YOU CANNOT WAIVE THE OFFENDING ARBITRATION PROVISION

Rick Freeman Commentary

One argument that is regularly made by lawyers who are attempting to compel arbitration is to ask the Court to reform the arbitration clause in some way, if the Court feels that the arbitration clause is so unfair or one-sided that it could be unconscionable.

This is generally a difficult argument to rebut if you are the lawyer arguing the effect of the unfairness or one-sidedness of an arbitration provision.

You argue:

Judge, the cost of the arbitration is too high on my client. Don’t compel arbitration.

The other lawyer argues in rebuttal:

Judge if you think the cost is too high, my client, in the goodness of his or her heart, will pay the arbitration costs. That takes care of any unfairness. Just compel the arbitration.

The same type of argument is made whatever unconscionable provision is alleged. The lawyer defending the arbitration clause tells the judge to remove or revise the offending clause – but to enforce the rest of the arbitration provision.

In an interesting 2004 decision by the United States Court of Appeals for the Sixth Circuit, the Court ruled that it was PROPER for the District Court to reject an employer’s offer to pay the employee’s arbitration costs.

The case is Tonya Cooper v. MRM Investment Company. Cooper was employed by MRM as a manager of an MRM owned restaurant. She alleged she was sexually harassed and constructively discharged. She filed suit under Title VII. MRM moved to compel arbitration pursuant to a pre-employment agreement. The District Court refused to compel the arbitration on several grounds, including that the cost of the arbitration was unduly high on the employee.

The Court of Appeals, in a very detailed opinion, discussed all the grounds cited by the District Court and overturned all of the grounds except for the high cost. The Court of Appeals remanded the case to the District Court for an evidentiary hearing to determine the effect of the costs to be paid by the employee.

A very interesting part of the opinion deals with an offer made by MRM to pay the arbitration costs of Cooper. The MRM lawyer told the District Court that, notwithstanding the arbitration provisions, MRM would pay ALL the costs of the arbitration, including the employee’s cost. The MRM lawyer then argued that any unfairness was removed.

The Appeals Court ruled that the District Court’s decision to refuse to, in effect, re-write the arbitration provision was sound as a matter of federal public policy. The Court went on to state that:

An employer will not be deterred from routinely inserting a deliberately illegal clause into the arbitration agreement it mandates for its employees if it knows that the worst penalty for such illegality is the severance of the clause after the employee has litigated the matter.

Further, the Court cited a North Dakota case that refused to consider such an offer saying that accepting the defendant’s offer to pay all arbitration costs, contrary to the contract, would effectively allow the defendant to unilaterally modify the contract.

In a footnote, the Appeals Court instructed the District Court, that on rehearing, the employee’s relevant costs were her out-of-pocket costs without reference to the possibility that she might later recoup some of them. The Court stated:

Hence, the District Court shall consider neither the arbitrator’s possible award of fees and expenses to Cooper pursuant to the AAA Rules, nor MRM’s offer to pay Cooper’s arbitration costs.

In summary, a Court should refuse to consider the argument made by the above lawyer who was attempting to compel arbitration. An arbitration provision cannot be written with unconscionable provisions which can then be waived when they are objected to as unconscionable.