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Brady v. Williams Capital Group

April 30, 2009


Petitioner appeals from an order and judgment (one paper) of the Supreme Court, New York County (Nicholas Figueroa, J.), entered July 13, 2007, denying the petition and dismissing the proceeding brought pursuant to CPLR article 78 to compel respondent American Arbitration Association to enter a default judgment against her former employer, respondent The Williams Capital Group, L.P., and, pursuant to CPLR 7503, to compel Williams to pay the arbitration fees.

The opinion of the court was delivered by: Renwick, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

David B. Saxe, J.P., John W. Sweeny, Jr., James M. McGuire, Dianne T. Renwick & Helen E. Freedman, JJ.

Index 114198/06

This dispute arises from an employment discrimination arbitration commenced by Lorraine C. Brady (Brady) against her former employer, The Williams Capital Group, L.P. (Williams) before the American Association Arbitration (AAA). The AAA cancelled the proceedings when Williams refused to pay the cost of arbitration pursuant to AAA rules. Such refusal was based on Williams's employee manual, which required the parties to equally share the arbitrator's compensation. As a result, Brady sought a court order compelling Williams to arbitrate in compliance with the AAA rules. Supreme Court denied the petition and this appeal ensued. The appeal raises two questions: first, whether the AAA's "employer pays" rule should supersede the "fee-splitting" provision of the parties' arbitration agreement with regard to the arbitrator's compensation; second, whether the fee-splitting arbitration provision should be invalidated as violative of public policy in this instance. We answer the first question in the negative and the second question in the affirmative.

Facts and Procedural Background

The material facts are not in dispute. Williams, an investment banking firm, hired Brady in January 1999 to work as a salesperson of fixed income securities. In or about January 2000, Williams adopted an employee manual signed by all employees as a condition of continued employment. The employee manual, requiring the arbitration of all disputes, contains a clause in which the employee and employer agree to equally share the fees and costs of the arbitrator. In addition, the arbitration agreement contains a provision that provides:

"The Company and I agree that, except as provided in this Agreement, any arbitrations shall be in accordance with the then-current Model employment Arbitration Procedures of the American Arbitration Association ( AAA') before an arbitrator who is licensed to practice law in the state in which the arbitration is convened ( the Arbitrator'). The arbitration shall take place in or near the city in which I am or was last employed by the Company."

Williams terminated Brady's employment on February 28, 2005. On December 22, 2005, Brady commenced an arbitration with the AAA against Williams claiming discriminatory termination in violation of state and federal law*fn1. On January 3, 2006, the AAA notified the parties that it had determined that the arbitration would be conducted consistent with an employer-sponsored plan*fn2. The applicable AAA rule provides:

"The parties shall be deemed to have made these rules part of their arbitration agreement whenever they have provided for arbitration by [AAA] or under its National Rules for the Resolution of Employment Disputes. If a party establishes that an adverse material inconsistency exists between the arbitration agreement and these rules, the arbitrator shall apply these rules."

By March 30, 2006, the parties had engaged in significant prehearing discovery. In accordance with its own "employer pays" rule, which requires the employer to pay the arbitrator's compensation, the AAA sent Williams a bill for $42,300, which represented the entire advance payment for the arbitrator's compensation. Williams refused to pay the entire advance payment of the arbitrator's compensation, and demanded that Brady pay half in accordance with the parties' arbitration agreement in the employee manual. Brady refused to make any payment.

In response to the dispute, the AAA advised the parties that Brady's position was accurate since its own rules regarding arbitration compensation superseded any agreement to the contrary. Specifically, the AAA explained:

"The Association has determined that this matter arises from an employer-promulgated plan. The parties' attention is drawn to Rule 1 ... which provides that ... if a party establishes that an adverse material inconsistency exists between the arbitration agreement and these rules, the arbitrator shall apply these rules.'"

After waiting for about five months for payment of the arbitrator's fee, the AAA cancelled the arbitration. Brady sought to revive the arbitration by commencing this article 78 proceeding seeking to compel Williams to pay the arbitrator's fee or to compel the AAA to enter a default judgment against Williams for failing to do so. Supreme Court, however, dismissed the article 78 petition in its entirety. First, the court reasoned that the parties' agreement, rather than the AAA rules, governed. Second, the court summarily rejected Brady's claim that her half share of arbitrator's compensation ($21,150) was prohibitively expensive due to the fact that she had been unemployed for 18 months since her termination. (For the year prior to her termination, 2004, Brady reportedly earned $204,691 in salary based on commissions*fn3. Instead, the court found that Brady's rights under the antidiscrimination statutes were not substantially impaired by the requirement that she pay half of the arbitrator's compensation.


This case involves a former employee seeking to compel a former employer to arbitrate*fn4. It is well settled that a court will not order a party to submit to arbitration absent evidence of "that party's unequivocal intent to arbitrate the relevant dispute" (Matter of Helmsley [Wien], 173 AD2d 280, 281 [1991]), and unless the dispute is clearly the type of claim that the parties agreed to refer to arbitration (Matter of Bunzl [Battanta], 224 AD2d 245, 246 [1996]). The threshold determination of "whether there is a clear, unequivocal and extant agreement to arbitrate" the disputed claims is to be made by the court and not the arbitrator (Matter of Primex Intl. Corp. v Wal-Mart Stores, 89 NY2d 594, 598 [1997]).


Williams does not dispute that a valid agreement to arbitrate exists between the parties. Nor does Williams deny that the dispute Brady seeks to arbitrate - whether her termination was discriminatory - falls within the scope of the arbitration agreement. Instead, Williams argues that it can only be compelled to arbitrate in accordance with the terms of the employment agreement, which requires the parties to equally share the cost of the arbitrator regardless of what the AAA rules says.

We resolve this conflict between the arbitration agreement and the AAA rules in favor of the arbitration agreement. Whether a fee-splitting clause in an arbitration agreement supersedes a contrary AAA rule presents a general issue of contract interpretation governed by New York law (see Credit Suisse First Boston Corp. v Pitofsky, 4 NY3d 149, 154 [2005]). "[A]rbitration is a creature of contract, and it has long been the policy of the State to interfere as little as possible with the freedom of consenting parties' in structuring their relationship" (id. at 155, quoting Matter of Siegel [Lewis], 40 NY2d 687, 689 [1976]).

As such, the parties control the scope of arbitration, the authority and selection of arbitrators, the choice of law, every aspect of the arbitration (see Matter of Salvano v Merrill Lynch, Pierce, Fenner & Smith, 85 NY2d 173, 182-183 [1995]). "[T]he court's role is limited to interpretation and enforcement of the terms agreed to by the parties; it does not include the rewriting of their contract and the imposition of additional terms" (id. at 182).

To read into the arbitration agreement the AAA rule that the "employer pays" the arbitrator's compensation would be to fundamentally modify the terms of the agreement and to force Williams to arbitrate in a manner contrary to the agreement to which it had assented. In the relevant portion of the arbitration agreement, the parties agreed to equally share the arbitrator's compensation. In another relevant portion, the parties agreed that any arbitration would be in accord with AAA rules, except as otherwise provided in the agreement. The provisions, read together, are clear and unambiguous as to the parties' intent to share the cost of the arbitrator's compensation.

We reject petitioner's argument that, regardless of the clear language of the agreement, the AAA compensation provision that the "employer pays" must prevail because the AAA rule in effect at the time of the arbitration provided that if "an adverse material inconsistency exists between the arbitration agreement and these rules, the arbitrator shall apply these rules." The arbitration agreement must take precedence over the AAA rules since the parties explicitly agreed to be bound by the provisions of the arbitration agreement where there was a conflict between the agreement and the AAA rules, including the arbitrator's compensation. The parties were free to have the AAA rules supersede the arbitration agreement where there was a conflict between them, but decided to do otherwise.


Although we find that the disputed fee-splitting provision of the employment arbitration agreement was not superseded by the conflicting AAA rule, the question remains whether this provision is unenforceable as a matter of public policy under the circumstances of this case. There is no dispute that the parties' arbitration agreement is governed by the Federal Arbitration Act (9 USC §§ 1 et seq. [FAA]).The Supreme Court has held that the FAA manifests a "liberal federal policy favoring arbitration agreements" (Gilmer v Interstate/Johnson Lane Corp., 500 US 20, 26 [1991] [internal quotations marks omitted]; see also Volt Information Sciences, Inc. v Board of Trustees of Leland Stanford Jr. Univ., 489 US 468, 479 [1989]). It reflects Congress's recognition that arbitration is to be encouraged as a means of reducing costs and delays associated with litigation (Vera v Saks & Co., 335 F3d 109, 116 [2d Cir 2003], quoting Deloitte Noraudit A/S v Deloitte Haskins & Sells, U.S., 9 F3d 1060, 1063 [2d Cir 1993]). The policy is not absolute.

The Supreme Court has made clear that arbitration agreements are only enforceable "so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum" (Gilmer, 500 US at 28 [1991] [internal quotation marks omitted]). In Green Tree Financial Corp-Ala. v Randolph (531 US 79 [2000]), the Supreme Court, applying Gilmer, recognized that "the existence of large arbitration costs could preclude a litigant ... from effectively vindicating her statutory rights in the arbitration forum" (id. at 90). The Court balanced the concerns over cost with the presumption in favor of arbitration by holding that the plaintiff had the burden of demonstrating the "likelihood" of incurring prohibitive costs. (id. at 92). The Court, however, declined to set forth the detail with which a party must make such a showing. It did hold that the mere risk of such "prohibitive costs is too speculative to justify the invalidation of an arbitration agreement" (id. at 91).

The majority of the federal circuit courts that have had occasion to apply Green Tree's burden-shifting approach to claims of prohibitively expensive arbitration fees have endorsed the approach taken in Bradford v Rockwell Semiconductor Syst., Inc. (238 F3d 549 [2001]), where the Fourth Circuit held that in the employment discrimination context the courts should engage in a case-by-case analysis focused on "the claimant's ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and whether the cost differential is so substantial as to deter the bringing of claims" (id. at 556; see Musnick v King Motor Co. of Fort Lauderdale, 325 F3d 1255, 1259 [11th Cir 2003], citing, inter alia, Thompson v Irwin Home Equity Corp., 300 F3d 88 [1st Cir 2002]; Blair v Scott Specialty Gases, 283 F3d 595, 610 [3rd Cir 2002]; Primerica Life Ins. Co. v Brown, 304 F3d 469, 471 n 6 [5th Cir 2002]; Gannon v Circuit City Stores, Inc., 262 F3d 677, 683 [8th Cir 2001]; and LaPrade v Kidder, Peabody & Co., Inc., 246 F3d 702, 708 [DC Cir 2001]; see also James v McDonald's Corp., 417 F3d 672, 680 [7th Cir 2005]). This case-by-case approach primarily involves comparing the financial means of the aggrieved employee to the costs associated with arbitrating the dispute, while relying on the fact that in the judicial forum a litigant pays only a minimal fee and does not have to pay other services pertaining to the adjudication of the matter (see Spinetti v Service Corp. Intl., 324 F3d 212, 218 [3d Cir 2003]; Shankle v B-G Maintenance Mgt. Of Colo., Inc., 163 F3d 1230, 1234 [10th Cir 1999]). While the Second Circuit has not addressed the issue, most federal district courts in this State have also adopted the Fourth Circuit's case-by-case analysis focusing on the claimant's ability to pay the expected arbitration fees and costs (see e.g. Equal Employment Opportunity Comm. v Rappaport, Hertz, Cherson & Rosenthal, P.C., 448 F Supp 2d 458, 463 [ED NY 2006], citing, inter alia, In re Currency Conversion Fee Antitrust Litig., 265 F Supp 2d 385, 411 [SD NY 2003]; Stewart v Paul, Hastings, Janofsky & Walker, LLP, 201 F Supp 2d 291, 293 [SD NY 2002]; and Mildworm v Ashcroft, 200 F Supp 2d 171, 179 [ED NY 2002]. Such an analysis is consistent with the Green Tree decision in that it requires much more than an abstract and speculative risk of high cost; instead, it requires a showing of individualized prohibitive expense.

The New York Court of Appeals applied this case-by-case approach when it recently held in Matter of Schreiber v K-Sea Transp. Corp. (9 NY3d 331 [2007]) that a $10,000 cost of arbitration before the AAA was prohibitively expensive. Schreiber was injured while serving as a seaman in the employ of K-Sea. The Jones Act permitted Schreiber to sue K-Sea if its negligence caused his injury. Schreiber, however, entered into a post injury agreement with K-Sea to arbitrate his claims before the AAA, rather than to litigate in court. The agreement provided, among other things, that "[a]ny filing fee, up to $750.00 and any deposit for compensation of the arbitrators shall be advanced by K-Sea, subject to subsequent allocation" (id. at 335). When Schreiber brought a suit against K-Sea, asserting a cause of action for violation of the Jones Act, K-Sea filed a demand for arbitration with the AAA. When the AAA arbitrator demanded payment of a $10,000 fee, K-Sea responded with payment of $750 and notification that the remainder was to be provided by Schreiber (id.).

Schreiber moved for a court order staying the AAA arbitration, which Supreme Court granted. While rejecting Schreiber's claim that the FAA rendered the agreement unenforceable, the motion court held that K-Sea had failed to prove " that there was no deception or coercion on its part, and that Schreiber understood his obligations under the agreement'" (id. at 336). On appeal, this Court, one Justice dissenting in part, reversed and directed a hearing at which K-Sea would have the burden to show that the agreement was fairly procured (id.). The Court of Appeals modified so as to place on Schreiber the burden of showing, at the hearing, that he was deceived By K-Sea to enter into the agreement to arbitrate (id. at 340-341).

As it pertains to the issue herein, the Court of Appeals in Schreiber, like the dissent in this Court, viewed the cost of arbitration payable by Schreiber under the agreement, at least $9,250, as prohibitively expensive. Thus, it held, "any order compelling arbitration should be conditioned on K-Sea's agreement to bear any costs not waived by the AAA subject later to reallocation of those costs by the arbitrator" (id. at 341).

Here, as in Schreiber, the risk of prohibitive arbitration cost was more than speculative. Indeed, the record is abundantly clear that the arbitration clause requiring Brady to share half the cost of the arbitrator's compensation would require her to bear a significant arbitration cost - $21,150. While this amount alone is substantial, it did not include other arbitration fees and costs that would have to be borne out equally by the parties. Moreover, Brady has provided sufficient information about her precarious financial situation. At the time she sought a court order to compel arbitration, Brady had not been gainfully employed for the 18-month period following her termination by Williams. A $21,150 cost may not seem onerous in light of Brady's earning history, ranging from $100,000 to $400,000 during her five-year period of employment with Williams. Yet, Brady was terminated and no longer commands such a yearly salary. In fact, it is undisputed that, at the time of the arbitration, she was still unemployed. Thus, ...

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