By Kathleen Kapusta, J.D. A massage therapy student does not have to arbitrate her claims that by requiring her and other students at the for-profit occupational school in which she was enrolled to provide massage therapy services to clients without pay, the school violated the FLSA and various Colorado wage and hour laws, ruled the Tenth Circuit. Affirming the district court’s order denying the school’s motion to stay proceedings and compel arbitration, the appeals court rejected the argument that the student’s ability to opt out of the school’s arbitration agreement prevented her from invoking the FAA’s “effective vindication exception.” The arbitration agreement was also ambiguous regarding the availability of a fee award for the student (Nesbitt v. FCNH, Inc., January 5, 2016, Briscoe, M.). The defendants own and operate for-profit occupational schools providing education in massage therapy and/or esthetics. The schools also provide personal services to the public for fees, which are performed by students who are not compensated for their labor. Arbitration agreement. Alleging that she and other students at the schools were effectively acting as employees in providing services to the public and were entitled under the FLSA and state law to minimum and/or overtime wages, the student filed a purported class action. Because she executed an arbitration agreement when she enrolled, the defendants moved to stay proceedings and compel arbitration. The district court denied the motion. Effective vindication exception. Federal courts have recognized an “effective vindication exception” to the FAA, which originated in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., where the Supreme Court expressed a willingness to invalidate, on public policy grounds, arbitration agreements that operate as a prospective waiver of a party’s right to pursue statutory remedies. Citing the Court’s subsequent decision in Green Tree Fin. Corp.-Alabama v. Randolph, the school argued that the student failed to show that arbitration would be prohibitively expensive. In Green Tree, the Court acknowledged that “the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating her federal statutory rights in the arbitral forum,” but it emphasized that the party seeking to invalidate an arbitration agreement because of prohibitive expensive bears the burden of showing the likelihood of incurring such costs. Opt-out provision. The school argued that because the student could have opted out of the arbitration clause and still enrolled in school, she did not meet her burden on the effective vindication issue. Reading Green Tree as implying that the exception can apply even where both parties voluntarily agree to arbitrate any claims that might arise between them, the Tenth Circuit observed that the availability of an opt-out clause is relevant only to the threshold question of “whether the parties agreed to submit their claims to arbitration” and does not impact the availability of the exception. Deferred or reduced costs. Also rejected was the assertion that the student failed to satisfy her burden because she did not pursue the possibility of deferred or reduced arbitration fees. While the school argued that the American Arbitration Association’s Commercial Rules include fee-waiving capabilities for parties in financial need, suggesting there was no way to determine what costs she actually would have incurred in arbitration, the court explained 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.” No misinterpretation. The school argued that the district court should have interpreted the agreement’s “silence” regarding the allocation of arbitration fees and costs to eliminate the potential for burdensome fees by requiring the defendants to bear those costs. While the agreement did not expressly mention arbitration fees and arbitrator costs, it did invoke the AAA’s Commercial Rules, including its rules on fees and expenses, noted the court; thus, the agreement was not “silent” on the issue of fees and costs. Although the school contended that the lower court’s assertion that the arbitration agreement precluded an arbitrator from awarding attorneys’ fees at the conclusion of a successful FLSA claim was unsupportable, the agreement provided in pertinent part that each party would bear the expense of its own counsel. Without question, the student would be required to bear, at least initially, her own attorneys’ fees. What was less clear was whether this provision could be overridden by other portions of the agreement. The agreement was internally inconsistent and ambiguous regarding the availability of a fee award, the court pointed out. On the one hand, the agreement said each party would bear its own fees, and remedies and forms of relief available in court could be limited by the agreement. On the other hand, it incorporated both the applicable substantive law (here the FLSA) and the AAA’s Commercial Rules, which would appear to authorize the arbitrator, should the student prevail, to include fees in the award. All of this, said the court, suggested that it was “unlikely that an employee in [the plaintiff’s] position, faced with the mere possibility of being reimbursed for arbitrator fees in the future, would risk advancing those fees in order to access the arbitral forum.”
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