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By Kevin P. McGowan
An airport shuttle driver in Baltimore who worked under a franchise agreement with Shuttle Express Inc. must arbitrate his Fair Labor Standards Act and state law wage claims against the company despite a class action waiver in the agreement's arbitration clause, the U.S. Court of Appeals for the Fourth Circuit ruled April 1 (Muriithi v. Shuttle Express Inc., 4th Cir., No. 11-1445, 4/1/13).
A federal district court in Maryland had ruled Samuel Muriithi could not be compelled to arbitrate his federal and state statutory claims against Shuttle Express because the class action waiver, in conjunction with a fee-splitting provision and a one-year limitations period on any claims under the franchise agreement, rendered the arbitration unconscionable and therefore unenforceable.
But the Fourth Circuit said the U.S. Supreme Court decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (81 DLR AA-1, 4/27/11), in which the court ruled the Federal Arbitration Act preempted a state rule requiring the availability of classwide arbitration, also means a class action waiver does not render unenforceable an otherwise valid arbitration agreement.
“[C]ontrary to Muriithi's contention, the Supreme Court's holding was not merely an assertion of federal preemption, but also plainly prohibited application of the general contract defense of unconscionability to invalidate an otherwise valid arbitration agreement under these circumstances,” Judge Barbara Milano Keenan wrote.
“The district court in the present case, deciding the same issue of unconscionability prior to Concepcion, reached the opposite conclusion,” the Fourth Circuit said. “Accordingly, we conclude that the district court erred in holding that the class action waiver was unconscionable.”
The Supreme Court in Concepcion did not mention its precedent in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 84 FEP Cases 769 (2000) (239 DLR AA-1, 12/12/00), in which the court said a claimant must prove the likelihood of prohibitive arbitration costs in order to invalidate an arbitration pact on grounds it would effectively prevent him from pursuing an underlying statutory claim in arbitration, the Fourth Circuit said.
Nothing in Concepcion indicates the court was overturning Green Tree by implication, the appeals court added.
“A fee-splitting provision can render an arbitration agreement unenforceable if, under the terms of the provision, an aggrieved party must pay arbitration fees and costs 'that are so prohibitive as to effectively deny the employee access to the arbitral forum,' ” the Fourth Circuit said.
The appeals court said it analyzes “prohibitive costs” on a case-by-case basis, focusing on factors including the fees and costs of arbitration, a claimant's ability to pay, the value of the underlying claim, and the difference in costs between arbitration and litigation.
In this case, Muriithi failed to meet his “substantial evidentiary burden” of showing a likelihood of incurring prohibitive arbitration costs that effectively would prevent him from pursuing his FLSA and state law wage claims in that forum, the Fourth Circuit said.
Judges Andre M. Davis and John A. Gibney joined in the decision.
Muriithi alleged Shuttle Express misled him regarding the compensation he would receive and that in April 2007, the company induced him to sign a unit franchise agreement with Shuttle Express. Under that agreement, Shuttle Express improperly classified Muriithi as an “independent contractor” or “franchisee” when he actually was an “employee,” Muriithi alleged.
In 2010, Muriithi sued under the FLSA, arguing that as a Shuttle Express employee, he was entitled to compensation of at least the minimum wage and to overtime pay. He sought to pursue an FLSA collective action on behalf of similarly situated drivers also improperly classified as franchisees and independent contractors by Shuttle Express. Muriithi asserted claims under the Maryland Wage and Hour Law on behalf of a class of Shuttle Express drivers.
Pursuant to the franchise agreement, which included a clause requiring arbitration of “any controversy arising out of this agreement,” Shuttle Express moved to dismiss Muriithi's complaint or to compel arbitration under the Federal Arbitration Act.
The district court found Muriithi's FLSA and Maryland law claims “arise out of” the franchise agreement and therefore fell within the scope of disputes covered by the parties' agreement to arbitration. But in a decision handed down before the Supreme Court decided Concepcion, the district court ruled the arbitration clause was unenforceable because of the class action waiver, the fee-splitting provision, and the one-year limitations period for bringing all claims arising under the franchise agreement.
The district court said the class action waiver and fee-splitting provision operate together to “prevent [Muriithi] from fully vindicating [his] statutory rights.” If the franchise agreement fully prohibits class actions in arbitration and in court, “the realistic alternative would be that no individual suits are brought given that the costs of each individual arbitration [have] the potential to exceed any recovery,” the district court said.
It therefore ruled Muriithi could not be compelled to arbitrate and declined to dismiss his FLSA and state law claims. Shuttle Express appealed to the Fourth Circuit.
“The issue whether a dispute is arbitrable presents primarily a question of contract interpretation, requiring that we give effect to the parties' intentions as expressed in their agreement,” Keenan wrote. “Any uncertainty regarding the scope of arbitration issues agreed to by the parties must be resolved in favor of arbitration.”
The district court identified the class action waiver contained in the franchise agreement's arbitration clause as “one factor preventing Muriithi from fully vindicating his statutory rights,” the appeals court observed.
The Fourth Circuit credited Shuttle Express's argument on appeal the district court's refusal to enforce the class action waiver as unconscionable is “directly at odds” with the Supreme Court's later decision inConcepcion.
Muriithi argued Concepcion is “limited in scope” to Federal Arbitration Act preemption of state law regarding whether class actions waivers are unconscionable and therefore does not apply to his suit asserting FLSA collective claims.
But the Fourth Circuit said the Supreme Court's holding in Concepcion “sweeps more broadly than Muriithi suggests.”
“In Concepcion, the Supreme Court cautioned that the generally applicable contract defense of unconscionability may not be applied in a manner that targets the existence of an agreement to arbitrate as the basis for invalidating that agreement,” Keenan wrote. “Applying that principle to the [California state] 'rule' at issue, the court explained that state law cannot 'stand as an obstacle to the accomplishment of the FAA's objectives' by interfering with 'the fundamental attributes of arbitration.' ”
The Fourth Circuit previously has said Concepcion bars courts from “altering otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures,” Keenan wrote, citing Noohi v. Toll Brothers Inc., 2013 BL 50544 (4th Cir. 2013).
The appeals court therefore ruled that even though Muriithi's case involved no state law prohibitions on class action waivers, Concepcion still applies and the district court erred by holding the arbitration clause unenforceable because it precludes class actions.
Shuttle Express argued the district court erred in addressing the issue at all, as the limitations period is not part of the arbitration clause but rather appears elsewhere in the franchise agreement. Any challenge to the limitations period provision must wait until the entire contract is considered by the arbitrator, the company argued.
The Fourth Circuit agreed that on a motion to compel arbitration, the district court should consider only challenges specific to the arbitration clause and not rule on the validity of a general limitations period located elsewhere in the agreement.
“Moreover, the language of this provision does not overlap in any substantive manner with the language of the arbitration clause, such as directing the parties to a different forum depending on when their claim was raised,” Keenan wrote.
“[T]he one-year limitations period discretely answers the question when any claim under the franchise agreement must be brought, whereas the arbitration clause is silent on that issue and instead addresses the proper forum where such claims under the franchise agreement must be brought,” the court said.
General contract defenses applicable to the entire agreement, such as the one-year limitations period, are “reserved for the forum in which the dispute ultimately will be resolved,” the arbitrator in this case, the court concluded.
John M. Singleton Sr. in Lutherville, Md., represented Muriithi. Christopher A. Parlo and Melissa C. Rodriguez in New York and Russell R. Bruch in Washington, D.C., all with Morgan Lewis & Bockius, represented Shuttle Express.
Text of the opinion is available at http://www.bloomberglaw.com/public/document/Samuel_Muriithi_v_Shuttle_Express_Inc_Docket_No_1101445_4th_Cir_M.
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