New York’s Court of Appeals Establishes Ability-to-Pay Hearing Before Enforcing Fee-Splitting Provision in Employment Arbitration Agreement

The Court of Appeals of New York [the highest court in the State of New York] held that an employee challenging the enforceability of a fee-splitting provision in a pre-dispute arbitration agreement is entitled to a factual hearing to establish that her inability to pay arbitration costs precluded her from vindicating her statutory rights.

In Brady v. Williams Capital Group, L.P., 2010 N.Y. LEXIS 49 (N.Y., Mar. 25, 2010) Lorraine Brady was employed as of January 1999 by Williams Capital Group (Williams), an investment bank and securities broker-dealer. In 2000, Williams issued a manual for all of its employees requiring arbitration of all disputes and equal sharing of the fees and costs of arbitration. The agreement included the following provision:

The Company and I agree that, except as provided in this Agreement, any arbitration shall be in accordance with the then-current Model Employment Arbitration Procedures of the [AAA] before an arbitrator who is licensed to practice law in the state in which the arbitration is convened (‘the Arbitrator’). The arbitration shall take place in or near the city in which I am or was last employed by the Company.

In February 2005, Williams terminated Brady’s employment. By then, Brady had earned $100,000 in 1999, $137,500 in 2000, $324,000 in 2001, $356,000 in 2002, $405,000 in 2003 and $204,691 in 2004. Brady filed a discrimination complaint with the New York State Division of Human Rights (DHR). After 8 months of discovery, however, Brady withdrew her complaint.

Shortly thereafter, Brady filed for arbitration by the AAA seeking damages against Williams for discrimination termination. After the parties engaged in extensive pre-hearing discovery, the AAA sent Williams a bill for $42,300 which represented the entire advance payment for the arbitrator’s fees pursuant to the AAA’s “employer pays” rule. Williams refused to pay and demanded that Brady pay her portion, citing their arbitration agreement. Similarly, Brady refused to pay her portion, and the AAA canceled the arbitration in October, 2006.

Brady sued relying on the AAA’s rule that requires an employer to pay the arbitrator’s fee. The New York Supreme Court [a trial court] held that the parties’ Arbitration Agreement, requiring Brady to pay half ($21,150) governed. Brady appealed. The issue before the New York Court of Appeals was whether Brady met her burden of demonstrating that an arbitration agreement’s provision for the equal sharing of arbitration fees and costs precluded her from pursuing her statutory rights in the arbitral forum.

The court noted that despite Brady’s earning history ranging from $100,000 to $400,000 annually during her employment with Williams, Brady had established that her finances were “precarious” as a result of her lack of gainful employment during the 18-month period following her employment termination.

The court held that:

the issue of a litigant’s financial ability is to be resolved on a case-by-case basis and that the inquiry should at minimum consider the following questions: (1) whether the litigant can pay the arbitration fees and costs; (2) what is the expected cost differential between arbitration and litigation in court; and (3) whether the cost differential is so substantial as to deter the bringing of claims in the arbitral forum.

Accordingly, the court remanded the case for a hearing to determine whether Brady was financially able to share equally in the arbitration fees and costs.

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