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If an arbitration agreement is “permeated” with illegal terms that unfairly favor an employer over its workers, a court cannot cure the problems by severing the illegal provisions, but instead must strike it down and allow the workers to pursue their claims in court, a divided panel of the 3rd U.S. Circuit Court of Appeals has ruled. In Alexander v. Anthony Crane International, the court found that two construction workers should not be forced to arbitrate their claims of race discrimination because the arbitration agreement they signed was presented on a “take-it-or-leave-it” basis, giving them no opportunity to negotiate; contained a strict 30-day limitations period; severely limited the relief they could seek; and included a “loser pays” provision that shifts all costs to a worker whose claim is rejected. “We cannot give effect to an agreement to arbitrate afflicted by so much fundamental and pervasive unfairness,” Senior U.S. Circuit Judge Robert E. Cowen wrote. Cowen said he recognized that the 3rd Circuit recently held in Spinetti v. Service Corp. International that an arbitration agreement with two illegal terms should be enforced with the illegal provisions severed. In Spinetti, Cowen said, the court commented: “you don’t cut down the trunk of a tree because some of its branches are sickly.” Working with the same analogy, Cowen found that the numerous illegal provisions in Anthony Crane’s arbitration agreement amounted to a diseased tree that could not be saved. “The cumulative effect of so much illegality prevents us from enforcing the arbitration agreement. Because the sickness has infected the trunk, we must cut down the entire tree,” Cowen wrote in an opinion joined by U.S. Circuit Judge Theodore A. McKee Jr. But a dissenting judge said that while she agreed that several of the provisions of the arbitration agreement were illegal and “unconscionable,” she disagreed with the majority’s decision to strike the entire agreement, and instead would have allowed the lower court to decide if the unenforceable provisions were severable. “The issue for purposes of severability analysis is not the number of unenforceable provisions, but rather whether those provisions go to the central purpose of the agreement,” U.S. Circuit Judge Jane R. Roth wrote. Roth complained that Cowen’s analysis was flawed because he relied on the “extent to which the four provisions are unfair in deciding not to sever them from the rest of the contract.” That reasoning, Roth said, “improperly blurs the issue [of] whether the four provisions are unenforceable and the issue [of] whether the provisions are severable if they are unenforceable.” The degree of unfairness, Roth said, is irrelevant to the question of severability. Picking up on Cowen’s tree analogy, Roth said she would hold that “since the sickly branches will be removed, it does not matter how sick the branches are, so long as they have not infected the trunk.” The plaintiffs in the suit, Blaise Alexander and Gerald Freeman, are construction workers who worked for more than 20 years as heavy equipment and certified crane operators at the Hess oil refinery on St. Croix in the U.S. Virgin Islands. In 1996, Hess awarded a contract to Anthony Crane International to operate the equipment, and workers were soon told in an orientation meeting that they would have to sign a contract that included an arbitration clause as a condition of employment. Cowen found that the workers “had no opportunity to negotiate or otherwise reject its specific terms.” The arbitration clause provided that the “losing party shall bear the costs of the arbitrator’s fees and expenses.” Cowen found that although Anthony Crane agreed to advance the arbitrator’s fees and expenses, it also took the position that if it prevailed in the proceeding, the employee would be bound to provide reimbursement. And even if the worker won, Cowen found, the arbitration clause stated that each side would pay its own attorney fees. The arbitration clause also required workers to file a complaint within 30 days “of the event which forms the basis of the claim.” Cowen found that “the 30-day limitations period … is clearly unreasonable and unduly favorable to Anthony Crane.” The arbitration clause also strictly limited the remedies available to a worker, stating that the arbitrator would have the power to award only “net pecuniary damages and/or reinstatement” and specifically excluded any “incidental or consequential damages” or punitive damages. Cowen found that the terms of the arbitration agreement were “unconscionable” because they offered workers much less than they would get in court under Virgin Islands law. “These restrictions are one-sided in the extreme and unreasonably favorable to Anthony Crane,” Cowen wrote. “They prevent an employee from recovering not only his or her attorney’s fees but also such potentially significant relief as punitive damages. An employee therefore is not entitled to complete compensation for any harm done and the company is able to evade full responsibility for its actions,” Cowen wrote. In a footnote, Cowen responded to Roth’s dissent. “We agree that a district court should ordinarily be accorded the opportunity to rule on the issue of severance based on a sufficiently developed record. But, under the circumstances of this case, no reasonable finder of fact could conclude that severance is appropriate,” Cowen wrote. “We are confronted with a procedurally unconscionable agreement containing multiple unreasonable terms. Unconscionability accordingly permeates the essence of this contract. The invalidation of the 30-day time restriction, the limitations on the recovery of damages and attorney’s fees, and the ‘loser pays’ provision leaves little of any substance in the agreement between plaintiffs and their former employer. This agreement cannot be redeemed by permitting further District Court proceedings and the development of a more extensive record,” Cowen wrote. In their suit, Alexander and Freeman alleged that Anthony Crane discriminated against black workers by paying white workers higher wages for the same work. They also alleged that workers were told at a September 1996 meeting that the company would not recognize seniority and that no “old men” would be filling crane operator positions. Alexander claimed he was required to take a “qualification test” to keep his job and was given no warning or an opportunity to prepare. He claimed that only certain older, black employees were required to take the test, and that he was fired when he did not perform well on it. Freeman claimed he was told that he was being laid off at the age of 59 because of a work reduction, but that the company retained younger, white employees with less experience and fewer qualifications. When Freeman allegedly discovered that Anthony Crane was still hiring crane operators, the company informed him that no work was available, the suit alleged.

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