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The U.S. Supreme Court’s rulings in Circuit City v. Adams [FOOTNOTE 1]and Gilmer v. Interstate/Johnson Lane Corp. [FOOTNOTE 2]have removed any doubt as to the enforceability of most pre-dispute arbitration agreements entered into as a condition of employment, even where statutory claims are involved. The question of who should pay the costs of the arbitration, however, remains undecided. This issue was recently discussed by the Supreme Court in Green Tree Financial Corp. v. Randolph, where the Court recognized that “the existence of large arbitration costs could preclude a litigant from effectively vindicating her statutory rights.” The Court ruled, however, that a litigant who seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive “bear[s] the burden of showing the likelihood of such costs.” [FOOTNOTE 3] This pronouncement in Green Treeseems to be prompting a re-evaluation of earlier circuit decisions in which courts have invalidated arbitration clauses that require the complaining party to either pay a portion of the arbitrator’s fees or bear a portion of the total cost of the arbitral forum. [FOOTNOTE 4] In this article we examine some of the recent court decisions, in the wake of Green Tree, which have held that cost-splitting is acceptable in the absence of a showing that the arbitral forum fees imposed erect an effective bar to an individual’s ability to vindicate statutory rights. CASE-BY-CASE BASIS Two of the most recent opinions dealing with this issue have issued from the Eastern District of Pennsylvania. In Zumpano v. Omnipoint Communications, Inc., [FOOTNOTE 5]the court upheld a provision that called for equal sharing of all expenses unless the arbitrator ordered otherwise. In Goodman v. ESPE America, Inc., [FOOTNOTE 6]the court enforced a “loser pays” provision that deferred all costs until the close of the arbitration, at which point they became the sole responsibility of the losing party. Although the two decisions employed slightly different rationales, both held that the respective provisions in question were enforceable unless the plaintiffs could concretely demonstrate how the imposition of these costs prevented them from exercising their statutory rights. In Goodman, the plaintiff, defendant’s former president, challenged his termination under Title VII and the Pennsylvania Human Relations Act. In response to a motion to compel arbitration, the plaintiff argued, in part, that “the ‘loser pays’ clause of the arbitration provision deni[ed] him his substantive right to an effective and accessible forum.” [FOOTNOTE 7]Relying on Green Tree, the Goodmancourt noted that the plaintiff had failed to allege “that imposition of arbitration costs would preclude him from arbitrating his claims” and that “no evidence [had] been presented to indicate what costs [the] plaintiff would incur or how prohibitively expensive those costs would be.” [FOOTNOTE 8]The court further reasoned that under the terms of the “loser pays” provision, the plaintiff would not have to advance any monies in order to commence the arbitration, and indeed the plaintiff would never have to pay anything if he prevailed. Although the mere possibility of having to pay at some point in the future might serve as a deterrent, the court decided that “it would be far less a deterrent than ordinary fee-splitting arrangements or agreements that require large initial deposits.” [FOOTNOTE 9]In the end, because the plaintiff had nothing to offer other than sheer speculation as to how much he would pay, the court found no basis to block the enforcement of an otherwise facially unobjectionable arbitration provision. The Omnipointcase also involved an employer’s successful motion to compel arbitration. The plaintiff had worked as the employer’s director of sales, earning a salary of $120,000 plus additional compensation in the form of stock options. His employment contract contained an arbitration provision that stated that the parties would share arbitration costs equally, unless they agreed to a different arrangement or costs were allocated differently in the arbitrator’s award. After his termination, the plaintiff brought suit asserting age and national origin discrimination claims. To prevent arbitration, the plaintiff argued that the court should either adopt a per se rule banning provisions which sought to place any part of the cost burden on the plaintiff, or, failing that, invalidate the particular provision in his agreement because it had the effect of substantially deterring him from pursuing his statutory rights. Neither argument prevailed. In support of his deterrence contention, the plaintiff submitted an affidavit stating that he had been unemployed for seven months, had not received unemployment compensation, was experiencing financial difficulties and that, given the projected cost of the arbitration — derived by extrapolating the hourly fees of most arbitrators — he would have to withdraw his claim if compelled to arbitrate. In the Omnipointcourt’s view, however, the affidavit was conclusory and self-serving because the plaintiff failed “to submit any concrete evidence, such as a bank statement or a statement of assets and liabilities or a statement of income and expenses supporting his claims.” [FOOTNOTE 10]Moreover, the Omnipointcourt ruled, the plaintiff’s current financial position was immaterial, for the relevant time period was either “when the contract was formed or during the intervening time when he was eligible to file for arbitration.” [FOOTNOTE 11]The court concluded: “Given his prior income level and the skills that presumably allowed him to earn it, the idea that a maximum expected cost of $5,000 would be so burdensome as to” substantially deter the plaintiff from bringing suit was “incredible.” [FOOTNOTE 12] NO ‘PER SE’ BAN The court also rejected the plaintiff’s argument for a per se ban on cost-sharing provisions. In reaching this result, the court distinguished pre- Green Treecircuit rulings that appeared to require the invalidation of arbitration provisions which contained cost-splitting provisions. In Shankle v. B-G Maintenance Management, [FOOTNOTE 13]for example, the clause in question required that the complaining party — a janitor subsequently promoted to shift manager — to bear half of the costs of the forum, although it did provide that the employer would advance the whole amount if the employee could not pay his share. [FOOTNOTE 14]In the Omnipointcourt’s view, both of these aspects were distinguishable because the plaintiff in Omnipointwas a highly paid employee and because the arbitration clause only created a possibility of the employee ultimately having to pay. [FOOTNOTE 15] Similarly, the court distinguished the D.C. Circuit’s Cole v. Burns International Security Services [FOOTNOTE 16]decision, where the court held that an employer that requires an employee to arbitrate all disputes cannot require the employee to pay part of the arbitrators’ compensation. [FOOTNOTE 17]The Omnipointcourt noted that Cole involved an “asymmetrical” arbitration clause that could be invoked only by the employer and did not allow the arbitrator any flexibility in tailoring who had to pay in a given situation. [FOOTNOTE 18]Indeed, the court reasoned that Coledid not prescribe a per se rule against cost sharing because the D.C. Circuit had explained the basis for its holding in that case by stating that “‘where arbitration has been imposed by the employer and occurs only at the option of the employer — arbitrator’s fees should be borne solely by the employer.’” [FOOTNOTE 19]The clause in Omnipointallowed either party to demand arbitration. [FOOTNOTE 20] ‘COLE’ REVISITED Roughly three months after Omnipoint, the D.C. Circuit handed down LaPrade v. Kidder Peadbody & Co. [FOOTNOTE 21]This case involved cross-motions by the employer and a former employee to confirm and vacate, respectively, an NASD arbitrator’s award of $65,000 in favor of the employee who alleged violations of the civil rights laws and the federal and state equal pay acts, in addition to common law defamation and fraud. The arbitration panel found in the employee’s favor on the defamation claim, but against her on all the other counts. Pursuant to the provisions of the arbitration agreement and the NASD Code of Arbitration Procedure, the panel assessed a total of $69,800 in forum fees to the parties, 12 percent of which — amounting to $8,376 — had to be paid by the plaintiff. [FOOTNOTE 22]She challenged this award, claiming that it clearly violated the tenets of Cole. After noting the general minimal standard of review applicable to arbitration awards, as well as Gilmer‘s mandate that transfers to an arbitral forum do not involve the surrender of statutory rights, the court chastised the plaintiff for overextending Cole. “Contrary to [the plaintiff's] contention that the assessment of arbitral forum fees contravenes Cole,” the D.C. Circuit stated, ” Coledoes not bar the assessment of all forum fees against an employee.” [FOOTNOTE 23]Rather, it allows employees to “‘assume the [reasonable] costs of filing fees and other administrative expenses’ arising from arbitration of statutory claims because ‘parties appearing in federal court’ may likewise be required to pay such costs.” [FOOTNOTE 24]The court held that only payments made to the arbitrators fall under the Coleprohibition, reasoning that a private litigant in court would not have to pay fees for the judge. The court noted that the arbitration took place over 74 sessions and the total per-session forum fee was $1,000. Of this $1,000, only $675 went to the arbitrators. This left $325 per session of charges that did not go towards the arbitrators’ compensation and could therefore be passed on to the plaintiff under Cole. The amount charged to the plaintiff was less than $325 when considered on a per-session basis, and were therefore permissible under LaPrade’s interpretation of Cole. [FOOTNOTE 25]Further, the underlying arbitration involved several claims that were not statutory claims and the plaintiff could not demonstrate that any of fees allocated to her were traceable to the arbitration of statutory discrimination claims. Therefore, the underpinnings of the Gilmerand Green Treedecisions — enabling claimants to assert their statutory rights — were inapplicable to a substantial portion of the proceedings. [FOOTNOTE 26] CONCLUSION In sum, it appears that in the wake of Green Treeseveral courts will enforce cost-splitting provisions so long as those provisions are reasonable. “Reasonableness,” in this context, is a function of the Supreme Court’s requirement that the shift to an arbitral forum not prejudice an employee’s practical ability to pursue his or her statutory rights. This will be decided on a case-by-case basis and, as several courts have done, may likely involve an analysis of the plaintiff’s income level. [FOOTNOTE 27]To be enforceable, a cost-splitting provision should therefore be designed in such a way as to reduce the economic barriers that could be seen as making the arbitral forum prohibitively expensive. Expensive up-front filing fees and the like should be avoided. Those employers who are intent on taking as many precautions as they can to avoid collateral litigation over the enforcement of their arbitration provisions, might consider offering to pay all arbitral forum costs. Recognize, however, that the developing post- Green Treecase law appears to permit some cost-sharing among the parties. Samuel Estreicher is professor of law and director of the Center for Labor and Employment Law at the New York University School of Law, as well as labor and employment law counsel to O’Melveny & Myers. Kenneth J. Turnbull is a partner of O’Melveny & Myers, specializing in labor and employment law matters. Adam P. Sweeney, an associate at the firm, assisted in the preparation of this article. :::: FOOTNOTES:::: FN1 Circuit City v. Adams, 121 S.Ct. 1302, 69 U.S.L.W. 4195 (2001). FN2 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). FN3 Green Tree Financial Corp. v. Randolph, 121 S.Ct. 513, 522 (2000); but see Armendariz v. Foundation Health Psychare Serv. Inc., 6 P.3d 669, 687 (Cal. 2000) (holding that “when an employer imposes mandatory arbitration as a condition of employment” employees may not be required “to bear any type of expense that the employee would not be required to bear if he or she were free to bring the action in court”). FN4 See, e.g., Shankle v. B-G Maintenance Management, 163 F.2d 1230 (10th Cir. 1999) (voiding a provision which required the employee to pay one half of the arbitrator’s fees); Cole v. Burns Int’l Sec. Services, 105 F.3d 1465 (D.C. Cir. 1997) (stating that employees may not be required to pay the arbitrator’s fees); Paladino v. Avnet Computer Tech., Inc., 134 F.3d 1054 (11th Cir. 1998) (expressing the opinion that “a clause such as this one that deprives an employee of any hope of meaningful relief, while imposing high costs on the employee” should be unenforceable). FN5 Zumpano v. Omnipoint Communications, Inc., No. 00-CV-595, 2001 WL 43781 (E.D. Pa. Jan. 18, 2001). FN6 Goodman v. ESPE America, Inc., No. 00-CV-862, 2001 WL 64749 (E.D. Pa. Jan 19, 2001). FN7 Id.at *3. FN8 Id.at *4. FN9 Id. FN10 Omnipoint, 2001 WL 43781, at *10. FN11 Id.at *11. FN12 Id. FN13 Shankle v. B-G Maintenance Management, supra. FN14 See id.at 1231-32. FN15 See Omnipoint, 2001 WL 43781, at *6; accord Bradford v. Rockwell Semiconductor Systems, Inc., 238 F.3d 549, 556 (4th Cir. 2001) (rejecting the propriety of a per se rule, and noting that its “conclusion that the proper inquiry is a case-by-case analysis rather than a per se rule is bolstered by” Green Tree); see also Williams v. Cigna Financial Advisers, Inc., 197 F.3d 752 (5th Cir. 1997), cert. den’d, 529 U.S. 1099 (2000); Rosenberg v. Merrill Lynch, 170 F.3d 1 (1st Cir. 1999); Kovelskie v. SBC Capital Markets, Inc., 167 F.3d 361 (7th Cir.), cert. den’d, 528 U.S. 811 (1999). FN16 Cole v. Burns Int’l Sec. Services, supra. FN17 See id.at 1468. FN18 See Omnipoint, 2001 WL 43781, at *6 ( citing Cole, 105 F.3d at 1484-85). FN19 Id.( quoting Cole, 105 F.3d at 1484-85) (emphasis added by Omnipoint). FN20It should be pointed out that while the Colecourt did note that the agreement at issue there left the decision to arbitrate solely in the hands of the employer, it is not clear that this feature was central to the court’s holding. In fact, the court expressly cautioned: “We do not mean to suggest, however, that our decision would be different if the agreement at issue allowed either party to require arbitration.” Cole, 105 F.3d at 1468. FN21 LaPrade v. Kidder, Peabody & Co., — F.3d –, 2001 WL 409118 (D.C. Cir. 2001). FN22 See id.at *1. FN23 Id.at *3. FN24 Id.(quoting Cole, 105 F.3d at 1484). FN25 Id.at *4. FN26 Id. FN27 See Omnipoint, supra; see also Ahing v. Lehman Brothers, Inc., No. 94- Civ.-9027, 2000 WL 460443 at *13 (S.D.N.Y. Apr. 18, 2000); Arakawa v. Japan Network Group, 56 F. Supp.2d 349, 354-55 (S.D.N.Y. 1999).

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