole and Shankle in denying motion to compel arbitration);
LeLouis v. Western Directory Co., 230 F. Supp. 2d 1214, 1223 (D. Or. 2001) (party imposing
mandatory arbitration agreement is responsible for costs, distinguishing from freely negotiated
agreement); Geiger v. Ryan’s Family Steak Houses, Inc., 134 F. Supp. 2d 985, 996 (S.D. Ind.
2001) (“arbitration agreements which include a fee structure and place the burden for the fees on
the shoulders of the employee are usually not upheld”) (striking down arbitration clause)
(citations omitted); see Martens v. Smith Barney, Inc., 181 F.R.D. 243, 256 (S.D.N.Y. 1998)
(pre-Green Tree) (stating in dicta that “[r]equiring plaintiffs to pay for access would surely deter
the bringing of arbitration, running counter to Congressional intent”) (citations omitted); cf.,
Bond v. Twin Cities Carpenters Pension Fund, 2002 U.S. App. LEXIS 21028, No. 01-
3300 (8th Cir. October 8, 2002) (holding that a cost sharing provision in a pension plan’s
mandatory arbitration clause is prohibited under ERISA); Ferguson v. Countrywide Credit
Indus., Inc., 298 F.3d 778, 785-6 (9th Cir. 2002) (striking down arbitration clause because, under

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California law, “the only valid fee provision is one in which an employee is not required to bear
any expense beyond what would be required to bring the action in court” and expressing concern
that employees who are required to pay high arbitration costs will be deterred from bring civil
rights claims); Armendariz v. Foundation Health Psychcare Serv. Inc., 24 Cal. 4th 83, 113
(2000) (holding that a mandatory arbitration agreement that includes claims under
California’s Fair Employment and Housing Act “impliedly obliges the employer to pay all
types of costs that are unique to arbitration”); Giles v. City of New York, 41 F.Supp. 2d 308,
312 (S.D.N.Y. 1999) (invalidating cost splitting provision in context of a collective bargaining
agreement).

                      2.      Case by Case Analysis of Cost-Splitting

        Other courts while equally hostile to burdening employees with excessive costs, reject the
per se rule and review each case to determine whether the cost burden prohibits the litigant from
effectively vindicating her statutory rights. The Fourth Circuit, in Bradford v. Rockwell
Semiconductor Sys., Inc., 238 F.3d 549 (4th Cir. 2001) held that “the appropriate inquiry is one
that evaluates whether the arbitral forum in a particular case is an adequate and accessible
substitute to litigation, i.e. a case-by-case analysis.” Id. at 556. This inquiry must focus on,
among other things, (1) the claimant’s ability to pay the arbitration fees and costs, (2) the
expected cost differential between arbitration and litigation in court, and (3) whether that cost
differential is so substantial as to deter the bringing of claims. Id.

        In Bradford, the court rejected plaintiff’s argument that the arbitration costs precluded
him from effectively vindicating his statutory rights because he “failed to offer any evidence of
the expected cost of litigation or that he suffered any hardship as a result of the arbitration
agreement.” Id. at 558, n.6. Moreover, before filing his complaint in court, plaintiff initiated
arbitration and, although he did not prevail, conceded that he received a full and fair hearing on
the merits of his claims. Id. at 558. The court held that plaintiff should have raised his
objections to the fee-splitting arrangement prior to the beginning of the arbitration. Id. at 558,
n.7. Invalidating the provision after the arbitrator already ruled on plaintiff’s claim would have
given him a “second bite of the apple under circumstances in which there is no evidence that
allowing him to pursue his litigation in court would cost him any less than the amount of money
that he ha[d] already spent in arbitration.” See also, Williams v. CIGNA Financial Advisors,
Inc., 197 F.3d 753, 764-65 (5th Cir. 1999) (rejecting plaintiff’s post-arbitration public policy
argument against cost-splitting where plaintiff presented no evidence that forum fees prevented
full vindication of his rights or that fees were prohibitively expensive for plaintiff).

        Recently, in Morrison v. Circuit City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-
4099/99-5897 (6th Cir. Jan. 30, 2003), the Sixth Circuit adopted a “case by case” analysis to
determine the validity of a cost-splitting provision. Id. at *4. The Sixth Circuit’s approach
differs markedly, however, from the Fifth Circuit’s. The Sixth Circuit does not focus solely on


                                                 6
the individual litigant, but takes a global perspective. “[E]mployers should not be permitted to
draft arbitration agreements that deter a substantial number of potential litigants from seeking
any forum for the vindication of their rights. To allow this would fatally undermine the federal
anti-discrimination statutes, as it would enable employers to evade the requirements of federal
law altogether.” Id. at *13.

        The Court went on to hold that both of the cost-splitting provisions before it were
unenforceable.3 The court found that “[m]inimal research will reveal that the potential costs of
arbitrating the dispute easily reach thousands, if not tens of thousands, of dollars, far exceeding
the costs that a plaintiff would incur in court.” Id. at *53-54; see also Id. at *75. Without
undertaking a “searching inquiry into the financial situation of either plaintiff, the court
concluded that the cost-splitting provisions would “deter a substantial number of similarly
situated potential litigants from seeking to vindicate their statutory rights in the arbitral forum.
Id. at *75-76; see also Id. at *56.

        The Sixth Circuit also rejected what it called the “post hoc judicial” approach to
determining whether plaintiffs can effectively vindicate their statutory rights in the face of cost-
splitting provisions. Id. at *28-34 (rejecting reasoning of Rosenberg v. Merrill Lynch, Pierce,
Fenner, & Smith, Inc., 170 F.3d 1, 16 (1st Cir. 1999) and Koveleskie v. SBC Capital Mkts., Inc.,
167 F.3d 361, 366 (7th Cir. 1999), cert. denied, 528 U.S. 811 (1999)). Under this approach,
courts rely upon judicial review of arbitration awards to adjudicate the enforceability of cost-
shifting provisions. Id. at *28. Such an approach is insufficient because it places plaintiffs “in a
kind of a ‘Catch-22’” by requiring them to pay the costs and arbitrate their claims before
allowing them to challenge the cost-shifting provision, and fails to address the Sixth Circuit’s
overriding concern that potential litigants will be prospectively deterred from pursuing their
claims. Id. *34.

         In Blair v. Scott Specialty Gases, 283 F.3d 595 (3rd Cir. 2002), the Third Circuit adopted
a case-by case approach, but held that the plaintiff challenging a cost splitting arrangement must
first be allowed to take discovery on the rates charged by the arbitrators and the approximate
length of similar arbitration proceedings before the court rules on the issue. Id. at 43; see also
Baugher v. Dekko Heating Technologies, 202 F. Supp. 2d 847, 850 (N.D. Ind. 2002) (ordering
discovery on the issue of arbitration costs and allowing plaintiff to present evidence of her
inability to pay the costs).

        Most courts that employ the “case-by-case” approach conclude that plaintiffs have carried
their burden and refuse to enforce cost-splitting provisions. For example, in Spinetti v. Service
Corp. Int., 2001 U.S. Dist. LEXIS 23959, No. 01-1191 (W.D. Pa. Nov. 15, 2001), the court
severed a cost-splitting provision that required the employee to pay almost $2,000.00 just to file
her claim before the American Arbitration Association (“AAA”), holding that such costs were
prohibitive because plaintiff was unemployed for six months following her termination and then,
       3
           The court’s opinion resolved the question in two consolidated cases.


                                                  7
even after finding work, was forced to take cash advances from her credit cards to pay her daily
expenses. Id. at *11-*12. Likewise, the court in Ball v. SFX Broad., Inc., 165 F. Supp. 2d 230
(N.D.N.Y. 2001), declined to compel arbitration before the AAA where the AAA’s rules would
have required plaintiff, who was newly employed on a commission basis and was the sole
financial support for herself and her four children, to pay fees of at least $1150.00 per day. See
also Carter v. Countrywide Credit Indus., Inc., 189 F. Supp. 2d 606, 620 (N.D. Tex. 2002)
(severing cost-splitting from agreement and ordering Defendant to pay all arbitration costs);
Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196, 1204 (D. Colo. 2001) (refusing to
enforce arbitration agreement that contained cost-splitting provision where plaintiffs were in
financial straits); Phillips v. Associated Home Equity Serv., Inc., 179 F. Supp. 2d 840, 846 (N.D.
Ill. 2001) (denying motion to compel arbitration of Truth in Lending Act claim because of the
mere risk that plaintiff would be saddled with a $4,000.00 AAA filing fee and other costs where
plaintiff’s affidavit stated that she could not afford to pay the costs and was in severe financial
straits).

         Moreover, even if the “case-by-case” approach is appropriate, it is not clear that plaintiffs
are required to make any showing regarding their personal financial circumstances. Some courts
require plaintiffs to show only that, if cost-splitting provisions are upheld, they will incur high
arbitration costs. Ball, 165 F. Supp. at 239 (N.D.N.Y. 2001) (“it is not at all clear that . . . a court
is required to consider the particular financial position of the plaintiff in evaluating the burden
imposed by an arbitration agreement.”); Giordano v. Pep Boys – Manny, Moe & Jack, Inc., 2001
U.S. Dist. LEXIS 5433, No. 99-1281, at *24 (E.D. Pa. 2001) (courts are not required 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.”). See Shankle, 163 F.3d at 1234-35 (invalidating Arbitration Clause without inquiry into
plaintiff’s finances); Carter v. Countrywide Credit Indus., Inc., 189 F. Supp. 2d 606, 620 (N.D.
Tex. 2002) (severing cost-splitting provision from arbitration agreement and ordering defendant
to pay all fees incurred in the arbitration without inquiry into plaintiff’s financial condition). Cf.,
Morrison v. Circuit City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-4099/99-5897, at *63
(6th Cir. Jan. 30, 2003) (holding that plaintiff’s financial condition should be examined only as
representative of “larger class’s ability to shoulder the costs of arbitration”) (citation omitted).

       In courts that employ the “case-by-case” approach, it is important for plaintiffs
challenging cost-splitting provisions to develop adequate records. Where courts have enforced
Arbitration Clauses containing fee-splitting provisions, they have almost invariably done so
because the records before them were inadequate. See, e.g. Rosenberg v. Merrill Lynch, Pierce,
Fenner, & Smith, Inc., 170 F.3d 1, 16 (1st Cir. 1999); Koveleskie v. SBC Capital Mkts., Inc., 167
F.3d 361, 366 (7th Cir. 1999), cert. denied, 528 U.S. 811 (1999); Middleworm v. Ashcroft, 200 F.
Supp. 2d 171, 179-80 (E.D.N.Y. 2002); Rajjak v. McFrank and Williams, 2001 U.S. Dist. LEXIS
9764, No. 01 Civ. 0493 (S.D.N.Y. 2001); Arakawa v. Japan Network Group, 56 F. Supp. 2d 349
(S.D.N.Y. 1999); but see Williams v. CIGNA Fin. Advisors, Inc., 197 F.3d 752, 763-64 (5th Cir.
1999); Zumpano v. Omnipoint Comm., 2001 U.S. Dist. LEXIS 376, No. 00-CV-595, at * 26-28
(E.D. Pa. Jan. 19, 2001).


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       B.      Limitations on Remedies

        “It is well-established that a party does not forgo the substantive rights afforded by a
statute when she agrees to arbitrate a statutory claim, but only submits to their resolution in an
arbitral, rather than a judicial, forum.” Morrison v. Circuit City Stores, Inc., 2003 U.S. App.
LEXIS 1456, Nos. 99-4099/99-5897 (6th Cir. Jan. 30, 2003) (citing Gilmer, 500 U.S. at 26)
(punctuation omitted). “The principal that an arbitration agreement may not limit statutorily
imposed remedies such as punitive damages and attorney fees appears to be undisputed.”
Armendariz v. Foundation Health Psychcare Serv. Inc., 24 Cal. 4th 83, 103 (2000) (citing
state and federal precedent).

               1.      Limitations on Attorneys’ Fees

       Title VII and other anti-discrimination statutes mandate fee awards to prevailing plaintiffs
except under unusual circumstances. See Christiansburg Garment Co v. EEOC, 434 U.S. 412,
416-17. Prevailing defendants, on the other hand, may recoup fees and expenses only if they
demonstrate that the action was frivolous, unreasonable, groundless, or that the plaintiff
continued to litigate after it clearly became so. Id. at 422. In passing these statutes, Congress
intended to place plaintiffs in the role of private attorneys general, vindicating policies that
Congress considered of great importance. See Id. at 417; McCaskill v. SCI Mgmt. Corp., 298
F.3d 677, 684 (7th Cir. 2002) (Rovner, J. concurring); Quaratino v. Tiffany & Co., 422 F.3d 422,
426 (2d Cir. 1999). The right to attorney’s fees and costs is integral to purposes of these statutes
because it “facilitates the bringing of discrimination complaints” by “mak[ing] it easier for a
plaintiff of limited means to bring a meritorious suit.” DeGaetano v. Smith Barney, Inc., 983 F.
Supp. 459, 465 (S.D.N.Y. 1997) (citing New York Gaslight Club v. Carey, 447 U.S. 54, 63
(1980)).

        Because fee-shifting provisions are critical components of anti-discrimination statutes,
and essential to the goals of uncovering, redressing and deterring employment discrimination,
courts are reluctant to enforce a prohibition on fee-shifting in an employment-related arbitration
agreement. In McCaskill v. SCI Mgmt. Corp., 285 F.3d 623 (7th Cir. 2002), the Seventh Circuit
reversed the district court’s order compelling arbitration because the arbitration agreement
mandated that each party pay its own attorneys’ fees regardless of the outcome of the arbitration.
 In a well-reasoned opinion, Judge Rovner explained that the statutory right to attorneys’ fees is
an essential part of Title VII’s remedial and deterrent functions and, by preemptively denying
plaintiff this remedy, the arbitration agreement prevented plaintiff from effectively vindicating
her statutory rights. Id. at 627. However, the court granted defendant’s motion for rehearing and
vacated Judge Rovner’s opinion. McCaskill v. SCI Mgmt. Corp., 294 F.3d 879 (7th Cir. 2002).


                                                 9
On rehearing, the court re-confirmed its reversal of the district court’s order compelling
arbitration, but this time, on the limited grounds that defendant admitted at oral argument that the
agreement was not enforceable. McCaskill v. SCI Mgmt. Corp., 298 F.3d 677 (7th Cir. 2002).

        Other courts have refused to compel arbitration where the arbitration agreements attempt
to eviscerate plaintiffs’ right to attorneys’ fees. For example, in Gambardella v. Pentec, Inc., 218
F. Supp. 2d 237 (D. Conn. 2002), plaintiff challenged the arbitration agreement which provided
that the employer and employee “shall each bear respective costs for legal representation” at
arbitration. The court refused to enforce the provision, finding that it impermissibly undermined
the remedial and deterrent purposes of Title VII. Id. at 247. See also Brooks v. Travelers Ins.
Co., 297 F.3d 167, 171 (2d Cir. 2002) (expressing, in dicta, similar concerns); Hooters of Am.,
Inc. v. Phillips, 39 F. Supp. 2d 582, 616 (D.S.C. 1998) (arbitration agreement that denies
prevailing plaintiff attorneys’ fees is void as matter of public policy); Graham Oil Co. v. ARCO
Prod. Co., 43 F.3d 1244, 1248-49 (9th Cir. 1994) (striking Arbitration Clause because it denied
remedies, including attorneys’ fees under Petroleum Marketing Practices Act); Plaskett v.
Bechtel, Int’l, Inc., No. 2002-0149, slip. op. at 6-7 (D.V.I. Jan. 27, 2003) (holding attorneys’ fee
prohibition unconscionable because it premptively denied plaintiff remedies authorized by Title
VII); Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196, 1205 (D. Colo. 2001),
(holding that an arbitration agreement’s prohibition of post-hearing briefs violated public policy
because it could prevent plaintiffs, if they prevailed, from petitioning the arbitration panel for
attorneys’ fees).

        Other courts will enforce arbitration clauses, notwithstanding provisions prohibiting fee-
shifting, but retain jurisdiction over the case, and grant fees, if appropriate, if the arbitrator
neglects to do so. In DeGaetano v. Smith Barney, Inc., 1996 U.S. Dist. LEXIS 1140, No. 95 Civ.
1613 (S.D.N.Y. Feb. 5, 1996), the court granted defendant’s motion to compel arbitration
pursuant to an arbitration clause that prohibited fee shifting, but retained jurisdiction over the
case. After plaintiff prevailed at arbitration, and the arbitrator denied plaintiff’s petition for
attorneys’ fees, the district court awarded plaintiff her attorneys’ fees, finding the prohibition
against fee-shifting to be void as against public policy. DeGaetano v. Smith Barney, Inc., 983 F.
Supp. 459, 469 (S.D.N.Y. 1997); but see, Beletsis v. Credit Suisse First Boston, Corp., 2002 U.S.
Dist. LEXIS 16586, No. 01 Civ. 6266 (S.D.N.Y. Sept. 4, 2002) (upholding arbitration agreement
despite a provision that arguably limited plaintiff’s potential remedies where another provisions
directs arbitrators to “allow remedies central to the statutory scheme.”); Feltner v. Bluegreen
Corp., 2002 U.S. Dist LEXIS 20449, No. IP 02-0873, at *33-34 (S.D. Ind. October 8, 2002) (an
agreement’s silence on attorneys’ fees does not invalidate the agreement).

               2.      Limitations on Other Statutory Remedies

         Courts routinely refuse to enforce arbitration provisions that limit the availability of other
statutory remedies including limits on punitive damages, compensatory damages, injunctive
relief, and reinstatement. Unless a plaintiff can be fully compensated for damages caused by
discrimination, the remedial puropses of Title VII cannot be effectuated. Morrison v. Circuit


                                                  10
City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-4099/99-5897, at *63 (6th Cir. Jan. 30,
2003). In Morrison, the Sixth Circuit refused to enforce a provision in an arbitration agreement
that limited backpay, front pay, compensatory damages and punitive damages because “monetary
awards for claimants who bring discrimination claims often serve as an incentive for employers
to eliminate their discriminatory practices.” Id. at *63, *67.

         In Paladino v. Avnet Computer Technologies, Inc., the Eleventh Circuit affirmed the
district court’s refusal to compel arbitration of a discrimination claim where the arbitration clause
prohibited the arbitrator from awarding any Title VII damages, because such a clause is
“fundamentally at odds with the purposes of Title VII because it completely proscribes an arbitral
award of Title VII damages.” 134 F.3d 1054, 1060 (11th Cir. 1998).

        Courts will also refuse to enforce narrower limitations on statutory remedies. For
example, the Ninth Circuit refused to enforce an arbitration clause on the grounds that it was
procedurally unconscionable under California law. The challenged clause allowed for only
limited remedies which were less than the remedies available under the California Fair
Employment and Housing Act. Circuit City Stores v. Adams, 279 F.3d 889, 894 (9th Cir. 2002);
see also Armendariz v. Found. Health Psychcare Serv., Inc., 24 Cal. 4th 83, 104 (2000) (holding
damage limitation contrary to California public policy).

        Likewise, the Fourth Circuit affirmed the district court’s order refusing to enforce an
arbitration clause that disallowed some of the remedies available under 42 U.S.C. § 1981 because
it prevented plaintiff from effectively vindicating her statutory rights. Johnson v. Circuit City
Stores, Inc., 203 F.3d 821 (4th Cir. 2000) (per curium) (reported in full at 2000 U.S. App. LEXIS
370); see also, Gannon v. Circuit City Stores, Inc., 262 F. 3d 677 (8th Cir. 2001) (holding that
remedy limitation should be severed from arbitration agreement); Gambardella v. Pentec, Inc.,
218 F. Supp. 2d 237, 247 (D. Conn. 2002) (arbitration agreement may not deny access to Title
VII remedy); Curry v. MidAmerica Care Found., 2002 U.S. Dist. LEXIS 14737, No. TH02-0053-
C (S.D. Ind. Jun. 4, 2002) (enforcing arbitration agreement only after defendant agreed to waive
limitations on statutory remedies); LeLouis v. Western Directory Co., 230 F. Supp. 2d 1214,
1222 (D. Or. 2001) (agreement’s silence on arbitrator’s authority to award “full panoply of
remedies, including punitive damages” contributed to unconscionability of “generic arbitration
agreement purchased on the internet” that does not identify the arbitral forum or the rules of
arbitration); Etokie v. Carmax Auto Superstores, Inc., 133 F. Supp. 2d 390, 392-93 (D. Md.
2000) (severing remedy limiting provision where defendant conceded that it was unenforceable);
Wright v. Circuit City Stores, Inc., 82 F. Supp. 2d 1279, 1286 (N.D. Ala. 2000) (holding that
limitations on punitive damages, back pay, and front pay prevented plaintiff from vindicating
rights under 28 U.S.C. § 1981); Trumbull v. Century Mktg. Corp., 12 F. Supp. 2d 683, 688 (N.D.
Ohio 1998) (refusing to compel arbitration of Title VII claim where agreement prohibited award
of punitive damages); DiCrisi v. Lyndon Guar. Bank of N.Y., 807 F. Supp. 947, 953 (W.D.N.Y.
1992) (severing claim for punitive damages, compelling arbitration, and allowing plaintiff to
return to court after arbitration to proceed on punitive damages claim).



                                                 11
       C.      Altering Burdens of Proof

        An arbitration provision that raises the plaintiff’s burden of proof above that which is
required under the anti-discrimination statutes may not be enforced. In Underwood v. Chef
Francisco / Heinz, 200 F. Supp. 2d 475 (E.D. Pa. 2002), the court allowed plaintiff to proceed in
court with his statutory retaliation claims, because the arbitration agreement required him to
prove that his termination was arbitrary and capricious while Title VII requires only proof of a
causal connection between a protected activity and an adverse action. The court held that
requiring a plaintiff to prove an additional element was “tantamount to a prospective waiver of
his statutory claims” and was, therefore, unenforceable. Id. at 480-81.

       D.      Limited Discovery

         In Gilmer, the Supreme Court rejected the argument that a provision in an arbitration
agreement that limits discovery renders the agreement unenforceable. Gilmer, 500 U.S. 20, 31
(1991); see also Morrison v. Circuit City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-
4099/99-5897, at *67, n. 16 (6th Cir. Jan. 30, 2003) (upholding discovery limitations); Carter v.
Countrywide Credit Indus., Inc., 189 F. Supp. 2d 606 (N.D. Tex. 2002) (same, citing Gilmer).
By agreeing to arbitrate, the Court held, parties agree to trade some of the procedural protections
of court for the “simplicity, informality, and expedition of arbitration.” Id. Indeed, proponents
of arbitration argue that arbitration cannot achieve its goal of efficient operation unless discovery
is limited. See Comstat Corp. v. National Science Foundation, 190 F.3d 269, 276 (4th Cir.
1999) (opining, in a non-employment dispute, that “[a] hallmark of arbitration -- and a
necessary precursor to its efficient operation -- is a limited discovery process.”) (citing
Burton v. Bush, 615 F.2d 389, 390-391 (4th Cir. 1980)).


       Plaintiffs have, however, successfully challenged arbitration agreements that limit
discovery where other factors are present which make the agreement unfair. In Ferguson
v. Countrywide Credit Indus., 298 F.3d 778 (2002), the Ninth Circuit, applying California
law, found an arbitration agreement to be unconscionable where “the entire agreement
seems drawn to provide [defendant] with undue advantages. . .” The court held that one
of these “undue advantages”, a provision that limited the scope of depositions of corporate
representatives but placed no limit on the depositions of employees, while not
unconscionable by itself, contributed to the unconscionability of the entire agreement. Id. at
787. Likewise, the district court for the Southern District of Indiana found that limited
discovery, when controlled by a potentially biased arbitration panel, created unfairness to


                                                 12
claimants. Geiger v. Ryan’s Family Steakhouse, 134 F. Supp. 2d 985 (S.D. Ind. 2001);
see also LeLouis v. Western Directory Co., 230 F. Supp. 2d 1214, 1222 (D. Or. 2001)
(agreement’s silence on extent of permitted discovery contributed to unconscionability of
“generic arbitration agreement purchased on the internet” that does not identify the arbitral forum
or the rules of arbitration).


       Where, however, there are no aggravating factors, such as a biased arbitration
panel or an otherwise unconscionable agreement, no decision to date has held a limited
discovery provision alone to render an arbitration agreement unenforceable. See
Continental Airlines v. Mason, 1996 U.S. App. Lexis 16558, No. 95-55343, (9th Cir. Jun.
19, 1996) (limited discovery provision not unconscionable under California law); Stewart v.
Paul, Hastings, Janofsky & Walker, 201 F. Supp. 2d 291, 292 (S.D.N.Y. 2002) (rejecting a
plaintiff’s argument that a discovery limitation is unconscionable where it permits a deposition
on each side and allows the arbitrator to afford more discovery); Curry v. Midamerica Care
Found., 2002 U.S. Dist LEXIS 14737, No. TH02-0053-C-T/H (S.D. Ind. Jun. 4, 2002)
(upholding discovery limitation that allows for at least 2 depositions, 5 interrogatories, and
3 production requests); Armendariz v. Foundation Health Psychcare Serv. Inc., 24 Cal. 4th
83, 104-05 (2000) (agreeing with plaintiff that “adequate discovery is indispensable” but
holding that arbitration agreement allowed for adequate discovery).

       E.      Unfair or Biased Rules

        Courts may invalidate an arbitration agreement that creates an inherently unfair or biased
forum. Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 938 (4th Cir. 1999) (revoking arbitration
agreement where rules and procedures were “so one-sided that their only possible purpose [was]
to undermine the neutrality of the proceeding”). One type of provision that could render an
arbitration agreement too one-sided to be enforceable is one that gives defendant the sole right to
choose the pool of potential arbitrators. See Ferguson, 298 F.3d at 787 (invalidating
arbitration agreement where “the entire agreement seems drawn to provide [defendant]
with undue advantages. . .”); Murray v. United Food and Commercial Workers Int’l Union,
289 F.3d 297, 303 (4th Cir. 2002) (citing Hooters, 173 F.3d at 939).

        On the other hand, of course, courts may not presume that arbitration itself is inherently
unfair or biased. Gilmer, 500 U.S. at 30; Penn v. Ryan’s Family Steak Houses, Inc., 269 F.3d
753, 758 (7th Cir. 2001) (citing Gilmer).

                                                13
       F.      Prohibitions of Class Actions

         Two issues that have been infrequently litigated in the employment arena are, (1) whether
a class action can be prosecuted in an arbitral forum, and (2) if not, whether a prohibition of class
litigation in an arbitration agreement voids the entire agreement. The Supreme Court recently
granted certiorari in an action which may resolve one of these issues. Bazzle v. Green Tree Fin.
Corp., 569 S.E.2d 349 (S.C. 2002), cert. granted, 123 S. Ct. 817 (2003).

         In Bazzle, a non-employment case, the South Carolina Supreme Court held that “class-
wide arbitration may be ordered when the arbitration agreement is silent if it would serve
efficiency and equity, and would not result in prejudice.” Id. at 360. The court reasoned that
failure to allow class actions in arbitration, where arbitration agreements are mandatory and
adhesive, would effectively deny a forum to parties with “small individual claims, but significant
collective claims,” and leave defendants without checks their abuses of the law. Id. at 360-61.

        Although South Carolina Supreme Court purported to decided the case on independent
state grounds, Id. at 360, the United States Supreme Court granted defendant’s petition for writ
of certiorari to decide “whether the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., prohibits
class-action procedures from being superimposed onto an arbitration agreement that does
not provide for class-action arbitration”.4


        Prior to Bazzle, one federal court had allowed class-wide arbitration where the arbitration
agreement was silent on the issue. In Brennan v. ACE INA Holdings, Inc., 2002 U.S. Dist. LEXIS
15039, No. 00-2730 (E.D. Pa. Aug 1, 2002), the court compelled plaintiffs’ race discrimination
claims to arbitration and authorized the arbitrator to determine whether plaintiffs could proceed
as a class. Id. at *13. The court rejected defendant’s argument that, because the arbitration
agreement was silent on the issue, class-wide arbitration was not permitted. Id. at *5. The court
relied on language in the agreement that granted the arbitrator “all of the powers that a judge
would have in dealing with any question that may arise before, during, and after the arbitration
hearing.” Id. at *5-6.

        Other federal courts have held that courts lack authority, under the FAA, to order class-
wide arbitration where the arbitration agreement does not provide for such relief. See Champ v.
Siegel Trading Co., 55 F.3d 269 (7th Cir. 1995) (refusing to certify arbitral class in consumer
action) (citing United Kingdom v. Boeing, 998 F.2d 68 (2d Cir. 1993) (courts must enforce
arbitration agreements as written)); Gammaro v. Thorp Consumer Disc. Co., 828 F. Supp. 673

       4
        See Public Citizen website,
http://www.citizen.org/litigation/court_assist/articles.cfm?ID=5816.



                                                 14
(D. Minn. 1993) (refusing to allow class-wide arbitration of Truth in Lending Act claims).

        Courts are split as to whether a prohibition against arbitration invalidates an arbitration
agreement. Some courts uphold such agreements. Adkins v. Labor Ready, Inc., 303 F.3d 496,
503 (4th Cir. 2002) (refusing to invalidate arbitration agreement solely because it prohibited class
action under FLSA); Horenstein v. Mortgage Mkt., Inc., 2001 U.S. App. LEXIS 9267, No. 99-
36125, at *3 (9th Cir. 2001) (unpublished) (elimination of right to bring collective FLSA action
does not render arbitration clause unenforceable); Johnson v. West Suburban Bank, 225 F.3d
366 (3rd Cir. 2000) (holding arbitration clause in short-term loan agreement enforceable
even though it may render class action to pursue statutory claims unavailable); Carter v.
Countrywide Credit Indus., Inc., 189 F. Supp. 2d 606, 618 (N.D. Tex. 2002) (the inability to
proceed as a class is not a substantive right that precludes arbitration) (citing Gilmer, 500 U.S. at
31-32); Hale v. First USA Bank, N.A., 2001 U.S. Dist. LEXIS 8045, No. 00 Civ. 5406, at
*21-23 (S.D.N.Y. 2001) (same).

        Other courts allow plaintiffs to proceed with class actions in court where they are
precluded from bringing arbitral class actions. Olde Discount Corp. v. Hubbard, 1999 U.S. App.
LEXIS, No. 98-3179 (10th Cir. 1999) (unpublished) (denying defendant’s motion to compel
arbitration of plaintiffs’ individual claim pursuant to Form U-4 where plaintiff had filed claim on
behalf of a class); Nielsen v. Piper, Jaffray & Hopwood, Inc., 66 F.3d 145, 150 (7th Cir.
1995)(denying defendant’s motion to compel arbitration of putative class action securities fraud
case pending district court’s determination of class certification); Martens v. Smith Barney, Inc.,
181 F.R.D. 243, 252 (S.D.N.Y. 1998) (stating that class claim could be brought in court because
such claims are excluded by NASD rules).

        Other courts have considered prohibitions on class actions as factors in invalidating the
arbitration agreement. In Bailey v. Ameriquest Mortgage Co., 2002 U.S. Dist. LEXIS 1343, No.
01-545 (D. Minn. Jan. 23, 2002) the court denied defendant’s motion to compel arbitration
because the arbitration agreement deterred plaintiff from vindicating her statutory rights under
the FLSA. Id. at *22. Contributing to the court’s holding was a provision in the agreement that
prohibited plaintiffs from proceeding collectively. The court held that because plaintiff’s
individual claims were so small, they were impractical to pursue individually. To deny plaintiff
the right to proceed as a class effectively denied plaintiff a forum in which to bring his claim. Id.
at *21-22. The court noted that Gilmer does not hold that procedural limitations can never be
grounds to invalidate an arbitration agreement. Courts should make such a determination on a
case-by-case basis. Id. at *20-21 (citing Gilmer, 500 U.S. at 33); see also Luna v. Household
Finance Corp. III, 2002 U.S. Dist. LEXIS 21761, No. C02-1635L, at *31-34 (D. Wash. Nov. 4,
2002) (class action prohibition (of non-employment claims) contributed to unconscionability);
ACORN v. Household Finance, 211 F. Supp. 2d 1160, 1171-72 (N.D. Cal. 2002) (same); Ting v.
AT&T, 182 F. Supp. 2d 902, 931-33 (N.D. Cal. 2002) (same); Lozada v. Dale Baker Oldsmobile,
Inc., 91 F. Supp. 2d 1087, 1105 (W.D. Mich. 2000) (same); Mandel v. Household Bank

                                                 15
(Nevada), 2003 Cal. App. 4th LEXIS 20, No. G029531, at *12-13 (Cal. Ct. App. January 7, 2003)
(finding prohibition on class actions common law claim unconscionable under Nevada law);
Szetela v. Discover Bank, 97 Cal. App. 4th 1094, 1100-1102 (Cal. Ct. App. 2002) (finding
prohibition against class common law claims unconscionable under California law where claims
are likely to be small); Ramirez v. Circuit City Stores, Inc., 76 Cal. App. 4th 1229 (Cal. Ct. App.
1999) (holding arbitration agreement unconscionable in part because it deprived arbitrator of
power to hear class actions).

       G.      Truncated Limitations Periods

        Plaintiffs have successfully challenged provisions in arbitration agreements that impose
limitations periods that are shorter than those provided by statute. This argument has more force,
however, when the truncated limitations period has some additional effect, or abridges some
statutory right beyond the mere period in which to file the claim. Where the statutory limitations
period plays a role in determining plaintiffs’ allowable recovery, courts are reluctant to enforce
clauses truncating such limitations periods. For example, the Ninth Circuit refused to compel
arbitration in part because the arbitration agreement contained a one-year filing period and,
therefore, denied plaintiff the benefit of the continuing violation doctrine under the California
Fair Housing and Employment Act. Circuit City v. Adams, 279 F.3d 889, 894 (9th Cir. 2002). In
Bailey v.Ameriquest Mortgage Co., 2002 Dist. LEXIS 1343, No. 01-545 at *14 (D. Minn. January
23, 2002), the court held that a provision truncating a statute of limitations served to disallow
enhanced liability for a willful violation of the Fair Labor Standards Act (“FLSA”), and therefore
impermissibly denied plaintiffs access to liquidated damages, a statutory remedy. See also,
Plaskett v. Bechtel, Int’l, Inc., No. 2002-0149, slip. op. at 7-10 (D.V.I. Jan. 27, 2003) (holding
30-day notice period unconscionable); LeLouis v. Western Directory Co., 230 F. Supp. 2d 1214,
1221 (D. Or. 2001) (one-year limitation period contributed to unconscionability finding); cf.,
Louis v. Geneva Enterprises, Inc., 128 F. Supp. 2d 912 (E.D. Va. 2000) (holding that FLSA
limitations period controls, not shorter period in arbitration agreement); but see Taylor v. W. &
S. Life Ins. Co., 966 F.2d 1188 (7th Cir. 1992) (upholding agreement despite shortened
limitations period); Meyers v. W. and S. Life Ins. Co., 849 F.2d 259 (6th Cir. 1988) (same);
Wright v. DaimlerChrysler Corp., 220 F. Supp. 2d 832 (E.D. Mich. 2002) (same).

        Courts will not usually invalidate an arbitration agreement because of an altered
limitations period, if the employee timely filed her claim under the agreement. Morrison v.
Circuit City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-4099/99-5897, at *63 (6th Cir. Jan.
30, 2003) (upholding one year limitations period); Farrell v. Convergent Communications, Inc.,
1998 U.S. Dist. LEXIS 17314, No. C98-2613, at *16 (N.D. Cal. Oct. 29, 1998) (provision not
substantively unconscionable because plaintiff filed claim within one-year period); but see
Plaskett v. Bechtel, Int’l, Inc., No. 2002-0149, slip. op. at 10 (D.V.I. Jan. 27, 2003) (“Even if
[plaintiff] notified [defendant] of his claims within the thirty-day period, the provision is still
unconscionable”); LeLouis, 230 F. Supp. 2d at 1221-22 (“unconscionability is determined on the
basis of the circumstances at the time of contract formation, and whether the agreement was
reasonable then”).


                                                16
       H.       Hearing Time Limit

        In Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196 (D. Colo. 2001), the
court held that language limiting an arbitration to two hearing days renders the arbitration
agreement unenforceable, because it limited plaintiff’s access to an adequate forum. Id. at 1204
(following Shankle v. B-G Maintenance Management of Colorado, Inc., 163 F.3d 1230 (10th Cir.
1999)).

       I.      Waiver of Right to Appeal

        A provision in an arbitration agreement that limits the parties’ rights to appeal an adverse
ruling has been held enforceable, but only within limits. As the Seventh Circuit has stated, “[if]
final and binding arbitration is to serve its purpose, it must be just that – final and binding.”
Baugher v. Dekko Heating Technologies, 202 F. Supp. 2d 847, 850 (N.D. Ind. 2002) (citing
Dean v. Sullivan, 118 F. 3d 1170, 1171 (7th Cir. 1997). However, limited judicial review must
be available to ensure the integrity of the process. Id.

       In Baugher, the Northern District of Indiana upheld a waiver of the right to appeal an
              arbitration award but concluded that the parties could not have intended to waive
              the right to seek the narrow type of review that the FAA allows. Other courts
              have also refused to prohibit appeals based on an arbitrator’s bias or abuse of
              authority. Baugher, 202 F. Supp. 2d at 850. See also Tabas v. Tabas, 47 F.3d
              1280, 1288 (3rd Cir. 1995); Team Scandia, Inc. v. Greco, 6 F. Supp. 2d 795 (S.D.
              Ind. 1998).     J.      Confidentiality Provisions

        Some courts have taken issue with provisions in arbitration agreements that seek to keep
aspects of arbitration confidential. In Cole, the D.C. Circuit expressed concern that, because
employers, and not employees, are “repeat player[s]” in arbitrations of individual statutory
claims, a lack of public disclosure of arbitration awards may “systematically favor companies
over individuals.” Cole, 105 F. 3d at 1476-77. Moreover, confidential arbitration awards
undermine the deterrent purposes of anti-discrimination statutes and “may prevent potential
plaintiffs from locating the information necessary to build a case of intentional misconduct or to
establish a pattern or practice of discrimination by particular companies. Id. at 1477. See also,
Plaskett v. Bechtel, Int’l, Inc., No. 2002-0149, slip. op. at 10-11 (D.V.I. Jan. 27, 2003)
(confidentiality of identity of parties contributed to unconscionability); Luna v. Household
Finance Corp. III, 2002 U.S. Dist. LEXIS 21761, No. C02-1635L, at *31-34 (D. Wash. Nov. 4,
2002) (confidentiality of awards contributed to unconscionability); ACORN v. Household
Finance, 211 F. Supp. 2d 1160, 1171-72 (N.D. Cal. 2002) (same); Ting v. AT&T, 182 F. Supp.
2d 902, 931-33 (N.D. Cal. 2002) (same).

II.    SEVERABILITY OF OFFENSIVE CLAUSES



                                                 17
       A major issue facing courts that review arbitration agreements is whether, when they find
overboard or overreaching clauses, they should void the entire agreement or reform the
agreement and compel arbitration.

        There is substantial authority for the proposition that the presence of unlawful provisions
renders an entire arbitration agreement unenforceable. See e.g., Paladino v. Avnet Computer
Tech., Inc., 134 F.3d 1054, 1058 (11th Cir. 1998) (citing Graham Oil v. Arco Prods. Co., 43 F.3d
1244, 1248-49 (9th Cir. 1994), cert. denied 516 U.S. 907 (1995); E. Allan Farnsworth,
Farnsworth on Contracts § 5.8, at 70 (1990) (severance is inappropriate when the entire provision
represents an “integrated scheme to contravene public policy”) (other citation omitted)); Circuit
City Stores v. Adams, 279 F.3d 889, 895-96 (9th Cir. 2002) (refusing to sever illegal provisions
where such provisions pervaded the entire contract); Plaskett v. Bechtel, Int’l, Inc., No. 2002-
0149, slip. op. at 14 (D.V.I. Jan. 27, 2003) (refusing to sever objectionable terms where they
permeated the arbitration agreement); Bailey v. Ameriquest Mortgage Co., 2002 Dist. LEXIS
1343, No. 01-545 at *17 (D. Minn. January 23, 2002) (refusing to sever invalid provisions from
arbitration agreement).

        The rationale for voiding the entire agreement is that if employers are confident that an
unlawful provision will be severed from an arbitration clause and the remainder of the clause
enforced, they will be encouraged to overreach by including such provisions in the agreements
that they draft. As a result, not only would employers benefit from the unlawful provisions when
they go unchallenged, but such provisions could deter employees from prosecuting meritorious
claims. Moreover, such provisions cause unnecessary litigation by requiring employees and
employers to expend resources litigating their validity. Perez v. Globe Airport Sec. Serv., Inc.,
253 F.3d 1280, 1286-87 (11th Cir. 2001); vacated, 294 F.3d 1275 (11th Cir. 2002) (vacated on
court’s own motion after parties signed stipulation of dismissal); Cooper v. MRM Inv. Co., 199
F. Supp. 2d 771, 782 (M.D. Tenn. 2002); Armendariz v. Foundation Health Psychcare Serv.
Inc., 24 Cal. 4th 83, 124, n.13 (2000) (employer will not be deterred from inserting illegal
clauses in arbitration agreements if the worst that can happen is that the court will strike
the offending clause after the employee has litigated the matter).

        In Shankle v. B-G Maintenance, 163 F.3d 1230, 1235, n.6 (10th Cir. 1999), the court
refused to “redline” an unlawful fee-splitting provision. Instead, the court affirmed the district
court’s outright denial of defendant’s motion to compel arbitration. Likewise, in many recent
cases, district courts have denied motions to compel arbitration because of a single objectionable
provision in the arbitration clause. See e.g., Gambardella v. Pentec, Inc., 218 F. Supp. 2d 237
(D. Conn. 2002) (denying motion to compel because arbitration clause contained a provision
conflicting with Title VII’s fee-shifting provision); Terrell v. Amsouth Inv. Serv. Inc., 217 F.
Supp. 2d 1233, 1238 (M.D. Fla. 2002) (denying motion to compel arbitration of a whistle-blower
claim because agreement did not allow full remedies allowed by Florida whistle-blower statute);
Underwood v. Chef Fransico / Heinz, 200 F. Supp. 2d 475 (E.D. Pa. 2002) (refusing to sever

                                                18
provision that impermissibly raised standard of proof); Cooper v. MRM Inv. Co., 199 F. Supp.
2d 771, 782 (M.D. Tenn. 2002); Popovich v. McDonald’s Corp., 189 F. Supp. 2d 772, 778 (N.D.
Ill. 2002) (denying motion to compel arbitration of non-employment claim where plaintiff’s share
of arbitration fees would be prohibitive, notwithstanding defendant’s offer to pay the fees);
Gourley v. Yellow Transportation, LLC, 178 F. Supp. 2d 1196, 1204 (D. Colo. 2001) (refusing to
sever unlawful provisions); Ball v. SFX Broad., Inc., 165 F. Supp. 2d 230 (N.D.N.Y. 2001)
(refusing to compel arbitration where arbitration clause contained an impermissible cost-splitting
provision).

        On the other hand, where an arbitration agreement contains a severability clause, allowing
unlawful or unenforceable terms to be struck from the agreement, some courts are willing to
sever or modify the unenforceable term and compel arbitration. In Gannon v. Circuit City Stores,
Inc., 262 F.3d 677 (8th Cir. 2001), the Eighth Circuit reversed the district court’s ruling that a
provision in an arbitration clause which limited punitive damages invalidated the entire
arbitration clause. The court remanded with instructions that, pursuant to a severability clause in
the agreement, the remedy limitation be severed and the remainder of the arbitration agreement
be enforced. The Gannon court rejected plaintiff’s public policy argument that severance created
an improper incentive for employers. Id.; see also Morrison v. Circuit City Stores, Inc., 2003
U.S. App. LEXIS 1456, Nos. 99-4099/99-5897, at *63 (6th Cir. Jan. 30, 2003) (severing cost-
splitting provision and remedy-limiting provision pursuant to severability clause); Carter v.
Countrywide Credit Indus., Inc., 189 F. Supp. 2d 606, 620 (N.D. Tex. 2002) (ordering cost-
splitting provision severed pursuant to severability clause and ordering defendant to pay all
arbitration fees); Etokie v. Carmax Auto Superstores, Inc., 133 F. Supp. 2d 390 (D. Md. 2000)
(enforcing arbitration agreement but severing remedy limiting provision pursuant to severability
clause); Wright v. Circuit City Stores, Inc., 82 F. Supp. 2d 1279, 1287 (N.D. Ala. 2000) (same).

        Even in the absence of a severability clause, some courts have severed unenforceable
provisions and compelled arbitration. In Gooden v. Village Green Mgmt. Co., 2002 U.S. Dist
LEXIS 22365, No. 02-835 at * 12-14 (D. Minn. Nov. 15, 2002), pursuant to Minnesota law, the
court severed a cost-splitting provision but compelled arbitration. In Beletsis v. Credit Suisse
First Boston, Corp., 2002 U.S. Dist. LEXIS 16586, No. 01 Civ. 6266 (S.D.N.Y. Sept. 4, 2002), the
court upheld an arbitration agreement despite a provision that arguably limited plaintiff’s
potential remedies. In dicta, the court went on to write that, even if the disputed provision
impermissibly limited plaintiff’s rights, the presence of the provision, by itself, would not
invalidate the entire arbitration agreement. Instead, the court indicated that it would have severed
the unlawful provision based upon general principals of contract law, not pursuant to a
severability clause. Id. at *14-*15. See also, Spinetti v. Service Corp. Int’l, 2001 U.S. Dist LEXIS
23959, No. 01-1191, at *17-*19 (W.D. Pa. Nov. 15, 2001) (severing unenforceable provisions
despite absence of severability clause).

      Some courts have allowed defendants to save an otherwise unenforceable arbitration
agreement by agreeing to cure or waive the offensive provision. In Curry v. Midamerica Care



                                                19
Found.,    2002 U.S. Dist LEXIS 14737, No. TH02-0053-C-T/H (S.D. Ind. Jun. 4, 2002),
after finding that a provision prohibiting punitive damages could render the entire arbitration
agreement unenforceable, the court allowed defendant to waive the limitation on remedies
and enforced the remainder of the arbitration clause. The court noted that essential to its
holding was a clause in the agreement that allowed for modification of the agreement
where any provision is ruled invalid. Id. at at *19-21. See also Baugher v. Dekko Heating
Technologies, 202 F. Supp. 2d 847, 850 (N.D. Ind. 2002) (allowing defendant to avoid
nullification of the arbitration agreement by offering to pay all costs associated with the
arbitration); Arellano v. Household Fin. Corp., 2002 U.S. Dist. LEXIS 2184, No. 01 C 2433 (N.D.
Ill. Feb. 12, 2002) (same); Phillips v. Associated Home Equity Serv., Inc., 179 F. Supp. 2d 840,
846 (N.D. Ill. 2001) (same).

        Other courts, however, have refused defendants’ offers to waive offensive provisions or
to assume responsibility for all costs in order to save arbitration agreements. In Morrison, 2003
U.S. App. LEXIS 1456, the Sixth Circuit held that “reviewing courts should not consider after-
the-fact offers by employers to pay the plaintiff’s share of the arbitration costs” because cost-
splitting provisions, as drafted, deter potential litigants from bringing claims and are therefore
unenforceable. Courts should not allow employers to pay the fees in a single case in order to
avoid such a holding. Morrison, at *76-77; see also LeLouis v. Western Directory Co., 230 F.
Supp. 2d 1214, 1223 (D. Or. 2001) (refusing defendant’s offer to pay costs and waive offensive
provisions because of employers’ incentive to write one-sided agreements).

         In Popovich v. McDonald’s Corp., 189 F. Supp. 2d 772, 778 (N.D. Ill. 2002), a non-
employment case, the court denied defendant’s motion to compel arbitration because
prohibitively expensive arbitration costs rendered the agreement unenforceable. Moreover, the
court declined to reconsider its ruling notwithstanding defendant’s offer to assume responsibility
for all costs of arbitration. The court held that defendant’s proposal was tantamount to an offer
for a new contract which plaintiff could not be compelled to accept and that defendant could not
unilaterally modify the contract by agreeing to pay the arbitration costs. Id. at 779; see also
Plaskett v. Bechtel, Int’l, Inc., No. 2002-0149, slip. op. at 13 (D.V.I. Jan. 27, 2003) (refusing
defendant’s offer to modify where offer not accepted by plaintiff); Bailey v. Ameriquest
Mortgage, 2002 U.S. Dist LEXIS 1343, No, 01-545, at *22-23 (D. Minn. Jan 23, 2002) (refusing
to allow employer to modify the agreement without satisfying contractual requirement that both
parties sign written modification). Similarly, in Gourley v. Yellow Transportation, LLC, 178 F.
Supp. 2d 1196 (D. Colo. 2001) the court rejected defendant’s suggestion that it compel
arbitration if defendant agreed to waive three offensive provisions, writing that such an offer
“merely serve[d] to underscore that the [agreement] was written so as to provide unilateral
flexibility to [defendant], but no flexibility to its employees. Id. at 1205.

III.   CONTRACT DEFENSES


                                                20
       Arbitration agreements are on the same footing as other contracts, Gilmer, 500 U.S. at 33,
and therefore, are subject to the same general contract defenses as are other contracts. Doctor’s
Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996), Armendariz v. Foundation Health
Psychcare Serv. Inc., 24 Cal. 4th 83, 98 (2000). Gilmer requires that courts resolve such
claims on a case-by-case basis. Brennan v. Bally Total Fitness, 198 F. Supp. 2d 377, 381, n.6-7
(S.D.N.Y. 2002) (citing Gilmer, 500 U.S. at 33). Courts may look to state contract law to do so.
Doctor’s Assocs., Inc., 517 U.S. at 687; Morrison v. Circuit City Stores, Inc., 2003 U.S. App.
LEXIS 1456, Nos. 99-4099/99-5897 (6th Cir. Jan. 30, 2003); Gibson v. Neighborhood Health
Clinics, 121 F.3d 1126, 1130 (7th Cir. 1997). The first question that a court must ask is whether
the parties entered into an enforceable agreement to arbitrate. Genesco v. T. Kakiuchi & Co.,
Ltd., 815 F.2d 840, 844 (2d Cir. 1986); Gibson, 121 F.3d at 1130.5 Collins & Aikman Products
Co. v. Building Systems, Inc., 58 F.3d 16, 19 (2d Cir. 1995). The party seeking to compel
arbitration bears the burden of demonstrating the existence of an enforceable arbitration
agreement. Gibson, 121 F.3d at 1130.

        A.      Consideration / Illusory Promise / Mutuality of Obligation

       Consideration is necessary element of an enforceable contract. In order for an arbitration
agreement to be enforceable against an employee, there must be some bargained for detriment to
the employer, or benefit to the employee, in exchange for the employee’s promise to arbitrate.
Gibson v. Neighborhood Health Clinics, 121 F.3d 1126, 1130 (7th Cir. 1997) (citing E. Allan
Farnsworth, Farnsworth on Contracts § 2.2, at 61 (1990) (other citations omitted). Courts have
held several types of promises to be valid consideration for an employee’s agreement to arbitrate.
 The employer’s agreement to be bound by the arbitration process is usually sufficient. See e.g.
Adkins v. Labor Ready, Inc., 303 F.3d 496, 501 (4th Cir. 2002); Blair v. Scott Specialty Gases,
283 F.3d 595 (3d Cir. 2002); Circuit City Stores, Inc. v. Najd, 294 F.3d 1104, 1108 (9th Cir.
2002); Michalski v. Circuit City Stores, Inc., 177 F.3d 634, 636-37 (7th Cir. 1999); Hull v.
Norcom, Inc., 750 F.2d 1547, 1550 (11th Cir. 1985) Armendariz v. Foundation Health
Psychcare Serv. Inc., 24 Cal. 4th 83, 114 (2000). An employer’s promise to continue to
employ an at-will employee can also serve as consideration for an employee’s promise to
arbitrate. O’Neil v. Hilton Head Hosp., 115 F.3d 272 (4th Cir. 1997); but see Phox v. Atriums
Mgmt. Co., Inc., 2002 U.S. Dist. LEXIS 21933, No. 02-2091 at *10-*11 (D. Kan. Nov. 7, 2002).
Likewise, an employer’s promise to hire an employee is often valid consideration. In fact, the
mere prospect of employment can suffice. Koveleskie v. SBC Capital Markets, Inc., 167 F.3d

        5
         “It is for the court, not the arbitrator, to decide in the first instance whether the dispute is
to be resolved through arbitration.” Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 937-38 (4th
Cir. 1999) (citing AT&T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 651
(1986)) (other citations omitted).


                                                   21
361, 368 (7th Cir. 1999); Johnson v. Circuit City Stores, Inc., 148 F.3d 373 (4th Cir. 1998)
(holding that plaintiff who was not hired was bound by arbitration agreement contained in
employment application); but see Geiger v. Ryan’s Family Steak Houses, Inc., 134 F. Supp. 2d
985, 1001 (S.D. Ind. 2001) (holding that promise to consider employment application is not
sufficient consideration).

        In order to constitute consideration, an employer’s promise must be equally bound to the
employee’s promise to arbitrate. In Gibson v. Gibson v. Neighborhood Health Clinics, 121 F.3d
1126 (7th Cir. 1997), the Seventh Circuit refused to enforce an arbitration agreement that bound
only the employee to arbitrate her claims. The employer argued that a provision in a separate
document, the employee manual, that arguably bound the employer to arbitrate all claims,
provided valid consideration for the employee’s promise in the arbitration agreement. The court
rejected this argument because the employee was unaware of the existence of the employee
manual when she signed the arbitration agreement, holding that “proper consideration must
consist of benefit or detriment given in exchange for the promise in question.” Id. at 1131
(emphasis in original).

        The Gibson court also rejected the argument that the employer’s promise to hire the
employee, or its promise to continue to employ her, constituted consideration for her promise to
arbitrate. While acknowledging that such promises can provide valid consideration, the court
found that the employer had already hired the employee when she signed the agreement, and
never communicated to her that her continued employment status depended upon her signing the
agreement. Therefore, the employer did not make these promises in exchange for the employee’s
promise to arbitrate. Id. at 1131-31; but see Farrell v. Convergent Communications, Inc., 1998
U.S. Dist. LEXIS 17314, No. C98-2613, at *16 (N.D. Cal. Oct. 29, 1998) (distinguishing Gibson
where plaintiff signed agreement before offer of employment).

        Where the employer reserves sole discretion to change the applicable rules, courts will
often find the employer’s promise to be illusory and refuse to enforce the arbitration agreement.
In Penn v. Ryan’s Family Steak Houses, Inc,, 269 F.3d 753, 758 (7th Cir. 2001), as a condition of
considering plaintiff’s employment application, defendant required plaintiff to enter into a
contract with an outside dispute resolution company, obligating plaintiff to resolve all
employment disputes with defendant in the outside company’s forum. Defendant was a
designated third-party beneficiary to the contract between plaintiff and the dispute resolution
company. The court affirmed the district court’s denial of defendant’s motion to compel
arbitration, holding that, under Indiana contract law, the contract between plaintiff and the
outside company was unenforceable for want of mutuality of obligation because the contract
prescribed no concrete rules for dispute resolution and the outside company retained unilateral
discretion to alter the agreement.6 Id. at 759-60; see also Floss v. Ryan’s Family Streak Houses

       6
         The district court declined to compel arbitration on different grounds – that the dispute
resolution system was inherently biased against plaintiff and that plaintiff did not knowingly and
voluntarily waive a judicial forum. Penn, 269 F.3d at 758 (citing Prudential Ins. Co. v. Lai, 42

                                                22
Inc., 211 F.3d 306, 316 (6th Cir. 2000) (holding same contract unenforceable).

        In Phox v. Atriums Mgmt. Co., Inc., 2002 U.S. Dist. LEXIS 21933, No. 02-2091 (D. Kan.
Nov. 7, 2002), the employee handbook that contained the arbitration agreement also contained
several disclaimers providing that the handbook was not a contract. The handbook also gave
defendant the right to modify or cancel its provisions at defendant’s sole discretion. The court
denied defendant’s motion to compel arbitration, rejecting defendant’s argument that its promise
to arbitrate was sufficient consideration, as this promise was illusory. Id. at * 8-*10; Gourley v.
Yellow Transportation, LLC, 178 F. Supp. 2d 1196 (D. Colo. 2001) (same); Geiger v. Ryan’s
Family Steak Houses, Inc., 134 F. Supp. 2d 985, 1000-01 (S.D. Ind. 2001) (same); Snow v. BE &
K Constr. Co., 126 F. Supp. 2d 5 (D. Me. 2001) (same); Trumble v. Century Mktg. Corp., 12 F.
Supp. 2d 683 (N.D. Ohio 1998) (same); c.f. Sherry v. Sisters of Charity Med. Ctr., 1999 U.S.
Dist. LEXIS 6623, No. 98-CV-6151, at *14 (E.D.N.Y. 1999); Ramirez-De-Arellano v.
American Airlines, Inc., 133 F.3d 89, 90 (1st Cir. 1997) (no arbitration agreement where
no “back and forth bargaining”, handbook not a contract, and employer could amend at any
time); but see Morrison v. Circuit City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-
4099/99-5897 (6th Cir. Jan. 30, 2003) (distinguishing Floss on fact that employer could alter
agreement but only on one specific day of the year and only with thirty days’ notice).

        Courts have also found arbitration agreements unenforceable that require employees to
arbitrate claims but allow the employer to bring claims in court. See e.g., LeLouis v. Western
Directory Co., 230 F. Supp. 2d 1214, 1220 (D. Or. 2001); Brooks v. Circuit City Stores, Inc.,
1997 U.S. Dist LEXIS 16955, No. DKC 95 3296 (D. Md. May 30, 1997).

       B.      Unconscionable Contracts of Adhesion

        Plaintiffs have also successfully challenged arbitration agreements on unconscionability
grounds. “An unconscionable contract is ‘one which is so grossly unreasonable or
unconscionable in the light of the mores and business practices of the time and place as to be
unenforceable according to its literal terms’. . . In other words, a contract is unconscionable
where there is ‘an absence of meaningful choice on the part of one of the parties together with
contract terms which are unreasonably favorable to the other party.’” Brennan v. Bally Total
Fitness, 198 F. Supp. 2d 377, 381-82 (S.D.N.Y. 2002) (citing Gillman v. Chase Manhattan Bank,
73 N.Y.2d 1, 10 (1988); Corbin on Contracts § 128; 8 Samuel Williston, A treatise on the Law of
Contracts § 18:9, at 54 (4th Ed. 1998)) (other citations omitted). A court may properly refuse to
enforce an unconscionable contract. Brennan, 198 F. Supp. 2d 377, 381 (S.D.N.Y. 2002) (citing
Gillman, 73 N.Y.2d at 10); Armendariz v. Foundation Health Psychcare Serv. Inc., 24 Cal.


F.3d 1299, 1305 (9th Cir. 1994) (no knowing and voluntary waiver)).


                                                23
4th 83, 114 (2000) (citing California Civil Code Section 1670.5).

        Unconscionability, has two elements, one “procedural” and the other “substantive”. Both
must be present for a contract to be held unconscionable. Armendariz, 24 Cal. 4th at 114. The
first question is whether the contract is one of adhesion, resulting from unequal bargaining
power. Id. at 113 (citation omitted). A contract of adhesion is “a standardized contract, which,
imposed and drafted by a party of superior bargaining strength, relegates to the subscribing party
only the opportunity to adhere to the contract or reject it.” Armendariz, 24 Cal. 4th at 114.
Agreements drafted by employers and offered to employees as a condition of employment are
“more susceptible to the presence of unconscionable terms than in other contexts.” Bailey v.
Ameriquest Mortgage Co., 2002 U.S. Dist LEXIS 1343, No, 01-545, at *10 (D. Minn. Jan 23,
2002); but see Morrison v. Circuit City Stores, Inc., 2003 U.S. App. LEXIS 1456, Nos. 99-
4099/99-5897 (6th Cir. Jan. 30, 2003) (finding no procedural unconscionability where plaintiff
was highly educated).

       If the contract is one of adhesion, the next question is whether other characteristics of the
contract or provision render it unenforceable, or substantively unconscionable. One such
characteristic is that enforcement of the contract or provision against the weaker party would be
unduly oppressive or “unconscionable”. Id. Substantive unconscionability focuses on “overly-
harsh” or “one-sided” results. Id.

        It is important to note that an arbitration agreement in which the parties have unequal
bargaining power is not necessarily unenforceable. As explained in Armendariz and Brennan, a
court should not refuse to enforce an arbitration agreement unless the adhesive nature of the
contract is combined with contract terms that are unreasonably favorable to the stronger party.
Brennan, 198 F. Supp. at 381-82. Indeed, the Supreme Court has rejected the argument that
unequal bargaining power alone is a sufficient reason to hold an arbitration agreement
unenforceable. Gilmer, 500 U.S. at 32-33; see also Adkins v. Labor Ready, Inc., 303 F.3d 496,
502 (enforcing arbitration agreement despite unequal bargaining power where plaintiff offered no
evidence of unfair contractual terms).

       In Armendariz, the Supreme Court of California refused to enforce an arbitration
agreement on unconscionability grounds. First, the court concluded that the contract was one of
adhesion because it “was imposed on employees as a condition of employment and there was no
opportunity to negotiate.” Armendariz, 24 Cal. 4th at 114-15. The court noted that, in general,
employees are rarely “in a position to refuse a job because of an arbitration requirement. Id.

       The Armendariz court also held that the agreement was substantively unconscionable
because, without justification, it required employees to arbitrate their claims against the
employer, but did not require the employer to arbitrate its claims against the employees. Id. at


                                                 24
115-16. In order to be enforceable, the court held, an arbitration agreement must have at least a
“modicum of bilaterality”. Id. at 117. The court also held that the “one-sidedness” of the
agreement was compounded by the fact that it limited employees’ potential damages while
placing no such restriction on the employer. Id. at 121.

         The Southern District of New York has also refused to enforce an arbitration agreement
on the grounds that it was unconscionable. Brennan v. Bally Total Fitness, 198 F. Supp. 2d 377,
384 (S.D.N.Y. 2002). In Brennan, plaintiff challenged an arbitration agreement that she signed
after filing an internal sexual harassment complaint. The court held that the agreement was both
procedurally and substantively unconscionable. The court found that employees were coerced
into signing the agreement by “high pressure tactics” employed by defendant. Brennan, 198 F.
Supp. at 383. At a sexual harassment training session, Defendant presented the employees with a
sixteen-page document, gave them only a few moments to review it, failed to explain that it
contained an arbitration clause, failed to explain that the agreement would affect pending
complaints against the company, and threatened that those who did not sign the document would
not be considered for promotion. Id.

        The agreement was procedurally unconscionable because plaintiff lacked a meaningful
choice in deciding whether to sign it. Id. The court reached this conclusion because (1) there
was a considerable disparity in bargaining power between plaintiff, a pregnant single mother
whose job with defendant was her only source of income and health insurance, and defendant, a
large national corporation; (2) plaintiff was not given adequate time to review the agreement; (3)
defendant failed to inform plaintiff that she could review the agreement with an attorney; (4)
defendant threatened to take adverse action against those who refused to sign the agreement; and
(5) defendant failed to inform plaintiff that the agreement would impact her pending sexual
harassment complaint. Id. at 383-84.

        The court found that the terms of the arbitration agreement unreasonably favored
defendant, and was, therefore, substantively unconscionable, because (1) the terms of the
agreement allowed defendant to unilaterally modify the contract; and (2) the agreement denied
plaintiff the right to proceed in court on a claim against defendant that she had already asserted.7
Id. at 384.

         The Fourth Circuit, in Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 935 (4th Cir. 1999),
refused to compel arbitration where the dispute resolution process set up by defendant was
“utterly lacking in the rudiments of even-handedness.” Hooters, 173 F.3d at 935. Defendant
required its employees to sign an arbitration agreement that it drafted by conditioning employees’
eligibility for raises, transfers, and promotions upon signing the agreement. The agreement
required employees to arbitrate all claims against defendant pursuant to rules and procedures,
       7
       The court specifically declined to rest its holding of substantive unconscionability on the
grounds that the agreement limited remedies, capped damages, and truncated limitations periods.
 Brennan, 198 F. Supp. at 384.


                                                 25
also drafted by defendant, which no employee saw before signing the agreement. Id. at 935-36.
The court held that defendant breached the arbitration agreement by promulgating rules and
procedures that were “so egregiously unfair as to constitute a complete default of its contractual
obligation to draft arbitration rules and to do so in good faith.” Id. at 938. The court held that
recission of the contract was the only proper remedy for defendant’s breach. Id. at 940. See also
Plaskett v. Bechtel, Int’l, Inc., No. 2002-0149, slip. op. at 7-10 (D.V.I. Jan. 27, 2003) (agreement
unconscionable where mandatory and one-sided); LeLouis v. Western Directory Co., 230 F.
Supp. 2d 1214, 1223 (D. Or. 2001) (same); Geiger v. Ryan’s Family Steak Houses, Inc., 134 F.
Supp. 2d 985, 998-99 (S.D. Ind. 2001) (holding arbitration agreement unconscionable where
agreement was shaped by three different documents, one of which the employees were not given,
and there was evidence that employees did not understand their rights under agreement); Prevot
v. Phillips Petroleum Co., 133 F. Supp. 2d 937, 940-41 (S. D. Tex. 2001) (refusing to enforce
agreement on grounds of procedurally unconscionability where employees, who could not read
English were pressured to sign agreements written in English).

       C.      No Agreement to Arbitrate

        A court may not compel arbitration where there has been no agreement to arbitrate. For
example, there is authority that an employee’s mere continuation of employment after an
employer establishes an arbitration policy does not constitute the employees agreement
acceptance of the arbitration policy, even when the employees knows about the policy. Phillips
v. CIGNA Inv., Inc., 27 F. 2d 345, 359 (D. Conn. 1998). Likewise, in Phox v. Atriums Mgmt.
Co., Inc., 2002 U.S. Dist. LEXIS 21933, No. 02-2091 (D. Kan. Nov. 7, 2002), the court held that
there was no meeting of the minds on the purported agreement to arbitrate in the employee
handbook because plaintiff never signed or initialed the page of the handbook that contained the
arbitration clause, nor did plaintiff know that the handbook contained an arbitration clause when
she executed a form acknowledging her receipt of the handbook. Id. at *11-*12. See also Bailey
v. Fed. Nat’l Mortgage Ass’n, 141 F. Supp. 2d 82 (D.D.C. 2001) (no agreement to arbitrate
where employee never agreed to arbitration provision in writing or verbally); Gibbs v.
Connecticut Gen. Life Ins. Co., 1998 Conn. Super. LEXIS 599, No. CV 970567009 (Conn. Super.
Ct. May 3, 1998) (no valid agreement where no acknowledgment of agreement).

        However, a party need not sign an arbitration agreement for it to be enforceable.
Gonzalez v. Toscorp, Inc., 1999 U.S. Dist. LEXIS 12109, No. 97 Civ. 8158, at *5 (S.D.N.Y. Aug.
5, 1999) (citing Thompson-CFA S.A. v. American Arbitration Association, 64 F.3d 773, 776-77
(2d Cir. 1995)) (other citations omitted). Courts have found valid agreements to arbitrate where
the employee failed to opt-out of such a policy. See e.g., Circuit City Stores v. Najd, 294 F.3d
1104, 1109 (9th Cir. 2002) (inferring that plaintiff assented to arbitration provision by failing to
opt out).


       D.      Knowing and Voluntary Waiver



                                                 26
        In Prudential Insurance Co. of Am. v. Lai, 42 F.3d 1299 (9th Cir. 1994), the court refused
        to
compel plaintiffs’ discrimination claims to arbitration pursuant to the NASD Form U-4. The
court held that plaintiffs did not “knowingly and voluntarily contract to forego their statutory
remedies in favor of arbitration” because when plaintiffs signed the U-4, they were not aware that
they were signing an arbitration agreement, were not given a copy of the NASD manual which
contains the arbitration rules, and the Form U-4 did not describe the types of claims subject to
arbitration. Id. at 1303-05. See also Caldwell v. KFC Corp., 958 F. Supp. 962 (D.N.J. 1997)
(refusing to enforce agreement where non-lawyer would not have reasonably understood
he was agreeing to arbitrate a future claim for retaliatory termination); Owen v. MBPXL
Corp., 173 F. Supp. 2d 905, 930 (N.D. Iowa 2001) (denying motion to compel arbitration
because “continued employment without knowledge of the offer did not constitute
acceptance”).

        Other courts repudiate Lai on the grounds that it is inconsistent with Gilmer’s premise
that arbitration does not necessarily require an employee to give up a statutory right. See e.g.,
Haskins v. Prudential Ins. Co. of Am., 230 F.3d 231, 235-36 (6th Cir. 2000) (compelling
arbitration where agreement did not mention specific claims and employee was not given copy of
rules).




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