April 21, 2019

Tenth Circuit: Arbitration Agreement Requiring Parties to Pay Own Costs Prohibitive to Plaintiff

The Tenth Circuit Court of Appeals issued its opinion in Nesbitt v. FCNH, Inc. on Tuesday, January 5, 2016.

Rhonda Nesbitt was a student at the Denver School of Massage Therapy (DSMT), and as such was required to provide massage therapy services to the public without compensation. Nesbitt filed a class action against DSMT’s parent companies (defendants) in April 2014, alleging that the students were effectively acting as employees in providing services to the public and, as such, were entitled to compensation under the Fair Labor Standards Act and wage and hour laws. Defendants moved the district court to stay the proceedings and compel arbitration pursuant to the arbitration agreement contained in plaintiffs’ student contract. The district court denied defendants’ motion, noting that although the agreement was not unconscionable, it effectively precluded Nesbitt from pursuing her claims because the cost of arbitration was prohibitive. The district court determined that because the arbitration agreement contained no savings clause, the entire agreement was unenforceable. Defendants filed an interlocutory appeal.

The Tenth Circuit first determined that the dispute was governed by the Federal Arbitration Act (FAA), and discussed the effective vindication exception, where plaintiffs are effectively prohibited from pursuing their claims because the prohibitive cost limits use of the arbitral forum. In this case, defendants argued that Nesbitt failed to carry her burden to show that arbitration would be prohibitively expensive. The Tenth Circuit disagreed. The Tenth Circuit found Nesbitt’s argument persuasive that the possibility of fee-shifting later in the arbitration is not the same as FLSA protection. The Tenth Circuit also rejected the defendants’ arguments that the arbitration agreement was silent as to fees and costs, noting it explicitly invoked the American Arbitration Association’s Commercial Rules, which address the allocation of fees and costs. The Tenth Circuit concluded that forcing an employee to pay for arbitration with the mere possibility of future reimbursement constituted prohibitive costs.

The Tenth Circuit affirmed the district court.

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