In this day and age,
arbitration agreements are found in all types of contracts. Such agreements are favored in the law and are upheld by courts. Mounting a successful attack on such an agreement is difficult, bordering on impossible.
The Tenth Circuit issued an opinion on January 5, 2016 that affirmed the order of Judge Brooke Jackson refusing to enforce the arbitration agreement in a contract.
Nesbitt v. FCNH, Inc., ___F.3d___ ( 2016WL53816). FCNH is a corporation that operates thirty-one for-profit educational schools in the U.S. One of the institutions is the Denver School of Massage (the school).
Plaintiff Rhonda Nesbitt enrolled as a student at the school. One of the requirements of the school was that students had to provide massage therapy services to the public, but without receiving any compensation. The school did charge the public, but the students received no percentage of the fees. Plaintiff commenced a lawsuit against the school alleging violations of the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-219, as well as violations of various Colorado wage statutes. Plaintiff sought class certification from the district court.
The school provided an enrollment agreement to incoming students. Included in the document was an arbitration provision. The agreement provided, in part, as follows:
THIS ARBITRATION AGREEMENT LIMITS CERTAIN RIGHTS, INCLUDING THE RIGHT TO MAINTAIN A COURT ACTION, THE RIGHT TO A JURY TRIAL, THE RIGHT TO PARTICIPATE IN ANY FORM OF CLASS OR JOINT CLAIM, THE RIGHT TO ENGAGE IN DISCOVERY (EXCEPT AS PROVIDED IN THE APPLICABLE RULES), AND THE RIGHT TO CERTAIN REMEDIES AND FORMS OF RELIEF. OTHER RIGHTS THAT YOU OR SEG (the school) WOULD HAVE IN COURT ALSO MAY NOT BE AVAILABLE IN ARBITRATION. RIGHT TO REJECT: I may reject this Arbitration Agreement by mailing a signed rejection of this notice to: Attention: Steiner Education Group Corporate Office........
The enrollment agreement allowed a student to reject the arbitration provision, provided notice was given to the school. Plaintiff did not opt out of the arbitration agreement.
The school filed a motion with the district court seeking a stay of court proceedings. The school further sought to compel arbitration pursuant to the rules of the American Arbitration Association (AAA). The AAA rules provided for a splitting of fees and costs. In denying the motion to stay and motion to compel, the district court held that the arbitration agreement would financially preclude Plaintiff from pursuing her claims. The denial of the motions led to the filing of an appeal.
The Tenth Circuit relied on its previous ruling in
Shankle v. B-G Maint. Mgmt. of Colo., Inc., 163 F.3d 1230 (10th Cir., 1999). That case upheld what has been called the "effective vindication exception." In
Nesbitt, the court relied on this exception, which rests on a finding by the court that the financial burden for an arbitration would be so excessive as to preclude any attempt by an individual to seek relief through an arbitration. The Tenth Circuit refused to reverse the district court or to compel arbitration. The circuit court also found the arbitration agreement to be internally inconsistent, especially as to whether Plaintiff would receive any attorney fees and costs if she prevailed.
The "effective vindication exception" forbids an arbitration agreement from financially preventing the assertion of statutory rights. The opinion should be read by all counsel, as it provides one basis for precluding a court from compelling arbitration.