Arbitration is a common means of resolving commercial disputes. Although arbitration is an attractive alternative to litigation, arbitration can be disadvantageous to a potential plaintiff because of high costs. The United States Supreme Court endorsed a “liberal … policy favoring arbitration agreements” whenever possible. However, a party is often at a disadvantage upon signing an arbitration agreement when little understanding of the agreement’s cost implications exist. Such scenarios can arise when negotiating adhesion contracts or employee handbook agreements, and when they do arise, the question of whether an agreement can be invalidated because of its cost implications must be answered convincingly.
In Green Tree Financial Corp. v. Randolph, the United States Supreme Court left open the possibility of an arbitration agreement being invalidated because of prohibitive costs. However, the Green Tree Court did not comment on how detailed the showing of prohibitive costs must be in order to do so. Instead, Green Tree ultimately leaves examination of specific cost issues to the lower courts, and those lower courts must also decide the appropriate standard for invalidating an agreement.
The federal circuit courts take varying approaches on how to invalidate an agreement based on cost. One circuit holds any agreement that places significant costs on the party bringing the claim per se invalid. The majority of jurisdictions apply a case-by-case analysis in determining whether to invalidate an agreement. However, two main approaches exist in applying the case-by-case test. The first, adopted by the Court of Appeals for the Fourth Circuit, evaluates the cost impact of the agreement based on the individual party’s situation. The second test, used by the Court of Appeals for the Sixth Circuit, applies the case-by-case test by evaluating the cost impact to a similarly situated “group of plaintiffs.”
This article argues that the best method of assessing prohibitive costs is the Sixth Circuit’s case-by-case approach, which evaluates the cost to a similarly situated group of potential plaintiffs. Part II of this article provides background on arbitration costs as opposed to litigation costs, and examines the Green Tree opinion that set the stage for possibly invalidating arbitration agreements based on prohibitive costs. Part III explains the federal circuit split between the “group of plaintiffs” approach found in Morrison v. Circuit City Stores, Inc., and the “individual plaintiff” approach in Bradford v. Rockwell Semiconductor Systems, Inc. Part IV analyzes the specific advantages and disadvantages of the group-of-plaintiffs approach and the individual-plaintiff approach. Part V of this article concludes that the best method of analyzing prohibitive costs is the Morrison group-of-plaintiffs approach.
Recommended CitationRichard A. Bales and Mark B. Gerano, Determining the Proper Standard for Invalidating Arbitration Agreements Based on High Prohibitive Costs: A Discussion on the Varying Applications of the Case-By-Case Rule, 14 Tenn. J. Bus. L. 57 (2012) ,