Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—4thCir: Class Action Waiver, Arbitration Fee-Splitting Clause, Contractual Limitations Period Were Not Unconscionable, (Apr 2, 2013)

By John W. Arden, J.D., LL.M.

A class action waiver, an arbitration clause requiring the splitting of arbitration fees, and a one-year limitations period contained in a Shuttle Express franchise agreement were not unconscionable, rendering the agreement’s arbitration clause unenforceable, according to the U.S. Court of Appeals in Richmond, Virginia (Muriithi v. Shuttle Express, Inc., April 1, 2013, Keenan, B.). A district court’s findings of unconscionability and refusal to enforce the arbitration clause were vacated, and the case remanded for an order compelling arbitration.

Samuel Muriithi, a driver providing ground transportation to and from the Baltimore-Washington International Thurgood Marshall Airport, signed a Shuttle Express franchise agreement in April 2007. He later alleged that Shuttle Express misled him about the compensation he would earn, inducing him to sign the franchise agreement, and improperly classified him as an independent contractor or “franchisee” rather than an “employee” entitled to receive the minimum wage and overtime pay.

Muriithi brought a collective action in the federal district court in Greenbelt, Maryland against Shuttle Express under the Fair Labor Standards Act (29 U.S.C. §§201 through 219) and various Maryland state laws, including the Maryland Wage and Hour Law and the Maryland Franchise Registration and Disclosure Law. Shuttle Express moved to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure or to compel arbitration under the Federal Arbitration Act.

The franchise agreement contained an arbitration clause providing that “any controversy arising out of this Agreement shall be submitted to the American Arbitration Association at its offices in or nearest to Baltimore, Maryland, for final and binding arbitration in accordance with its commercial rules and procedures which are in effect at the time the arbitration is filed.” The clause further stated that “parties shall bear their own costs, including without limitation attorney’s fees, and shall bear one-half (1/2) of the fees and costs of the arbitrator” and required that “any arbitration, suit, action or other legal proceeding shall be conducted and resolved on an individual basis only and not on a class-wide, multiple plaintiff, consolidated or similar basis.” The agreement also included a one-year limitations period for “any arbitration, suit, action or other proceeding relating to this Agreement . . .”

In considering Shuttle Express’ motion to compel arbitration, the federal district court first addressed whether Muriithi’s claims fell within the scope of the arbitration clause. The court held that the Fair Labor Standards Act and Maryland law claims arose out of the franchise agreement and therefore fell within the scope of disputes covered by the arbitration clause. The court further concluded, however, that the arbitration clause was unenforceable based on three unconscionable provisions.

First, the district court held that the fee-splitting provision made the cost of arbitration “so prohibitively expensive as to deter arbitration” at Muriithi’s request. Second, the court held that the class action waiver and the fee-splitting provision operated together to prevent Muriithi from fully vindicating his statutory rights. Third, the court concluded that the one-year limitations provision operated to prevent Muriithi from vindicating his statutory rights because the Fair Labor Standards Act afforded him at least two years in which to assert his claims. Because the arbitration clause was “so permeated by substantively unconscionable provisions,” it could not be remedied by severing the unconscionable parts, according to the court. Thus, the court denied the motion to compel arbitration. Shuttle Express appealed this ruling.

On appeal, Shuttle Express argued that (1) a class action waiver is not unconscionable under the U.S. Supreme Court’s holding in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011); (2) Muriithi failed to establish that he would incur prohibitive arbitration costs under the fee-splitting provision; and (3) the district court erred in holding that a one-year limitations provision is unconscionable.

Federal Arbitration Act. According to the Federal Arbitration Act (FAA), arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or equity for the revocation of any contract,” the appeals court stated. The court shall apply ordinary state law principles to determine validity, revocability, or enforcement of contracts generally. Any uncertainty regarding the scope of arbitrable issues agreed to by the parties must be resolved in favor of arbitration.

Scope of arbitration agreement. The appeals court agreed with the district court that Muriithi’s claims under the Fair Labor Standards Act, the Maryland Wage and Hour Law, and the Maryland Franchise Registration and Disclosure Law plainly arose out of the franchise agreement and therefore fell within the scope of the arbitration clause.

Class action waiver. Shuttle Express argued that the district court’s refusal to enforce the class action waiver was “directly at odds” with the Supreme Court’s decision in Concepcion, which held that requiring the availability of classwide arbitration interfered with the fundamental attributes of arbitration and created a scheme inconsistent with the Federal Arbitration Act. In response, Muriithi maintained that the decision in Concepcion was limited in scope to the FAA’s preemption of state law on the issue of arbitration agreements.

The appeals court disagreed with Muriithi, holding that the Supreme Court warned against state law standing as an obstacle to the accomplishment of the FAA’s objectives by interfering with the fundamental attributes of arbitration. Concepcion prohibits courts from altering otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures, the court held. The district court erred in deciding that class action waiver was unconscionable.

Fee-splitting provision. Shuttle Express argued that Muriithi did not meet the burden of showing prohibitive costs under the fee-splitting provision, since he did not present sufficient evidence of (1) the cost of arbitration, (2) his ability to pay, and (3) the difference in cost between arbitration of his dispute and litigation. Muriithi contended that the projected costs of arbitrating his dispute rendered the franchise agreement unenforceable because it would always cost more to enforce the agreement than to ignore clear violations when a party’s damages do not substantially exceed the expected cost of the proceedings. The appeals court disagreed with Muriithi’s arguments.

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 him or her access to the arbitral forum. The party seeking to invalidate an arbitration agreement on this basis bears the substantial burden of showing a likelihood of incurring prohibitive costs. Muriithi did not meet his substantial burden. He did not even establish the most basic element of this challenge—namely, the costs of arbitration. Muriithi further did not provide evidence of the value of his claim, a critical factor in “prohibitive cost” analysis.

One-year limitations period. A party challenging the enforceability of an arbitration clause under the Federal Arbitration Act must rely on grounds that relate specifically to the arbitration clause and not to the contract as a whole, the Fourth Circuit held. In this instance, the one-year limitations provision was not referenced in the arbitration clause, but was applicable generally to the franchise agreement. Moreover, the language of the limitations period did not overlap in any substantive manner with the language of the arbitration clause, answering the question of when a claim must be brought rather than where a claim must be brought.

The case is No. 11-1445.

Attorneys: Christopher A. Parlo (Morgan Lewis & Bockius, LLP) for Shuttle Express, Inc. John Michael Singleton, Sr. for Samuel D. Muriithi.

Companies: Shuttle Express, Inc.

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