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An arbitration agreement that includes provisions that violate federal law — by requiring workers lodging discrimination claims to pay their own attorney fees regardless of the outcome as well as their share of the costs of arbitration — is nonetheless enforceable since federal judges have the power to sever the offensive provisions before sending the case to arbitration, the 3rd U.S. Circuit Court of Appeals has ruled. In Spinetti v. Service Corp. International, a unanimous three-judge panel rejected the argument that courts must void the entire arbitration agreement instead of merely trimming its offensive portions. “You don’t cut down the trunk of a tree because some of its branches are sickly,” Senior U.S. Circuit Judge Ruggero J. Aldisert wrote. Aldisert found that such arbitration agreements point up a tension between “two important expressions of public policy” — the Federal Arbitration Act’s liberal federal policy favoring arbitration agreements, and the statutory provisions of discrimination laws that call for an award of attorney fees to a prevailing plaintiff. The best way to resolve the tension, Aldisert found, is to sever the offensive provisions so that the agreement to arbitrate can be enforced. “The boundaries of private arbitration agreements in the employment context are currently being set, with the Supreme Court only recently affirming that the FAA extends to arbitration agreements covering employment disputes,” Aldisert wrote in an opinion joined by Judges Jane R. Roth and Julio M. Fuentes. “In an evolving climate such as this, if we were to hold entire arbitration agreements unenforceable every time a particular term is held invalid, it would discourage parties from forming contracts under the FAA and severely chill parties from structuring their contracts in the most efficient manner for fear that minor terms eventually could be used to undermine the validity of the entire contract. Such an outcome would represent the antithesis of the liberal federal policy favoring arbitration agreements,” Aldisert wrote. Aldisert also rejected arguments made by the Equal Employment Opportunity Commission in a friend-of-the-court brief that said employers “should not have the benefit of a sanitized arbitration procedure stripped of the improper attorney fees and arbitration costs clauses.” The EEOC argued that the presence of agreements operates as a disincentive to vindicate employee rights because the specter of advancing thousands of dollars in arbitration costs and paying one’s own attorney fees would have a “daunting, discouraging and intimidating effect on an employee standing on the lower rungs of the economic ladder.” As a result, the EEOC argued, the entire arbitration agreement should be voided. Aldisert found there was “some surface appeal” to the EEOC’s arguments, but that they could not survive “thoughtful analysis.” “To accept the EEOC’s position is to throw the baby out with the bath water. It would compel the impecunious employee to resort to the courts — the only alternative to arbitration in dispute adjudication,” Aldisert wrote. “To accept the EEOC’s submission would be to deny the employee the real benefits of arbitration — benefits that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts.” Under the FAA, Aldisert said, courts must look first to the relevant state law of contracts when deciding whether an arbitration agreement is valid. Under Pennsylvania law, Aldisert said, if an “essential” term of a contract is deemed illegal, it renders the entire contract unenforceable by either party. Aldisert found that Chief U.S. District Judge Donetta W. Ambrose of the Western District of Pennsylvania was correct in holding that “the provisions regarding payment of arbitration costs and attorney fees represent only a part of the agreement and can be severed without disturbing the primary intent of the parties to arbitrate their disputes.” Plaintiff Maryann Spinetti began working for Service Corporation International as a sales counselor in April 1989. In May 1997, she signed a “new personnel policy” that included an agreement to arbitrate all employment disputes. Spinetti’s employment was terminated in October 2000 after SCI said she had engaged in inappropriate conduct including treating staff abusively, throwing an object at a co-worker and using vulgar language. She later filed suit alleging that SCI terminated her employment because of her age and gender in violation of Title VII and the Age Discrimination in Employment Act. When SCI moved to compel arbitration, Spinetti’s lawyer argued that the arbitration agreement was not enforceable because it prevented her from fully and effectively vindicating her ADEA and Title VII rights. The arbitration agreement required that each party pay its own costs and attorney fees, regardless of the outcome of the arbitration; and that each party pay one-half of the compensation to be paid to the arbitrators, as well as half of any other costs relating to the administration of the arbitration proceeding. Ambrose said she agreed with Spinetti that the requirements violated federal law. But instead of declaring the agreement invalid, Ambrose severed the attorney fee and cost provision from the arbitration agreement and compelled the parties to proceed to an arbitration governed by the remaining provisions of the agreement, relevant case law and the statutory guidelines of Title VII and the ADEA. Now the 3rd Circuit has ruled that Ambrose correctly found that the arbitration agreement imposed prohibitive costs on Spinetti. “Spinetti was required to pay an initial, non-refundable filing fee of $500 to the American Arbitration Association, an additional filing fee of $2,750, a case-filing fee of $1,000, an additional charge of $150 for each day of the hearing and half the cost of an arbitrator,” Aldisert noted. The evidence also showed that a midrange arbitrator in Western Pennsylvania charges approximately $250 an hour with a $2,000-per-day minimum, Aldisert noted. Although Spinetti was earning $63,000 a year when employed by SCI, she was unemployed for six months following her termination. When she found new employment, she says, she was earning less than $300 per week while her monthly expenses for food and rent totaled approximately $2,000. As a result, Aldisert said, Ambrose correctly determined “that Spinetti has adequately demonstrated that the costs associated with arbitrating her claims are prohibitive.” Aldisert found that Ambrose was also correct in severing the offensive terms in the arbitration agreement in order to salvage it. “Pennsylvania law supports the actions of the district court in referring Spinetti’s employment discrimination dispute to arbitration and striking the agreement’s illegal provisions,” Aldisert wrote. “Under Pennsylvania law, a court of equity may not only remove an offensive term, but may supply a new, limiting term and enforce the covenant so modified.”

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