In a recent case, Matarrazo v. L.R. Royal, Inc., a New York court said “No.” The employer was a mortgage broker, and the employee was hired as a mortgage sales manager. The employee’s attorney drafted the arbitration clause, which provided that the parties split the costs of arbitration, with an important caveat: the employee’s share was capped at $3,000. A dispute arose, the parties went to arbitration before AAA, and the costs of the arbitration rapidly escalated past $20,000. The employer refused to pay. The employee sought an order from Supreme Court compelling the employer to proceed with the arbitration under the terms of the agreement. In opposition, the employer claimed that she did not realize what she was agreeing to and that she could not afford to proceed with arbitration under those terms. She asked the court “to render unenforceable the fee-splitting clause in the Agreement as a matter of public policy, sever it from the agreement and allow the parties to proceed to the alleged lower cost alternative of adjudicating the claims in court.”
The employer relied on Brady v. Williams Capital Group, L.P., 14 N.Y.3d 459 (2010), in which the New York Court of Appeals had held that an arbitration fee-splitting clause could not stand if it precluded an employee from vindicating her rights because of financial inability to proceed. The Court of Appeals held in Brady 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 a 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.” The employer in Matarrazo argued that the same standards should apply to an employer faced with large arbitration costs under the terms of an arbitration agreement. Finding that the clause was better for the employer than AAA rules, that the employer never objected to arbitration, and that the employer participated in activities that increased the costs, the Matarrazo court rejected that argument and ordered the parties back to arbitration, with the employer paying.