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By Kevin McGowan
Jan. 6 — A massage school student alleging federal and state law violations because she wasn't paid for massage therapy services for which the school charged customers doesn't have to arbitrate her wage and hour claims, the U.S. Court of Appeals for the Tenth Circuit ruled Jan. 5.
Affirming the denial of arbitration to FCNH Inc. and affiliated companies that operate 31 for-profit occupational schools nationwide, the Tenth Circuit said Rhonda Nesbitt couldn't effectively vindicate her rights under the Fair Labor Standards Act and Colorado's state wage law if she were forced into individual arbitration.
The agreement, which incorporated the American Arbitration Association's commercial arbitration rules, would require Nesbitt to share in paying the arbitrator's fees and pay her own legal costs even if she prevailed in arbitration.
The ruling means Nesbitt can go to court on her claims that the students are employees legally entitled to wages when they perform services for clients who pay the school. It also puts meat on the bones of a U.S. Supreme Court doctrine that arbitration can't be enforced if it prevents the “effective vindication” of statutory rights.
Nesbitt testified the arbitration agreement imposed financial burdens she couldn't afford. The Federal Arbitration Act sets a national policy in favor of arbitration, but the court said this pact can't be enforced because it effectively would prevent Nesbitt from pursuing her statutory rights.
FCNH argued an opt-out provision that allowed students to stay enrolled but decline arbitration saved the agreement. It also argued an arbitrator could decide to defer or reduce fees for low-income parties such as Nesbitt.
But the mere possibility an arbitrator may defer or reduce fees isn't equivalent to the FLSA's protections and isn't likely to induce a student/employee to risk advancing such fees, the court said.
The Labor Department and Equal Employment Opportunity Commission filed a joint amicus brief in the Tenth Circuit supporting Nesbitt. A prevailing plaintiff's right to attorneys' fees under the FLSA and other federal fee-shifting statutes is one that can't be waived in arbitration, the DOL and the EEOC had contended.
The court's decision is gratifying but “not a great surprise,” said David Miller of Sawaya & Miller Law Firm in Denver, who represented Nesbitt. The “effective vindication” exception has been an accepted part of arbitration law for about 30 years, he told Bloomberg BNA.
Nesbitt's evidence satisfied the elements the Supreme Court identified in Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 84 FEP Cases 769 (2000) (239 DLR AA-1, 12/12/00) for showing arbitration would be so expensive she effectively was denied access to the forum, Miller said.
In this case, Green Tree was the “controlling” precedent, as the Supreme Court there said if an arbitration agreement was structured so it conflicts with statutory law and prevents access for vindicating those rights, then arbitration can't be required, Miller said.
FCNH could seek review by the entire Tenth Circuit, Miller noted. If the company doesn't do so or the court denies en banc review, then Nesbitt will pursue her proposed FLSA collective action and class action on state law claims in district court, he said.
Attorneys for the company weren't available for comment Jan. 6.
When FCNH moved to compel arbitration of Nesbitt's statutory claims, she argued the arbitration provision, which was part of the student enrollment form, was unenforceable.
The U.S. District Court for the District of Colorado rejected Nesbitt's contention the arbitration agreement was procedurally unconscionable.
But the district court agreed with Nesbitt the provisions requiring each party to bear its own costs in arbitration effectively deprived her of FLSA rights. It accepted Nesbitt's estimate that she would incur between $2,320 and $12,487 in costs “simply paying for the arbitrator's time” and she couldn't afford to proceed under those circumstances.
The district court also concluded that requiring Nesbitt to bear her own legal costs even if she won at arbitration violated public policy because it was a “prospective waiver” of her FLSA right to attorneys' fees.
On appeal, the Tenth Circuit affirmed Nesbitt's case fits within the “effective vindication” exception to the Federal Arbitration Act, originally discussed in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).
More recently, the Supreme Court in American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013), said the doctrine “would certainly cover” an arbitration agreement forbidding the assertion of certain statutory rights and “would perhaps cover” a case in which arbitration fees are “so high as to make the forum impracticable.”
The court in Italian Colors ultimately ruled the plaintiff restaurants must take their antitrust claims to arbitration because they couldn't satisfy the “effective vindication” exception (119 DLR AA-1, 6/20/13).
Writing for the Tenth Circuit, Judge Mary Beck Briscoe said Nesbitt met her burden of showing arbitration of her individual claim would be “prohibitively expensive.”
FCNH argued Nesbitt couldn't meet her effective vindication burden because she could have opted out of arbitration when enrolling and still remained a student.
But the court said Supreme Court precedent indicates the “effective vindication” exception stands apart from the issue of whether the parties voluntarily agreed to arbitrate.
The effective vindication exception therefore “can apply even in situations where both parties voluntarily agreed, at the outset of their relationship, to arbitrate any claims that might arise between them,” the court said.
The availability of an opt-out clause is relevant only to the “threshold question” of whether the parties agreed to arbitrate and doesn't affect the effective vindication exception, the court said.
FCNH argued Nesbitt's failure to pursue deferred or reduced fees in arbitration prevents her from satisfying her burden on the effective vindication issue.
Absent such an attempt, there's no way to know if the arbitrator might have removed the alleged economic hurdle to Nesbitt's participation in the process, FCNH said.
“The problem with this argument, as Nesbitt convincingly notes, is that ‘being at the mercy' of the arbitrator's ‘discretion' as to whether to defer or reduce her share of the arbitration fees ‘is not the same as the protections of the FLSA,' ” Briscoe wrote. “And, indeed, both this court and others have rejected arguments similar to one now made by” FCNH.
FCNH said Nesbitt's failure to present any evidence about the cost of pursuing her class or collective action claims in federal court prevented the lower court from making a necessary comparison of arbitration and court costs.
But the Tenth Circuit said because FCNH failed to raise that argument below, it needn't be considered on appeal.
In any event, the argument lacks merit because Nesbitt and other FLSA plaintiffs in court are likely to be represented on a contingency-fee basis, meaning their lawyer would pay the filing fees and other litigation costs, the court said.
FCNH argued the district court could have interpreted the arbitration agreement's “silence” to require the company to bear the arbitration fees and costs and remove any burdens on Nesbitt.
But the Tenth Circuit said the agreement's reference to the AAA's commercial rules, which require fee-splitting, support the district court's interpretation the pact required Nesbitt to bear her own costs.
Judges Carlos F. Lucero and Carolyn B. McHugh joined in the decision.
Rachel Graves of Sawaya & Miller also represented Nesbitt. Todd Wozniak in Atlanta and Jeffrey M. Lippa in Denver, both of Greenberg Traurig LLP, and Scott D. Segal in Miami represented FCNH and the affiliated companies. Attorneys with the Labor Department and the EEOC in Washington represented those agencies as amicus.
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