NY’s Highest Court Requires Ability-to-Pay Hearing Before Enforcing Fee-Splitting Provision in Arbitration Agreement

In a decision with ramifications for employees and consumers subject to a mandatory arbitration agreement, New York’s Court of Appeals recently 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, a la the Supreme Court’s 2000 Greentree decision.  In Brady v. The Williams Capital Group, L.P., 2010 WL 1068163 (N.Y. Mar. 25, 2010), Lorraine Brady, a former fixed income specialist employed by  investment banker and broker-dealer Williams Capital Group (WCG), challenged her termination under federal, state and New York City civil rights statutes in AAA arbitration. (Employees are not required to arbitrate discrimination claims before FINRA, but the employee manual in this case had an arbitration provision designating AAA as the forum.)  Before the hearing, AAA sent an invoice for advance payment of the arbitration fee to WCG under AAA’s employment arbitration rules which require the employer to pay for the arbitration.  In turn, WCG sent an invoice to Brady for half of the fee pursuant to the arbitration fee-splitting provision in the employee manual.  Brady refused to pay, and AAA cancelled the arbitration.

Brady then pursued in court an order to compel WCG to pay the arbitration fee or enter a default judgment in the arbitration against WCG.  The trial court denied relief, but the Appellate Division reversed, finding the fee-splitting provision unenforceable, and directing WCG to pay the entire arbitration fee.  WCG appealed. 

The Court of Appeals balanced the strong public policy of New York State favoring arbitration agreements with the competing policy rejecting arbitration agreements that preclude a party from effectively vindicating her statutory rights.  The Court held that this is a fact-specific inquiry requiring a full record.  Since there had been no fact-finding or record on the issue of Brady’s ability to pay the arbitration fee, the Court of Appeals remanded the case to the trial court for a hearing on that issue.  The Court held that the lower court should inquire as to: “(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.”  The Court also directed that, if the lower court declared the fee-splitting provision unenforceable, it should decide whether to sever the provision and enforce the remainder of the arbitration agreement, or permit the employee to pursue her claims in court.

By providing Brady access to the courts for a factual hearing on the issue of ability to pay arbitration fees, the Court of Appeals strengthened the “vindicating statutory rights” defense to arbitrability, at least in New York state courts.  

JG

(Hat Tip to Sean Nolon for alerting me to this decision)

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