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Massage Therapy School's Arbitration Provision Would Preclude Student's Pursuit of FLSA Claims: Tenth Circuit
Practical Law Legal Update w-001-1668 (Approx. 6 pages)
Massage Therapy School's Arbitration Provision Would Preclude Student's Pursuit of FLSA Claims: Tenth Circuit
by Practical Law Labor & Employment
| Published on 12 Jan 2016 • USA (National/Federal) |
In Nesbitt v. FCNH, Inc., the US Court of Appeals for the Tenth Circuit declined to enforce an arbitration agreement signed by a massage therapy school student that would have effectively prevented her from vindicating her right to seek unpaid wages under the Fair Labor Standards Act (FLSA).
On January 5, 2016, in Nesbitt v. FCNH, Inc., the US Court of Appeals for the Tenth Circuit declined to compel arbitration in a massage therapy school student's wage case because the arbitration agreement signed by the student would have effectively prevented her from vindicating her FLSA rights. The Tenth Circuit found the arbitration agreement invalid because it incorporated by reference commercial arbitration rules that would require the plaintiff student to bear her own costs in arbitration and half of the arbitrator's fees by default. These provisions would dissuade the student from pursuing her claims in arbitration and fell short of providing her protections and rights afforded by the FLSA. ( (10th Cir. Jan. 5, 2016).)
Background
Rhonda Nesbitt enrolled at a massage therapy school in Colorado where she and other students sometimes provided massage therapy services to clients for no pay. When she enrolled in the school, Nesbitt signed an enrollment document containing an arbitration agreement providing that any claims between her and the school would be subject to arbitration in accordance with the American Arbitration Association's (AAA) Commercial Rules (which provide that the parties must split the arbitrator's fees) and the Federal Arbitration Act (FAA). The agreement also provided that:
- Each party would bear its own arbitration-related expenses, including legal fees and preparation of witnesses and experts.
- It limited the parties' rights to certain remedies and forms of relief.
- Nesbitt could opt-out of the agreement by mailing a signed rejection notice.
- No claims could be arbitrated or litigated on a class or multi-student basis.
Nesbitt did not exercise her opt-out right.
In April 2014, Nesbitt sued the school in US district court alleging that she and other students were entitled to minimum wage and overtime pay under the FLSA and Colorado wage and hour law for the time they spent performing massage therapy services on the school's behalf for private clients. The school moved to compel arbitration.
The district court denied the school's motion to compel arbitration, finding that the provision in the arbitration agreement requiring Nesbitt to bear her own expenses in arbitration and the provision requiring that the arbitration be conducted in accordance with the AAA's Commercial Rules violated Nesbitt's FLSA rights. The school appealed.
Outcome
The Tenth Circuit affirmed the district court's denial of the school's motion to compel arbitration holding that:
- The school's arbitration agreement was unenforceable because it effectively precluded Nesbitt from vindicating her right to bring an action against the school for unpaid wages under the FLSA and Colorado law.
- An arbitration agreement is invalid if it imposes substantial costs on an employee that limit the employee's access to the arbitral forum and effectively prevent an employee from vindicating statutory rights.
The Tenth Circuit noted that:
- Generally, Section 2 of the FAA provides that agreements to arbitrate will be enforced unless, under the "savings" clause, contract revocation grounds apply such as unconscionability, fraud or duress (9 U.S.C. § 2; AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)).
- The effective vindication exception to the FAA may invalidate an otherwise enforceable arbitration agreement if the agreement functions as a waiver to a party's right to pursue statutory remedies and vindicate statutory rights, including by imposing arbitration-related fees that make it impracticable for a party to pursue arbitration (Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304, 2310 (2013); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985)).
- The Tenth Circuit recognized the effective vindication exception with an employment-related arbitration agreement in which the employee was required to pay half of the arbitrator's fee and could not afford it. The Tenth Circuit viewed the employee plaintiff as having no meaningful choice because he was prohibited from pursuing his claims in a judicial forum where there was potentially no litigation cost (if he retained an attorney on a contingency basis), while at the same time could not afford to take his claims to arbitration. (Shankle v. B-G Maint. Mgmt. of Colo., Inc., 163 F.3d 1230, 1233–35 (10th Cir. 1999).)
- A party seeking to invalidate an arbitration agreement on the ground that arbitration would be too expensive must meet the burden of showing that those costs would likely be incurred (Green Tree Fin. Corp.- Alabama v. Randolph, 531 U.S. 79 (2000)).
The Tenth Circuit relied on Shankle and found that Nesbitt satisfied the Green Tree burdens because:
- The unexercised opt-out provision in Nesbitt's arbitration agreement might have shown that Nesbitt signed the agreement voluntarily, but it did not prevent Nesbitt from meeting her burden on the effective vindication issue. Under Green Tree, the exception can apply even when the parties voluntarily agree to arbitrate. (531 U.S. at 90.)
- The possibility that the AAA's Commercial Rules fee-waiver provision for parties in financial need might apply did not prevent Nesbitt from showing that the effective vindication exception applied because Nesbitt would:
- be at the mercy of the arbitrator's discretion, and that does not equate to the rights she would have when litigating her claims under the FLSA and Colorado's wage and hour laws; and
- likely not want to risk advancing hefty arbitration costs at the outset of arbitration based only on the possibility that an arbitrator might later order her to be reimbursed. (Shankle, 163 F.3d at 1234, Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 665 (6th Cir. 2003).)
The court did not rule on whether the arbitration agreement:
- Was entirely unenforceable as a contract of adhesion under Section 2 of the FAA's savings clause.
- Violated the NLRA, as Nesbitt separately alleged.
Practical Implications
The Tenth Circuit's decision in Nesbitt applies the effective vindication exception to an arbitration agreement that provided for an employee to bear her own arbitration-costs and applied fee shifting rules that did not put the plaintiff employee on equal footing as the FLSA. At least one circuit court has found an employer should not be able to obtain dismissal of a wage and hour action and compel arbitration of those statutory employment claims using an arbitration agreement rooted in the AAA's commercial arbitration rules in part because of the fees and costs associated with arbitration under those rules. Employers in the Tenth Circuit may find it difficult to preclude an employee from litigating statutory employment claims using an arbitration agreement that requires employees to bear their own costs and split arbitration fees and costs with the employer, even if employees voluntarily enter the arbitration agreement.
The EEOC and DOL filed amicus briefs in this case. Other circuits likely will be informed of this court's effective vindication doctrine analysis in future employment litigation.