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Are high arbitral fees grounds for voiding a fee-splitting provision? A divided NY appellate court reviews US Supreme Court decisions and answers "Yes".
A frequent complaint of franchisee counsel (and others) is that the arbitration process is significantly more expensive than litigation, and may render the arbitral remedy an illusory one (franchisor trade lobbyists disagree).
In Brady v. Williams Capital Group (April 30, 2009), the Appellate Division First Department analyzes current federal and state case law in holding that a fee-splitting provision may be violative of public policy.
In a lengthy split decision, the majority and dissent spar over the standard for making such a decision and how much proof must be tendered by the party seeking to avoid paying the arbitration fee.
Lorraine Brady was a bond saleswoman fired by her employer Williams Capital after a 5-year employment during which her commission-based compensation varied between $100K to $400K. After making $204,691 during the year prior to her termination, she objected to a bill from the AAA demanding that she pay her portion ($21,150 as being one half of the $42,300 total) of the AAA fees before the AAA would proceed with the arbitration.
The majority began with Gilmer v. Interstate/Johnson Lane Corp standing for the proposition that "The Supreme Court has made clear that arbitration agreements are only enforceable 'so long as the prospective litigant effectively may vindicate...statutory cause of action in the arbitral forum'" and proceeds to note that in Green Tree v. Randolph the US Supreme Court noted that "the existence of large arbitration costs could preclude a litigant...from effectively vindicating her statutory rights in the arbitration forum."
The majority is dismissive of the dissent's uncertainty as to the higher costs of arbitration (as opposed to litigation):
The dissent attempts to minimize the effect of such high cost by making us believe that the alternative litigation cost would be much higher. We cannot agree. It is common knowledge that an employee filing an employment discrimination claim in the federal courts must pay a minimal filing fee, generally only a few hundred dollars. Also, the costs of maintaining and operating the court system, including the salaries of judges and other employees, are borne by the taxpayers, not the litigants themselves...her attorneys may be likely to take the case on a contingency fee basis...if the employee's suit is successful, the remedies available under federal...legislation include the award of attorney's fees. Thus, in general, it cannot be disputed that the out-of-pocket expenses for an employee filing a legal suit are minimal. [emphasis added]
The dissent cited Bradford v. Rockwell Semiconductor (4Cir. 2001) as noting that arbitration may be less expensive due to shorter proceedings and limited ability to appeal the arbitral decision; the dissent also says:
I have no idea whether the alternative litigation costs would be higher, let alone much higher...the majority's assertion of the ostensible 'fact' that [the employee] would incur a 'substantial arbitration cost relative to litigation' is pure ipse dixit.
This 3-2 decision is one which may give guarded optimism to franchisees. Although it takes place in the employment context and not a B-to-B context such as a franchise agreement, the employee in this case was a sophisticated and well-paid bond trader who had earned significant sums for the 5-year period preceeding her termination.
At the present time, it is not known whether the decision will go up to the NY Court of Appeals.